Mandatory Cashouts

[Purplemandinga]

411(a)(11)(A) Discusses the mandatory cashout limit. But where is the statute, regulation or guidance that states the account value used to determine if this limit has been exceeded is determined on the date the employee terminated? Is it right under my nose and I'm completely missing it?

[Cassopy]

Not that I am aware of.  I typically see date of distribution as the determination date, and when I last looked at this I came to the conclusion that distributing an amount that exceeds $5,000 (or such other lower limit under the plan) would violate Section 411(a)(11)(A) (and/or the Plan), even if it was less than the limit on the date employment terminated. 

I don't read the rules to require that the distribution be tied to termination of employment, so a plan could provide for cash out any time the benefit is reduced below $5,000 -- i.e., once the value dips below $5,000 (e.g., e.g. due loss of market value), it is distributed.  For example, if a participant takes a partial distribution 5 years after terminating employment and leaves $3,000 in the plan account, the plan can now distribute this amount without the participant's consent. On the other hand I have seen plans that require the benefit be less than $5,000 at termination, so if an amount exceed that at termination but later decreases to below the limit, it is not distributed (and also would not be distributed if the benefit increases after termination but before distribution).

[Kevin C]

The regs address the timing of the determination in:

Quote

1.411(a)-11(c)(3) Cash-out limit. (i) Written consent of the participant is required before the commencement of the distribution of any portion of an accrued benefit if the present value of the nonforfeitable total accrued benefit is greater than the cash-out limit in effect under paragraph (c)(3)(ii) of this section on the date the distribution commences. The consent requirements are deemed satisfied if such value does not exceed the cash-out limit, and the plan may distribute such portion to the participant as a single sum. Present value for this purpose must be determined in the same manner as under section 417(e); see §1.417(e)-1(d).

There used to be a look-back rule that determined the vested balance at the time of any prior distribution, but that was eliminated a long time ago.  The preamble for the revised regs that eliminated the look-back rule has a discussion of it.

https://www.federalregister.gov/documents/2000/07/19/00-18119/increase-in-cash-out-limit-under-sections-411a7-411a11-and-417e1-for-qualified-retirement-plans  

[Purplemandinga]

It was  right under my nose! Thanks Kevin. But to Cassopy's point, if a plan document states that the value of the account balance at termination is to be used, then I suppose date of termination it is.

Fort Williams takes an interesting approach and throws in a little extra text that opens the door back open oddly enough by saying  "at the time such individual becomes entitled to a distribution hereunder (or at any subsequent time established by the Plan Administrator to the extent provided in applicable Treasury Regulations)."

 

[Kevin C]

The requirement for participant consent for distributions if the vested balance is over $5,000 is also in ERISA 203(e).  The IRS cashout regs under section 411 apply to the corresponding ERISA provisions under the Reorganization Plan No. 4 of 1978.  

https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/executive-orders/4

Your document should also have a provision saying that the Plan Administrator has a duty to follow the plan document to the extent it is consistent with ERISA.  If the plan document says to involuntarily distribute someone that the regs say must provide consent, then you follow the regs, not the document.  Otherwise, you have a qualification issue and an ERISA violation.