Plan Sponsors Should Ensure that Small Benefits are Cashed Out Before the March 28th Deadline

As discussed in our October 20, 2004 article, beginning March 28, 2005, the rules for mandatory distributions between $1,000 and $5,000 will change.  As you work through the options available to comply with the new rules, you also need to make sure that the current mandatory distribution rule in your plan is being administered correctly.

Many plans provide that if the vested benefit of a terminated participant does not exceed $5,000,  the "small benefit" will be paid in a lump sum payment as soon as administratively feasible after the participant terminates employment.  We have found that vendors rarely cash out these small benefits without the direction of the plan administrator.  As a result, in many plans small benefits for terminated vested employees need to be distributed before the March 28th deadline to avoid being subject to the new mandatory rollover rule.

To avoid the application of the new mandatory rollover rules to these "small benefit" cash outs and to correct your plan operation to match the current terms of your plan, it is important that all existing "small benefit" distributions be "cleaned up" before March 28th.  That means that the plan must provide direct rollover tax notices and distribution election forms to such participants before mid-February because:

• actual payment must be made by March 27th in order to make a lump sum cash payment to participants who do not make an affirmative election,
• participants must receive a direct rollover tax notice at least 30 days prior to the date of any mandatory cash-out, and
• an additional amount of time will be needed to process any mandatory lump sum cash payments for participants who do not make a distribution election within 30 days after receiving the notice. 

The deadline for ensuring that your plan is in compliance with its current mandatory distribution provision is fast approaching.  Check with your vendor today to make sure you do not need to "clean up" your distribution process.

To discuss this matter with your contact in the Employee Benefits Group at Ice Miller, please use this link to access our directory of attorneys. 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.