The Participant Separation from Service Checklist provides step-by-step instructions for processing each Participant who has separated from service. It also allows you to fully document your actions regarding each participant in order to fulfill your fiduciary responsibilities.
The Separation from Service Distribution Process involves three major steps for you as Plan Sponsor:
Outlined below are the distribution options available to both the Plan Sponsor and the Participant. The distribution options available are determined by the Internal Revenue Code and, in part, the value of the account.
Plan Sponsors prefer to have Participants who have separated from service exit the Plan. Otherwise, you have the ongoing fiduciary obligation and administrative burden associated with required plan communications. These communications include revisions to the Summary Plan Description, ongoing plan notifications, fee disclosures and required plan reports.
Any outstanding loan against the plan will need to be paid off by the Participant. If the loan is not paid in full it will go into default and the Participant will receive a 1099-R reflecting the distribution. This is typically a taxable event to the Participant.
Housing Allowance tax treatment is available on distributions to pastors when certain criteria are met. Guidelines for this process are here.