(b)lines Ask the Experts – Including Rollover Balances for Auto Cashouts

“Our plan automatically cashes out small balances under $5,000, with rollovers to an IRA for balances between $1,000 and $5,000. We recently had a participant terminate employment with a $3,000 account balance, but an additional $15,000 in rollover assets. Should we automatically cash out her account balance, or not?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

This question requires a review of your plan document, as it is optional whether to include or disregard rollover balances. From the IRS General Distribution Rules webpage:

“In certain circumstances, the plan administrator must obtain your consent before making a distribution. Generally, if your account balance exceeds $5,000, the plan administrator must obtain your consent before making a distribution. Depending on the type of benefit distribution provided under your 401(k) plan, the plan may also require the consent of your spouse before making a distribution. Your plan may provide that rollovers from other plans are not included in determining whether your account balance exceeds the $5,000 amount.” (boldface text is the Experts’ emphasis)

Though the language above is written for 401(k) plans, the same provisions apply to 403(b) plans as well.

Thus, your plan document should indicate whether rollovers are included, or not, in determining the $5,000 threshold. If, for some reason, your plan document is silent on this issue, rollovers are included.  For clarity, you may want to amend your plan document to expressly reflect whether rollovers are counted.

One word of caution; the Experts have encountered some vendor prototype and volume submitter documents where the decision whether or not to include rollovers in the $5,000 threshold is included in the base plan document language as a required provision, and CANNOT be modified in the plan’s adoption agreement, where the plan sponsor would typically be given the flexibility to make decisions on optional provisions. In those cases, it may be necessary to utilize an individually designed plan document if you wish to elect a provision regarding rollovers that conflicts with the prototype/volume submitter language. And, of course, you should always confirm with the plan’s recordkeeper(s) that the provision you elect can be properly administered.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.