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February 18, 2009

Cashout ( Involuntary Cashout)

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Definition

An involuntary distribution of a separating participant’s vested account balance of $5,000 or less, under a qualified plan, 403(b) or 457(b) plan. This involuntary distribution occurs when the participant is non-responsive to plan communications about distributions.

The plan administrator must provide written notification to the plan participants of its intent to distribute the amount, the tax-treatment of such distribution and rollover options for the amount.

Section 657 of EGTRRA amended § 401(a)(31)(B) of the Code to require that mandatory distributions of more than $1,000 from a plan qualified be paid in a direct rollover to a traditional IRA of a designated trustee or issuer if the distribute does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly.

The plan administrator must notify the distributee in writing (either separately or as part of the § 402(f) notice) that the distribution may be paid in a direct rollover to an IRA

Referring Cite

IRC § 411(a)(11) ; IRC § 457(e)(9)(A); Treas. Reg. 1.411(a)-11(e), IRS Notice 2005-05, Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor; Final Rule, Rev. Proc. 2013-12 

Additional Helpful Information

  •  
    1. Cash-out amounts between $1,000 and $5,000 must be rolled over to a traditional IRA
    2. When determining the $5,000 balance, rollovers to the plan, and attributable interest can be disregarded
    3. The following methods can be used to locate missing participants
      • Social Security Administration’s Letter forwarding program
      • commercial locator services
      • credit reporting agencies
      • internet search tools
    4. Spousal consent is not required for a cash-out
    5. The automatic rollover requirements apply to any mandatory distribution that is more than $1,000 and is an eligible rollover distribution that is subject to the direct rollover requirements. Therefore, in order for a plan that provides for such mandatory distributions to be a qualified plan, it must satisfy the automatic rollover provisions.
    6. A mandatory distribution is a distribution that is made without the participant’s consent and that is made to a participant before the participant attains the later of age 62 or normal retirement age. A distribution to a surviving spouse or alternate payee is not a mandatory distribution for purposes of the automatic rollover requirements.
    7. Although the tax code generally prohibits mandatory distributions of accrued benefits attributable to employer contributions with a present value exceeding $5,000, the automatic rollover provisions apply without regard to the amount of the distribution as long as the amount exceeds $1,000.

 Note from the IRS

“Previously, the IRS provided letter-forwarding services to help them locate missing plan participants, but with the August 31, 2012, release of Revenue Procedure 2012-35, the IRS stopped this letter forwarding program. The IRS will no longer process requests to locate retirement plan participants or beneficiaries.” irs.gov

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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