February 2015 Vol. 1 No.

UHY LLP
Mid-Atlantic

Insider
ERISA
U H Y LLP pro vide s qu ali fie d p la n assur ance
and co ns ul ting se r vi ces.

Frequently Overlooked Non-Compliance:

Small Balances Cash-Outs
By Nelly Gizdova, Principal

e n e r a l l y,
qualified
pension
plans
cannot distribute
benefits without
the participants
consent prior to
participants reaching normal retirement age. One exception is a plan provision present in
most retirement plans (both defined
contribution and defined benefit) frequently referred to as small balances
cash-outs. According to this provision, plans may make an automatic
cash-out distribution to terminated
participants without their consent if
the value of their vested account balances (or vested accrued benefits for
defined benefit plans) is $5,000 or less.
Plan sponsors are required to give
such participants a notice 30 to 60
days prior to the cash-out payment.
The notification should give participants the option to roll over their accounts to a new employers plan or
into an Individual Retirement Account
(IRA) instead of receiving cash and incurring a tax liability. No notification is
required for automatic cash-out pay-

ments to participants with vested balances of less than $200.

With the Economic Growth and Tax
Relief Reconciliation Act of 2001
(EGTRRA), Congress made changes
to these rules by implementing a requirement that certain small balances cash-outs have to be automat-

ically rolled over to an IRA and not

paid directly to the participants, unless the participants specifically elect
otherwise. The automatic rollover requirement affects participants with
vested account balances (accrued
benefits) larger than $1,000 but not
more than $5,000.
If participants do not make an affirmative election, the plan can make a
lump-sum payment directly to participants with vested account balances
(accrued benefits) of $1,000 or less;

the next level of service

for participants with vested account

balances between $1,000 and $5,000,
the cash-out distribution is done by an
automatic rollover to an IRA established on behalf of the participant.

Determination of account
balances subject to the
automatic cash-out provision
IRS allows plans using the $5,000 cashout limit to disregard rollovers into the
plan when calculating participants
vested account balance and determining if terminated employees can be
forced out of the plan. The importance
of this rule is that it makes it possible for
participants with significant rollovers
into the plan, but accumulations under
the plan as a result of contributions and
earnings of less than $5,000, to have
their entire account balance subject to
automatic cash-out and rollover.

Summary of plan
administrator responsibilities
(safe harbor requirements)
Vested account balances (accrued
benefits) subject to the automatic
continued on page 2

For more information,

please contact Nelly Gizdova
at ngizdova@uhy-us.com

8601 Robert Fulton Drive l Suite 210 l Columbia, MD 21046 l 410-423-4800 l Fax 410-381-5538 l www.uhy-us.com

the next level of service

Small Balances Cash-Outs
continued from page 1
cash-out provision should not exceed the plans cash-out threshold
(maximum cash-out limit is $5,000)
and otherwise meet the provisions
of Code section 411(a)(11).
Plan administrators must designate
an authorized IRA provider (banks,
credit unions, licensed insurance
companies, registered investment
companies, etc.) to receive the automatic rollovers of cash-outs valued between $1,000 and $5,000.
The plan should have a written
agreement with the IRA provider
addressing the investment options
and the expenses associated with
the account.
The amounts rolled into the IRA
must be invested in investment options designed to preserve principal and provide a reasonable rate
of return. The investments do not
need to be guaranteed and can include money market funds and interest-bearing savings accounts,
certificates of deposit, fully benefit-responsive stable value products, etc.
The fees charged to the IRA should
not exceed the fees charged by the
IRA provider for comparable IRAs
(IRAs established not as a result of
automatic rollovers).
The plan documents and the summary plan description (SPD) should
reflect the plans automatic
rollover and mandatory cash-out
provisions. The documents must
describe the types of investments
that will be available under the IRA

and how fees will be charged and

allocated under the IRA.
The rollover, the selection of the IRA
provider, or the investment products
in which the amounts are invested
must not represent a prohibited
transaction. For example, this may
be the case if the plan sponsor receives something of value when selecting the IRA provider or investment product. The Department of
Labor (DOL) has issued certain prohibited transaction exemptions.

Monitoring participants
accounts and taking
proactive steps will

improve the plans

performance, reduce

the administrative burden,

and reduce the possibility
of future problems.

Complying with the automatic

rollover provisions creates concerns
about plan sponsors fiduciary responsibilities under ERISA. According
to the DOL, plan administrators can
satisfy their fiduciary responsibility if
they have met the above-listed safe
harbor requirements.

Significance of small
balances cash-outs
Non-compliance with the plan provisions regarding automatic cash-outs is
considered a breach of fiduciary re-

sponsibility. But another very important aspect is that complying with

these provisions can be quite beneficial for the plan. Provided that the
plan agreement with the IRA provider
has met the ERISA safe harbor rules,
the fiduciary responsibility of the plan
sponsor with regard to the terminated participants whose balances
were rolled over into IRAs ends when
the funds are transferred to the IRA
provider. As of that point, the participants are deemed to be exercising
control over the assets of the IRA and
cease to be plan participants.
The significance of this is that many of
the plan fees are based on participant
counts and the required plan notices
(fee disclosures, summary annual reports, etc.) must be provided to all
plan participants with account balances (including former employees).
As a result, forcing out of the plan
the participants with small balances
can generate substantial savings for
the plan.
It also has one very important side
benefit, which includes preventing
future situations where the plan
sponsor may need to expend a lot of
time and resources tracking down
missing participants. Since participants with small account balances
are the ones most likely to forget
about their accounts after employment termination, cash-out distributions to those former employees before they become missing can
prevent those situations. Monitoring
participants accounts and taking
proactive steps will improve the
plans performance, reduce the administrative burden, and reduce the
possibility of future problems.

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