Cashing-out of Small Pension Benefits: The Rules have Changed

more+
less-

[author: Mary Picard]

The rules for cashing-out or “unlocking” small pension benefit amounts have been overhauled. Effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:

  • The threshold amount for cashing-out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee’s annual pension is less than 4% (rather than the previous 2%) of the year’s maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules.
  • DC plan administrators will no longer have to convert a departing employee’s individual DC account into an annual pension amount in order to determine if the cash-out threshold is met. Under the new rules, the benefit can be cashed-out if the DC account is less than 20% of the YMPE (in 2012, that’s $10,020).

Many defined benefit and defined contribution pension plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher thresholds. However, we recommend that plan sponsors amend their plan texts so that they can adopt these higher cash-out thresholds. Doing so will significantly lessen the administration costs of dealing with employees who terminate plan membership with small pension benefit amounts.

 

Written by:

Published In:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »

All the intelligence you need, in one easy email:

Great! Your first step to building an email digest of JD Supra authors and topics. Log in with LinkedIn so we can start sending your digest...

Sign up for your custom alerts now, using LinkedIn ›

* With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name.
×
Loading...
×
×