Retirement
plans have options in place to distribute balances of some terminated participants
if the participant does not provide an affirmative distribution election. These
are referred to as involuntary
distributions, force-outs, or mandatory distributions. Why are there involuntary
distributions? How can you administer this? How can ABG take the worry away?
Why have involuntary distributions?
Involuntary
distributions help to clear out small balances of participants who will no
longer participate in the plan. More importantly, this helps with lowering
participant count and may allow your retirement plan to remain under the threshold
required for an audit. Clearing out balances defined below as soon as possible
ensures participants aren’t carried over into future years.Your plan’s
adoption agreement may state if a terminated participant’s vested balance is
less than $1,000 it will be distributed as a lump sum via a check to the
participant’s home address. It may also state that if the terminated
participant’s vested balance is greater than $1,000 but less than $5,000 it will
be rolled into an IRA established by the plan administrator on the
participant’s behalf.
How can the plan sponsor administer this?
When a
participant terminates, a sponsor can provide a termination form or
instructions how to request a distribution through the ABG participant website https://www.abgncs.com. On ABG’s termination form, there is
a handout called Special Tax Notice Regarding Plan Payments. The tax notice
explains taxation, rollover and withholding rules and needs to be given to
participants no less than 30 days and no more than 180 days before a
distribution is made. This allows participants time to submit a distribution
request. Your plan may have a defined amount of time that must elapse before the
plan sponsor can direct an involuntary distribution. For many plans, this
timeframe is between 30 to 60 days. If the participant hasn’t directed their
own distribution by this time, the plan sponsor may contact their ABG
administration team for instruction how to distribute the balance.
How can ABG take the worry away?
Involuntary
distributions can be simplified if you opt to use a full-service IRA rollover
provider. ABG has partnered with Retirement
Clearinghouse to provide our plans with a worry-free service! When your ABG
administration team receives termination dates, either through our Data
Validation Center for contributions or via phone call or email, ABG provides
Retirement Clearinghouse with a list of terminated participants every 2 weeks.
Retirement Clearinghouse handles mailing distribution forms to all terminated
participants and ABG tracks the number of days elapsed. After 60 days, ABG will
distribute the vested balances of the terminated participants as either a check
or to an IRA established by Retirement Clearinghouse if the balance meets the
rollover amount threshold. This service adds no cost to your plan and takes the worry away from involuntary
distributions.
There are
two options available to work with your plan’s design: $0 to $5,000 rollovers or $1,000 to $5,000
rollovers. If your plan document states all involuntary distributions are
rolled into an IRA, ABG will direct all of the vested balances from $0 to
$5,000 to Retirement Clearinghouse. The $1,000 to $5,000 option means that vested
balances less than $1,000 will be distributed as a lump sum check to
participants and vested balances between $1,000 and $5,000 are rolled into IRAs
created by Retirement Clearinghouse.
Do you have
up-to-date addresses for participants who terminated years ago? If you don’t,
this is not a problem for Retirement Clearinghouse. They have resources to
track down missing participants if you do not have a recent address. A great
feature of the $0 to $5,000 option is that if your plan has outstanding
distribution checks due to bad addresses, we can reissue the funds to
Retirement Clearinghouse. They can help out with these old cash items and get
them off your plate.
Ask your ABG
administration team how you can administer your plan’s involuntary
distributions and request more information about Retirement Clearinghouse. Thanks
and have a great day!
Todd Eyler, QKA
Account Manager – Retirement
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