"The sponsor of a retirement plan that yet has no provision for an involuntary distribution desires to provide an involuntary distribution if a participant is severed from employment and her balance is no more than $1,000.
The sponsor prefers to limit the plan’s involuntary distribution to the amount specified in Internal Revenue Code § 401(a)(31)(B)(i)(I) because the sponsor/administrator is unwilling to provide
for a default-rollover IRA, which would be required if an involuntary distribution is more than $1,000 and the participant/distributee furnishes no different instruction.
The plan’s provision would look to whether a participant’s whole account, including her rollover-contributions subaccount, is no more than $1,000. The plan’s governing document uses no IRS-preapproved document. The sponsor would amend the document
to state its desired provision (except to the extent a provision would tax-disqualify the plan).
Assume all amounts are 100% nonforfeitable.
The plan provides participant-directed investment, with a broad range of investment alternatives. Account balances are recomputed every New York Stock Exchange day.
For simplicity (and to not resume a June 2020 BenefitsLink discussion), assume the plan incurs no fee for processing a
distribution, and a participant’s account incurs no charge that could result in a distribution amount less than the participant’s before-charge account balance.
What happens if, between the time the plan’s administrator sends a § 402(f) notice and the form for instructing a direct rollover and the time the administrator would process an involuntary distribution, the participant’s changes from less than
$1,000 to more than $1,000?
Must the administrator cancel the distribution? What happens if, on the day the involuntary distribution would be processed, the participant’s account balance changes from $999 (based on the preceding day’s funds’ shares’ prices) to $1,001 (based on the funds’ shares’ prices on which shares would be redeemed)? Must the administrator cancel the
distribution? How does a recordkeeper do that? If looking to the preceding day’s balance is good enough and the distribution is not canceled, what does the recordkeeper with the breakage between $1,000 and the funds’ shares’ redemption value?
How do plans’ administrators and, perhaps more important, recordkeepers deal with this in the practical real world?"