Mandatory Cash Out Deadline

[matlock77]

Does anyone have a citation for the deadline to make an involuntary cash out of an account less than 7,000, other than that it has to happen after the participant was terminated? Not seeing any deadline requirements, wondering if a plan sponsor can theoretically let an account atrophy until it is eligible for cash out. 

[Bri]

The citation is likely in your plan document itself.

[Peter Gulia]

As Bri suggests, Read The Fabulous Document; it might state provisions narrower than what might be provided without contravening ERISA or tax-disqualifying the plan.

The IRS’s “LRM” guidance to sponsors of IRS-preapproved documents recognizes that an involuntary distribution might not be paid immediately after a participant’s severance-from-employment because the account then is more than the plan’s threshold, but might later be paid as an involuntary distribution because the account becomes less than the plan’s threshold. (I express no view about whether the IRS’s interpretation comports with applicable or relevant law.)

Consider that a plan’s sponsor (or a plan’s administrator, or both) might prefer that the plan’s administrator lack discretion about when to direct an involuntary distribution.

And consider that whatever provision is set, the plan’s administrator must obey the documents governing the plan (unless a provision is contrary to ERISA’s title I).

This is not advice to anyone.

[matlock77]

Thank you guys!

[rocknrolls2]

I wanted to make two other points so as to more fully inform this discussion:

(1) To the extent that the plan document does not automatically cross-reference the Code and/or ERISA section so as to incorporate the current cash-out threshold by reference, the decision to increase the cash-out threshold from $5,000 (which was in effect until the SECURE 2.0 change became effective) to  $7,000 is optional for the plan sponsor. The employer could simply leave the cash-out threshold at $5,000 and there is no issue. 

(2) The plan should adopt a procedure where it looks at whether participant account balances exceed the cash-out threshold once per year. If the account balance is below the threshold, then it should be automatically cashed out. This is a way to avoid the problem of missing participants. You should use it to the advantage of your client to avoid administrative hassles down the road.

Turning to your initial question, the plan can allow a participant's account to atrophy to the point below the cash-out threshold and then cash it out. For that, see point (2). The other side of the coin is that the participant should be monitoring his or her account and either redirect investments from time to time, request distributions or rollovers. If it atrophies, it is the participant's responsibility to prevent that, not the plan sponsor's.