I have a client who would like to take advantage of the cash-out feature in his retirement plan and distribute some small balances to several participants. He will be sending a letter telling the participants that they have 45 days to respond or a check will be sent, minus the 20% withholding. He will include the Special Tax Notice and distribution paperwork with his letter.

Does anyone have a sample letter that you would be willing to share?

Silly question, but are these all terminated participants?

Yes, this only pertains to terminated employees who, for whatever reason, did not request a distribution when they terminated employment.

if the amount is less than the 5000 limit, the plan may just issue a cash out.

Yes it would make good practice to send a notice to the participants advising them and giving them the chance to elect a direct transfer.

There may be another issue. Many plans require distribution if the balance is below $5000, although perhaps after a waiting period.

The admonition about sending "...a notice to the participants advising them and giving them the chance to elect a direct transfer" is probably not strong enough. If the plan administrator plans to send them a check, then tax is withholding is required, and the participant must be given an opportunity to elect a direct rollover to avoid the withholding.