It has always been my understanding that even if a plan specifies that distributions will not be made until the terminated participant has incurred a 1 year break in service, this would only apply to participants with vested account balances >$5,000. In other words, if a participant has <$5,000, then no matter when the plan says the distributions are payable, the plan sponsor can pay them out immediately upon request. is this correct, or have i been mislead????

I believe the Plan would have to be specific in distinguishing between <$5000 and >$5000 in order to do what you suggest. I have a client whose plan makes those over $5000 wait until NRA, but those under $5000 are immediately eligible for distribution upon termination but the Plan specifically states this provision. If the Plan Document states that distribution occurs at a 1-year break and does not specify between <>$5000, I think that ALL distributions are subject to the 1-year break. Just my humble opinion....

I agree that the plan must contain cash-out provisions relating to distributions less than $5,000 if they are to be paid out immediately. (These distributions are optional, not mandatory.) The plan should also develop and consistenly follow a policy as to timing, rollover elections and so forth.

The Code and ERISA permit an under $5,000 distribution to be made before a one year break in service. The Code and ERISA also permit a plan to delay an under $5,000 distribution until a one year break in service. Thus, it is a matter of plan terms as to when the distribution is to be made.

BTW, in most cases, the one year break in service requirement is a vestige of the pre-REA provision permitting a dc plan to disregard service completed after a one year break in service in determining pre-break vesting. By waiting for the one year break, the plan could avoid the special vesting rules for distributions made to less than 100% vested participants at a time when their vesting percentage could increase.