Understanding Your Retirement Plan’s Force-out Provisions
Are you aware of your plan’s force-out provisions? If not, now would be an excellent time to find out.
What force-out limit does your plan contain? When you find out, send out the appropriate paperwork to terminated participants. How force-outs are handled is a plan document issue, and like any other plan provision, must be followed.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) changed the cash out rule. It requires that account balances between $1,000 and $5,000 must be rolled over to an individual retirement account (“IRA”) if the plan sponsor has so chosen. The participant also may have elected another form of distribution.
If your plan allows for mandatory rollovers, you must establish a written/signed agreement with an IRA provider. Additionally, policies and procedures must be in place to accommodate the rollovers. Participants must be given the appropriate distribution paperwork, including the 402(f) Notice of Special Tax Rules on Distributions. The rollover must be processed if no response is received by the end of the notice period (at least 30 days but no more than 90 days).
Likewise, terminated participants with a balance of less than $1,000.00 must be forced out of the plan if they do not make an affirmative election. If the distribution is more than $200.00, the appropriate Federal and State withholding will apply.
Understand Your Plan’s Additional Fees
You may be paying additional fees for terminated participants. Many plan-related base fees on the number of participants with account balances. Certain plan disclosures/notices must be given to terminated participants, and once a plan exceeds 100 participants, an outside, independent audit must be performed, which can be quite costly.
So, in addition to complying with your plan document on force-outs, it is fiscally responsible to force-out the appropriate terminated participants.
Contact Watkins Ross if you need assistance with your employee 401(k) plans.
Written by Marybeth Jorgensen
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