What happens to the money in an employee's pension plan when he or she terminates employment?
In certain circumstances, an employee may be required to take a distribution of the amount that has accrued in his or her pension plan account. This applies only to amounts in such an account that are vested or, in other words, belong to the employee and cannot be forfeited. Paying out an account balance in a lump-sum distribution to an employee is known as a "cash out."
Cash out. A plan may involuntarily cash out an employee's pension benefit without the employee's consent if the present value of the benefit does not exceed $5,000. If the present value of a vested benefit exceeds $5,000, a plan may cash it out only with the employee's consent.
Tax consequences. If an employee receives a lump-sum distribution from a pension plan account upon termination of employment, he or she will have to pay taxes on the distribution. On the other hand, if an employee can transfer, or roll over, the amount to another qualified retirement or savings account, then he or she may be able to defer being taxed on the amount until a later date.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contains rules requiring employers to use a direct rollover for involuntary distributions that are greater than $1,000, but less than $5,000, but those rules will not take effect until the DOL issues implementing regulations.
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What happens to the money in an employee's pension plan when he or she terminates employment?
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