(b)lines Ask the Experts – $5,000 Cash Out Rule and Individual Contracts

April 20, 2010 (PLANSPONSOR (b)lines) – A plan provider asks: “When a plan is funded by individual contracts, can a plan document impose the $5,000 small-sum cash out rule?”
By PS

David Levine, Groom Law Group answers:  

Yes, a plan can be written to include a small-sum cash out provision in the plan document.  However, before doing so, a sponsor should confirm with the individual contract providers that they can, in fact, comply with the terms of a mandatory cash out provision to ensure that this rule would not cause a plan operational failure. 

In addition, if a plan is attempting to fall within the Department of Labor safe harbor that exempts the plan from ERISA’s requirements or the Department of Labor relief provided in Field Assistance Bulletins 2009-2 and 2010-1, before the plan is amended, consideration should be given to ensure that adding this feature will not require additional employer involvement, such as an employer having to approve cash outs, that could adversely affect the applicability of ERISA to the plan or the Form 5500 reporting requirements (if applicable) that apply to the plan.  

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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