Retirement Plan Options When Participants Separate From Service
Most organizations have an exit process for employees leaving the organization. Including the retirement plan in the separation from service process is an important and often overlooked component that will make your plan oversight much simpler and keep it compliant with the new IRS regulations.
To provide context, remember this Plan requirement: As a Plan Sponsor, you are required to provide all plan participants with the ongoing required Plan communications including revisions to the Summary Plan Description, required Plan notifications and required Plan reports.
This can be a challenge – or impossibility – if you lose contact information for participants who are no longer employed by the organization. For this reason, most Plan Sponsors prefer to have terminated Participants exit the plan.
Depending on the Participant's account balance, and if you have obtained authorization when they separate from service, you may be able to move the former employee out of the retirement plan. The following chart outlines the available distribution options when an employee separates from service:
Participant's Account Value |
|||
Available Distribution Options |
$1,000
|
Between
|
More than $5,000.01 |
| 1. Transfer the Account to an Envoy Choice IRA - The Participant may elect to transfer all or part of the account balance to an Envoy Choice IRA. (Distribution fees from the Plan and the IRA setup fees are waived.) | √ |
√ |
√ |
| 2. Transfer the Account to an IRA or Eligible Plan - The Participant may elect to transfer all or part of the account balance to an outside (not Envoy Choice) IRA or to another eligible plan. (Distribution fees will apply.) | √ |
√ |
√ |
| 3. Keep the Account Open - The Participant may elect to keep the account in the Plan. | √ | ||
| 4. Periodic or Recurring Distributions - The Participant (over age 59½) may elect to take periodic or recurring distributions from their account. These distributions might have special tax considerations. (For example, a Housing Allowance Tax Treatment for a pastor from a church's 403(b) plan.) | √ |
||
| 5. Partial Distribution - The Participant may elect to take a partial distribution from their account. These distribution types have special tax considerations. (For example, if the Participant is less than 59½ years of age, early withdrawal penalties may apply.) | √ |
||
| 6. Plan Sponsor Directed Cash Out - The Plan Sponsor can authorize a mandatory cash out. In this case, the account will be liquidated and a distribution check will be forwarded to the Participant. (Federal and State taxes, as well as distribution fees, will apply. In some cases, early withdrawal penalties will apply as well.) | √ |
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| 7. Plan Sponsor Directed Force Out to an IRA - The Plan Sponsor can authorize a mandatory IRA rollover. (Distribution fees from the Plan and the IRA setup fees are waived.) | √ |
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| 8. Participant Directed Cash Out - The Participant may elect to cash out all of the account. (Federal and State taxes, as well as distribution fees, will apply. In some cases, early withdrawal penalties will apply as well.) | √ |
√ |
√ |
Of particular interest to Plan Sponsors are 6 & 7 above. Having the Participant sign a Separation From Service Retirement Plan Authorization Form as part of the exit process will assure that the terminated Participant’s account (subject to the account value requirements above) will be transferred out of the plan in the event that they take no action on their own to move the account.
This is another resource we are pleased to provide for retirement plans on the Envoy Choice platform.
As always, we’re available to help you with your plan administration needs. For assistance, contact our Plan Sponsor Service team at (888) 879-1376, option 4 or by email.
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