43. Vesting on distribution before break-in-service, cash-outs

Statement of Requirement: Code §§ 411(a)(11), 401(a)(31)(B); Reg. §§ 1.411(a)-6(c)(1)(ii), 1.411(a)-7(d)(4) and (5); Notice 2001-57, 2001-2 C.B. 279; N otice 2005-5, 2005-3 I.R.B. 337

(Note to reviewer: If the plan permits distribution of the account balance derived from employer contributions at a time when the participant may increase the nonforfeitable percentage in such account, it must use provision #1 or #2. Provision #1 provides for immediate forfeiture of nonvested amounts upon distribution of the employee's entire vested account balance on termination of service. Provision #2 applies if the plan provides for delayed forfeiture. Profit-sharing plans which provide for in-service distributions must include provision #2.)

(Note to reviewer: Section 304 of the SECURE 2.0 Act of 2022 increases the limit for mandatory retirement plan distributions to be automatically rolled over to an IRA from $5,000 to $7,000, effective for distributions made after December 31, 2023. See below and LRM #44 for sample plan language changes in this regard.)

Provision #1

If elected by the Employer in the adoption agreement, and an employee terminates service, and the value of the employee's vested account balance derived from employer and employee contributions is not greater than $5,000 ($7,000 for distributions made after December 31, 2023) (or such lesser amount as selected by the employer in the adoption agreement), the employee will receive a distribution of the value of the entire vested portion of such account balance and the nonvested portion will be treated as a forfeiture.

If an employee would have received a distribution under the preceding sentence b ut for the fact that the employee's vested account balance exceeded $5,000 ($7,000 for

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distributions made after December 31, 2023, or such lesser amount as selected by the employer in the adoption agreement) when the employee terminated service and if at a later time such account balance is reduced such that it is not greater than $5,000 ($7,000 for distributions made after December 31, 2023, or such lesser amount as selected by the employer in the adoption agreement), the employee will receive a distribution of such account balance and the nonvested portion will be treated as a forfeiture. Any such distribution shall comply with the requirements of section 401(a)(31)(B) of the Code (relating to automatic distributions as a direct rollover to an individual retirement plan for distributions in excess of $1,000).

For purposes of this section, if the value of an employee's vested account balance is zero, the employee shall be deemed to have received a distribution of such vested account balance. A participant's vested account balance shall not include: (1) accumulated deductible employee contributions within the meaning of section 72(o)(5)(B) of the Code for plan years beginning prior to January 1, 1989, and (2) if elected by the employer in the adoption agreement, the portion of the account balance that is attributable to rollover contributions (and earnings allocable thereto) within the meaning of sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16) of the Code.

If an employee terminates service, and elects, in accordance with the requirements of section _____, to receive the value of the employee's vested account balance, the nonvested portion will be treated as a forfeiture. If the employee elects to have distributed less than the entire vested portion of the account balance derived from employer contributions, the part of the nonvested portion that will be treated as a forfeiture is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution attributable to employer contributions and the denominator of which is the total value of the vested employer derived account balance.

(Note to reviewer: The blank should be filled in with the plan section number which corresponds to LRM #44.)

If an employee receives or is deemed to receive a distribution pursuant to this section and the employee resumes employment covered under this plan, the employee's employerderived account balance will be restored to the amount on the date of distribution if the employee repays to the plan the full amount of the distribution (without regard to gains/losses) before the earlier of 5 years after the first date on which the participant is subsequently re-employed by the employer, or the date the participant incurs 5 consecutive 1-year breaks in service following the date of the distribution. If an employee is deemed to receive a distribution pursuant to this section, and the employee resumes employment covered under this plan before the date the participant incurs 5 consecutive 1-year breaks in service, upon the reemployment of such employee, the employer-derived account balance of the employee will be restored to the amount on the date of such deemed distribution.

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Provision #2

If a distribution is made at a time when a participant has a nonforfeitable right to less than 100 percent of the account balance derived from employer contributions and the participant may increase the nonforfeitable percentage in the account:

(1) A separate account will be established for the participant's interest in the plan as of the time of the distribution, and

(2) At any relevant time, the participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula:

X = P(AB + (R x D)) − (R x D)

For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time, AB is the account balance at the relevant time, D is the amount of the distribution, and R is the ratio of the account balance at the relevant time to the account balance after distribution.

(Adoption agreement provisions)

Treatment of Rollovers in A pplication of Involuntary Cash- o ut provisions:

A1. ( ) $ ________ For distributions made on or before December 31, 2023, Ee nter an amount from 0 to $5,000, which will be the value of the employee’s vested account balance for purposes of the plan’s involuntary cash-out rules.

A2. ( ) $ ________ For distributions made after December 31, 2023, enter an amount from 0 to $7,000, which will be the value of the employee’s vested account balance for purposes of the plan’s involuntary cash-out rules.

B. The employer:

( ) elects to exclude rollover contributions in determining the value of the participant’s nonforfeitable account balance for purposes of the plan’s involuntary cash-out rules.

C. If the employer has elected to exclude rollover contributions, the election shall apply with respect to distributions made after __________ (ENTER A DATE NO EARLIER THAN DECEMBER 31, 2001) with respect to participants who separated from service after _________. (ENTER DATE. THE DATE MAY BE EARLIER THAN DECEMBER 31, 2001.)