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$5,000 Cash-Out

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Section 657 of EGTRRA amended § 401(a)(31)(B) of the Code to require that mandatory distributions of more than $1,000 from a plan qualified under § 401(a) be paid in a direct rollover to an individual retirement plan (i.e., an individual retirement account as described in § 408(a) or an individual retirement annuity described in § 408(b)) of a designated trustee or issuer if the distributee does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly. Section 657(a) of EGTRRA also added a notice provision to § 401(a)(31)(B)(i) of the Code which requires that the plan administrator notify the distributee in writing (either separately or as part of the § 402(f) notice) that the distribution may be paid in a direct rollover to an individual retirement plan.

A TPA manages many plans with the $5,000 cash-out feature, notifies affected terminated participants regarding the mandatory distribution, but only rolls over the account balance to the IRA upon direction from the plan sponsor.  Absent plan sponsor direction, the participant’s account balance remains in the plan.

Is there a time factor in which the direct rollover be made to the IRA or can the monies remain in the plan as currently administered?

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Assuming the Plan Sponsor, not the TPA, is the Plan Administrator then the Sponsor should be the one authorizing cash out distributions and default rollovers and failure to do so in accordance with the plan document is an operational defect. If 402(f) notices have been sent, the proper time elapses, and rollovers are not made then you have a compliance problem - this is no different than if someone returned an election saying pay me and withhold taxes but then never gets paid. Also, ignoring a cash out provision altogether, which doesn't appear to be your case, is an operational defect as well.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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Of course the other problem is that if the money stays in the plan long enough, the account eventually goes over $5,000 and can't be forced out.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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