removal of automatic force-out: cutback?

For those plans that just don't participate in the automatic force-out process and therefore aren't following the helpful provision that's in their document: is it a cutback to remove it?

16 minutes ago, AlbanyConsultant said:

For those plans that just don't participate in the automatic force-out process and therefore aren't following the helpful provision that's in their document: is it a cutback to remove it?

Good question!  Now, without research (I hope others take up the task), I don't think it is a cutback.  You aren't removing participant right to a distribution; you are adding the right to leave the money in the plan which I think it an enhancement.

I agree, involuntary cash-out provisions can be added or deleted (especially if voluntary lump sum distribution is still available) - BUT, if the plan has not been cashing out under $5,000 balances as required by the document then you have an operational defect. Amending out this provision may eventually sweep it all under the rug, but they would be "exposed" to scrutiny for a few years.

Treas. reg. 1.411(d)-4(b)(v) says you can lower the threshold (e.g., take it from $5,000 to $1,000), but does not specifically say you can remove it altogether, although that is probably implied.

3 hours ago, Luke Bailey said:

Treas. reg. 1.411(d)-4(b)(v) says you can lower the threshold (e.g., take it from $5,000 to $1,000), but does not specifically say you can remove it altogether, although that is probably implied.

Lowering to zero is still lowering. That would be the perfect citation. Thanks.

18 hours ago, CuseFan said:

I agree, involuntary cash-out provisions can be added or deleted (especially if voluntary lump sum distribution is still available) - BUT, if the plan has not been cashing out under $5,000 balances as required by the document then you have an operational defect. Amending out this provision may eventually sweep it all under the rug, but they would be "exposed" to scrutiny for a few years.

I've not seen the IRS call out these operational failures, but I have seen the DOL call it a fiduciary breach to not follow the terms of the plan, and a prohibited transaction to asses any fees to the accounts of participants who should have been cashed out - including underlying investment management fees taken by the mutual funds in which the account is invested.  They've required the fiduciaries to reimburse the account for all fees, plus earnings, and then process the cash out into a HIGHER FEE IRA....

Shaking my head in disbelief at stuff like this....

1 hour ago, MoJo said:

I've not seen the IRS call out these operational failures, but I have seen the DOL call it a fiduciary breach to not follow the terms of the plan, and a prohibited transaction to asses any fees to the accounts of participants who should have been cashed out - including underlying investment management fees taken by the mutual funds in which the account is invested.  They've required the fiduciaries to reimburse the account for all fees, plus earnings, and then process the cash out into a HIGHER FEE IRA....

Shaking my head in disbelief at stuff like this....

While I haven't seen these bad results, this is why I advise clients to think carefully before adding forceouts.  It's just something else to screw up (by not doing them).  If it becomes a problem (to have dormant accounts), then amend the plan.

2 minutes ago, Bird said:

While I haven't seen these bad results, this is why I advise clients to think carefully before adding forceouts.  It's just something else to screw up (by not doing them).  If it becomes a problem (to have dormant accounts), then amend the plan.

Sound advice for your clients.  We've actually posited language to the IRS as part of our restated documents to make the cash out "permissive" and not mandatory.  No go.  It is an optional provision in our document, but once selected (which is the default), then it must be done.  During the restatement, we may change our default....

Thank you all for the help.