As Pension Administrator, the Plan Sponsor sent me a letter from their terminated participant who has a vested profit sharing plan balance less than $50.00. In the letter, the participant states she "does not want the money". Can the Plan Sponsor direct it as forfeitures, or do they force the distribution?

This is a nonlawyer response:

The distribution must be forced. If the participant does not cash it, they still owe taxes on it. I would surmise that it gets turned over to state escheat funds if the check never gets cashed.

I don't think there is any legal way to call it a forfeiture.

Does taxation apply if the distribution is less than $200?
I know mandatory withholding does not. Thanks!

You are correct that the federal withholding would be zero for a lump sum distribution of $200 or less. (State tax laws vary.) However, the amount of the tax owed will depend on the individual's total income and tax circumstances in the year of distribution.

I tend to agree with responses from MGB. However, whether or not the account should be distributed is governed by the terms of the plan. Most plans will require distributions of accounts less than $X (such as $5000). But this plan might have different provisions, and the plan should also define whether a certain time period must elapse before any disbursement is made.

It seems to me that there is an issue as to whether ERISA preempts state escheat laws.

I agree with Kirk, in general ERISA will preempt state escheatment laws. In particular I believe there are a couple of DOL rulings that specifically state that position.

Once the funds are distributed to the participant. They are taxable and reportable on form 1099R. Likely once this person receives the 1099 they will cash the check, if it is not stale.

There are also some court decisions to that effect. See Commonwealth Edison Company v. Vega, 7th Cir. 1999.

Under IRS revenue ruling ( 80-140?) vested benefit cannot be forfeited or refused by the participant. Plan can be disqualified for not paying benefit. Pay out the money as involuntary cashout.

I know that the IRS does not like this approach, but what about paying it all into the IRS as withholding? That approach is often used when you can't locate a participant in a terminating plan, particularly an orphan plan.

Kirk : paying the distribution to the IRS is permissible when there are no other options in a terminated plan but why does a plan fiduciary want to take the such a risk if a) the administrator knows where the employee lives and b) the employee has not complied with the plan terms for requesting a distribution of the funds. Some employees have ulterior motives to hide assets (e.g, revenge against an ex spouse who is trying to enforce a QDRO or meet income requirement for medicaid). Why should the administrator be a dup especially if the employee has not requested a distribution. Secondly is paying over the entire distribution to the IRS permitted under the plan terms instead of an involuntary cashout of balances of $5000 or less? Third isnt paying all of the benefit to the IRS a violation of the plan terms to withhold only 20% of the taxable amount?

Mbozek:

1. If the participant won't cash the check, how have you "paid" it to the participant? All you've done is mail a check.

Remember that the participant here does not need to request a distribution; the amount of the account balance is under the threshold for involuntary distributions.

2. The plan could be amended to state that paying it all to the IRS is the equivalent of paying to the participant, because it all inures to the participant's benefit.

3. Where does it say that you can't withhold more than 20%? I've had several situations where participants have voluntarily elected to withhold 100%. Stated in a different fashion, I think that the 20% is a minimum, not a maximum.

Can anyone here seriously justify dwelling longer than 20 minutes on a matter that concerns all of $50 (& yes, I know, it's not the amount, it's the principle of the thing )?

Yes, the bank I just left, was under a DOL order to distribute "left over" monies from terminated trusts some of the distributions were less than $1.00. Failure to comply could result in DOL prohibiting bank from acting as Trustee.

Brett

Kirk: according to case law, a participant is paid for tax purposes in the year for which the check is mailed by the payor, not when the employee cashes the check... Otherwise the employee could avoid taxation on the distribution by holding the check. Employee cannot avoid taxation by returning the check to the payor. Kicking out the account balance creates a taxable distribution to the employee. A participant can elect to withhold more than 20%, but I don't think there is authority for a plan adminstrator to authorize it without the employees consent unless the p/a has a power of attorney from the employee. Distribution of 100% of benefit to IRS upon termination is done because it is the only way to satisfy IRS requirement that all assets have been distributed.

In a situation like this, assuming the document permits it, I'd just treat as a forfeiture. At such time as the employee ever decides they want the money, then pay them the 50 bucks from a new employer contribution. As long as the employer can document that they made a good faith attempt to pay it out, then I don't see the DOL getting all exercised over it.

To Greg Judd, I say "amen." And yes, I know the DOL doesn't care about the amount.
It takes me back to my time in the Marines -- you could ruin your career or "go to jail" just as easy for making a $1.00 mistake on your travel voucher (aka expense report), as you could for driving a multi-million dollar tank off a cliff.

Jarhead, aka Maverick

To Jarhead: as a former squid I can affirm that the Navy is no different.