Force Out Rollovers

We sent a terminated 401(k) Participant a letter stating we would roll their account into an IRA if they did not return a distribution form.  At the time their account balance was < $5,000.  Now, 45 days later, we have not heard back, but their account balance has increased to > $5,000.  Can they still be forced out of the Plan?

At least one IRS-preapproved document appears to allow an involuntary cash-out if “the vested amount of an Account payable to a Participant or Beneficiary does not exceed $5,000 . . . at the time such individual becomes entitled to a distribution hereunder[.]”  (Your plan's governing document might state different provisions.)

But ERISA § 404(a)(1)(D) commands a plan’s fiduciary to follow the plan’s governing documents only insofar as the documents “are consistent with” ERISA’s title I.

Even if one may rely on the Internal Revenue Service’s opinion letter for some assurance that a document is not contrary to Internal Revenue Code § 411, there is no assurance about anything for ERISA’s title I.

ERISA § 203(e)(1) [29 U.S.C. §1053(e)(1)]:  “If the present value of any nonforfeitable benefit with respect to a participant in a plan exceeds $5,000, the plan shall provide that such benefit may not be immediately distributed without the consent of the participant.”

Consider also 26 C.F.R. § 1.411(a)-11(c)(3)(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 . . . on the date the distribution commences.”

I recognize I have not answered your question.  Perhaps others on BenefitsLink might steer you toward more knowledge than I have.  And whatever you learn, you should evaluate with your lawyer's advice.

15 hours ago, Fiduciary Guidance Counsel said:

Consider also 26 C.F.R. § 1.411(a)-11(c)(3)(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 . . . on the date the distribution commences.”

 

This answers your question.  For a plan that uses a $5,000 cash out limit, if the distribution is more than $5,000, it can not be distributed without the participant's consent.  In your case, the only way you will be able to cash out this person is if the vested account balance drops to $5,000 or less.

There can be an exception if part of the vested balance is a rollover account, but that wasn't part of the OP. [411(a)(11)(D)].