The CPA Journal

IRS Final Regulations And Revenue Ruling Address Involuntary Cash-Outs

By Peter S. Altwardt, CPA, KPMG LLP

Final IRS regulations under IRC sections 411(a)(7), 411(a)(11), and 417(e)(1) increase the limit on the amount that can be involuntarily cashed out of a qualified plan. As in the proposed regulations, the final regulations increase the limit for involuntary cash-outs from $3,500 to $5,000. An important change in the final regulations is the elimination of the “look-back rule,” which provided that the present value of a vested, accrued benefit was treated as exceeding the cash-out limit if the cash-out limit had ever been exceeded prior to the distribution. With the look-back rule eliminated, a plan participant with a vested accrued benefit of $5,000 or less could be cashed out even though the benefit had previously been greater than $5,000. This provides for easier administration of involuntary cash-outs.

IRS Revenue Ruling 2000-36

Revenue Ruling 2000-36 states that an employer can amend a plan to provide that the default form of payment for involuntary cash-outs is a direct rollover to an IRA. An employer can use the default rollover if the employee does not request either a cash payment or a direct rollover to another qualified plan or designated IRA. An amendment must provide that the plan administrator will select an IRA trustee, custodian, or issuer that is unrelated to the employer, as well as establish the IRA and make the initial investment choices.

The plan administrator must include with the IRC section 402(f) notices an explanation of the default direct rollover with certain information, such as the name, address, and phone number of the IRA trustee; information on maintenance and withdrawal fees; and the funds’ investment strategy. The IRS section 402(f) notice must be provided not less than 30 or more than 90 days before the distribution.

In deciding to allow default direct rollovers, the IRS holds that the default status of an optional form of benefit is not a protected benefit under IRC section 411(d)(6). Therefore, an amendment changing a plan’s default provision from a cash-out to a direct rollover does not violate IRC section 411(d)(6). If a plan provides each distributee with an explanation of the default procedure and the rollover option within the specified period of time, then the IRS considers the requirement of IRC section 402(f) to be satisfied. Furthermore, the IRS states that a plan would not fail IRC section 401(a)(31) because the direct rollover is a default method of payment, which allows a person eligible for a rollover distribution to elect to have the distribution paid to a specified eligible retirement plan.

Editors:
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Mitchell J. Smilowitz
GBS Retirement Services Inc.

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