Small payment force out

[fiona1]

Like most plan documents, the plan has a small payment provision in which a single sum payment is made to the participant if the PV of their benefit is under $5,000 at the time of their termination. The plan sponsor has apparently failed to pay out several terminated participants who fall under this category - some of whom have been terminated for well over 5 years.

Has anyone heard of this coming up under an audit?

[MoJo]

I haven't seen the IRS do this, but we are currently dealing with a DOL auditor who is on a parallel tract in a DC plan.  His contention is that routine fees assessed against all participant account are potentially "excessive" for small balance (mandatory cash outs or "MCOs in our lingo) accounts that should have been forced out.  Explaining to him that the "retail" IRA market is more expensive than the "institutional" pricing that the plan receives has gone nowhere.  The auditor is about to "hit" the plan sponsor for this failure, and may require a "refund" of fees taken since the MCO "should have" been processed.

The DOL "National" office is involved, so they are at least tacitly expressing approval for the auditor's stance.

[ESOP Guy]

This appears to be an areas of new focus for the IRS.  I have had two clients in the last 6 months or so who have ESOPs come under IRS audit.  In both of them there was a huge deal of were they making force out payments.  In one the plan won because the language in the ESOP document said the plan administrator "may" force the person out if the balance is <$1,000.  The IRS auditor backed down in the end saying there was an issue because they hadn't done the force outs. 

Being DC plans the issue of earnings can't come up. 

But I think this should serve as a warnings this is appears to be an new area of focus for the IRS.  I can't help but think some memo didn't go out about this and the auditors are following orders. 

By the way pointing out forcing out a lost participant to one of the companies who take such IRAs will often times be more expensive then keeping the money in the plan didn't seem to go any where for my clients either.   I know of plenty of such places that charge a flat $50 annual fee on such IRAs.  On a $1,000 balance that is obviously 5% of assets.  Most ESOPs the sponsor pays 100% of the plan costs. 

[Peter Gulia]

fiona1, does your client's plan mandate a single-sum distribution if, on severance-from-employment or other retirement, the present value of the participant's pension is less than $5,000?

 

[Bird]

15 minutes ago, Fiduciary Guidance Counsel said:

fiona1, does your client's plan mandate a single-sum distribution if, on severance-from-employment or other retirement, the present value of the participant's pension is less than $5,000?

That's the question; well, really, does it have force out language, if not then...no force out.  And if someone does ask for their money, you just determine their PV now and pay them out.  It's like adding interest but the auditor is stating it poorly, at best.  Probably doesn't know anything about DB plans; I think they are pulling people off the street. 

[fiona1]

11 minutes ago, Fiduciary Guidance Counsel said:

fiona1, does your client's plan mandate a single-sum distribution if, on severance-from-employment or other retirement, the present value of the participant's pension is less than $5,000?

 

That is correct. I believe the plan uses similar language as DB LRM 44 where it just says that employee will receive distribution if the PV is not greater than $5,000. I've seen plans that say that these payments will be made by the first day of the plan year after termination - presumably to allow the plan sponsor some wiggle room. 

[MoJo]

55 minutes ago, Bird said:

Probably doesn't know anything about DB plans; I think they are pulling people off the street. 

I'm not sure they are aiming that high....

[Luke Bailey]

I'm not sure the EP agent is not correct. If the plan said they would get the small cashouts, then those cashouts should have occurred and not paying at the time they were due was a failure to operate the plan in accordance with its terms. Since the payouts would have occurred in the past, and would have eliminated any mortality risk after the payment date, seems like the amounts should be brought forward with interest only and then distributed.

[CuseFan]

Luke is correct. if a required distribution from a DB plan - whether a cash out or RMD - is not paid when it was required by plan terms to be paid, then it must be corrected by making the payment plus interest. Some plans true involuntary cash out threshold is actually at $1,000 because they don't want to deal with default/auto rollover - so check for that language. However, if you have PVABs under $1,000, this doesn't help. Plans administratively have "wiggle room" as was noted, but maybe to the end of the PY or first quarter of subsequent year, but certainly not 5 years.