Small Balance Cashouts When Annuity Contracts Don’t Allow Them

“We currently sponsor a single-recordkeeper ERISA 403(b) plan with both mutual funds and annuity contracts among the plan investments. We wish to add an automatic cashout feature for balances of $5,000 or less upon employment termination, but some (not all) of our annuity contracts do not allow for small balance cashouts. Could we just amend our plan to require cashouts for all of our mutual funds and the annuity contracts that allow them?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Depending on the type of plan document you use, you should indeed be able to do this, provided that your recordkeeper can properly administer this provision. If you have an individually designed plan document, you can simply amend that document to allow for such cashouts to the extent permitted by the annuity contract or custodial account (mutual fund) agreement.

However, if you have a recordkeeper’s pre-approved document, you will need to see if this option exists in your adoption agreement. Often it does (particularly when the recordkeeper and the annuity contract provider is the same entity), but sometimes there is no option for small balance cashouts in this circumstance (and you will generally be limited to the available options under the adoption agreement if you intend to maintain your reliance on the opinion letter). Also, you will want to make sure that the annuity contracts that do permit automatic cashouts provide for an exception to any withdrawal fees (such as a surrender charges) for cashouts of small account balances.

And, finally, of course, for plan changes such as this, you should always consult with your outside Employee Retirement Income Security Act (ERISA) attorney before proceeding.

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.

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