Distributions
Distributions when you leave or the plan ends
When a participant leaves, or when the employer ends the plan, the vested account is paid out. The choices are similar either way, but plan termination adds a few steps of its own.
When a participant leaves
| Option | How it works |
|---|---|
| Lump sum, direct rollover | Paid straight to an IRA or another employer plan. No tax withheld |
| Lump sum, paid to the participant | Taxable, with 20% federal withholding. Can still be rolled over within 60 days |
| Annuity | Monthly income for life, from the plan or through an insurance company |
| Leave it in the plan | Balances over $7,000 can generally stay until normal retirement age or plan termination |
Small balances of $7,000 or less can be paid out without the participant's consent, and are usually rolled to an IRA set up for them.
Spousal consent
A defined benefit plan's default form of payment for a married participant is a joint and survivor annuity. (This is an annuity that continues until the later of the death of the participant or spouse.) To take a lump sum instead, the spouse must consent in writing, witnessed by a notary or plan representative.
When the plan terminates
Ending a Cash Balance plan follows a standard sequence:
- Adopt a termination resolution and set the termination date. Every participant becomes 100% vested.
- Notify participants. PBGC-covered plans follow PBGC's standard termination notices and filings.
- Square the assets with the benefits. Make a final contribution if there is a shortfall and a contribution is desired, or decide how to handle a surplus. See Investments and risk.
- Pay everyone out, usually by lump sum and rollover, typically within two to four months of the termination date.
- File the final Form 5500. Due by the end of the seventh month after assets are distributed.
Timing tip
Owners near the 415(b) cap often time termination to the year their maximum lump sum peaks. The calculator shows exactly where that peak falls.