Distribution Consent Requirements
By Jeff Aga, QKA, QPA, CPC, CISP, CHSP
Does a plan sponsor need consent to process participant distributions?
Under most circumstances, a plan sponsor may not distribute plan assets to a participant without the participant’s consent as long as the distribution is “immediately distributable.” A distribution generally is considered “immediately distributable” at any time before a participant attains age 62 or, if later, the normal retirement age as defined in the plan document or under IRC Sec. 411(a)(8) (currently age 65). A valid consent is one made only after the participant receives the required distribution notice.
What is the distribution notice requirements for the participant’s consent?
Plan sponsors must provide a distribution notice explaining a participant’s distribution options no more than 180 days and no less than 30 days before the distribution is taken. The regulations permit a waiver of the 30-day waiting period and allow an immediate distribution following receipt of the notice, provided the participant makes an informed, affirmative election to distribute. The participant must understand, however, that she has the right to consider distribution options for 30 days after receipt of the distribution notice.
Are there exceptions to the participant consent requirements?
Yes, there are exceptions to the general rule. Under the following circumstances, a plan sponsor may provide that participants or other beneficiaries under the plan will receive a distribution without the participant’s consent. But note that plan sponsors generally must allow participants and spouse beneficiaries the option of having their distribution directly rolled over to an eligible retirement plan.
Mandatory Cash Out Distributions – If a participant separates from service and does not indicate how the account balance should be paid out, the plan sponsor may provide that the individual will be given a distribution of his entire vested account balance. This can happen only if the vested accrued benefit of the account is $7,000 or less. Such a distribution upon termination of employment is referred to as a mandatory distribution (or involuntary cashout).
Death Distributions – The consent requirements do not apply after the plan participant’s death.
Distributions Required by QDROs – Except as explicitly provided by a QDRO, a plan sponsor need not obtain an alternate payee’s consent before making a distribution to such alternate payee.
Distributions to Satisfy IRC Secs. 401(a)(9) or 415 – A plan sponsor need not obtain a plan participant’s consent before distributing assets to satisfy the requirements under IRC Sec. 401(a)(9) (relating to RMDs) or to satisfy the requirements of IRC Sec. 415 (which limit a plan participant’s annual additions to the lesser of 100 percent of compensation or the indexed amount for the year ($69,000 for 2024 and $70,000 for 2025).
Distributions Following Plan Termination – If a plan sponsor terminates its defined contribution plan and the plan does not offer an annuity option (purchased from a commercial provider), then the plan may distribute a participant's accrued benefit without the participant's consent.
