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Cash-Out Distribution Plans Require Amendment
Qualified retirement plans that provide immediate cash-out distributions to a terminated participant if the vested benefit is “$5000 or less” must be amended to comply with Department of Labor (DOL) final regulations. The final regulations are effective for rollovers of mandatory distributions made on or after March 28, 2005. The final regulations provide a safe harbor for fiduciaries of tax-qualified pension plans that are required to roll over plan benefits into an individual retirement plan when a terminated employee fails to elect a distribution method.
Background
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), if a qualified plan provides for mandatory distribution of amounts under $5000 upon termination of employment, and if the participant does not consent to receive the distribution or elect to have the distribution rolled over into another qualified plan or individual retirement plan, the plan is required to transfer distributions of vested benefits between $1000 and $5000 to an individual retirement account (IRA). These provisions are contained in Section 401(a)(31)(B). Under prior law, a qualified plan was permitted to cash-out a terminated participant by sending a distribution check directly to the participant. Under the new rules, automatic rollover to an IRA is the default method for making cash-out distributions.
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