(b)lines Ask the Experts – Inactive Vendor Accounts Counted Toward Cashouts?

“We are reducing the number of recordkeepers in our Employee Retirement Income Security Act (ERISA) 403(b) retirement plan from five to a sole recordkeeper, beginning in 2016.

“At the same time, we wish to add a small balance cash-out provision to our plan. Must we count the balances of the inactive vendors in determining the cash-out amount?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

Unfortunately, the answer is yes, since such account balances remain assets in your plan until distributed. Thus a participant’s account balance with each vendor will need to be combined in order to determine whether the total amount may be automatically distributed at termination of employment without participant consent.

For example, let’s say that your cash-out provision is set at the maximum threshold of $5,000. Participant A has $2,000 in assets with Vendor X, $2,000 in assets with Vendor Y and $2,000 in assets with vendor Z and has terminated employment. One might think that the participant is eligible to be automatically cashed out without consent. However, the vendor balances must be totaled, and the total $6,000 exceeds the threshhold for automatic cash-out.

Thus, administering cash-out provisions in a multiple vendor plan can be a cumbersome task, whether the vendors are active or not (the only exception to this rule involves vendors that were eliminated prior to 2005, as well as certain contracts of vendors that were eliminated prior to 2009). In your situation, you may wish to inquire of the selected sole recordkeeper as to whether they can take over the responsibility of aggregating the balance of inactive vendors with the active vendor for cash-out purposes. Otherwise, it may not be practical to administer a cash-out provision.

Thank you for your question!


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.