How do I process a separation from service?
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:
- Deliver Separation from Service - Important Information about Your Retirement Account to Participant (printable form)
- Notify Envoy of the change in the Participant's employment status via the Comprehensive Payroll Data File (CPD). The CPD file includes data fields for both the termination date and the termination reason. The status change should not be provided until the last pay period for which the Participant has a contribution to his/her account.
- Upon receipt of a properly signed Distribution Authorization Form or Transfer Authorization Form, approve the distribution on the Envoy Choice Web Portal. Click here for detailed instructions.
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.
- Option A - Participant Directed Transfer to an Envoy Choice IRA - The Participant may elect to transfer all or part of the account balance to an Envoy Choice IRA.
- Option B - Participant Directed Transfer to an IRA or to Another Eligible Plan - The Participant may elect to transfer all or part of the account balance to an outside (not Envoy Choice) IRA or to another eligible Plan.
- Option C - Participant Directed Cash Out - The Participant may elect to cash out all of the account.
- Option D - Periodic or Recurring Distributions - If the Participant is over age 59½ with a vested account balance that exceeds $5,000, he/she may take periodic or recurring distributions from the account.
- Option E - Partial Distribution - If the Participant is over age 59½ with a vested account balance that exceeds $5,000, he/she may take a partial distribution from the account.
- Option F - Keep the Account Open - The Participant may elect to keep the account in the Plan. This option is available only if the Participant's vested balance exceeds $5,000.
- Option G - Plan Sponsor Directed Cash Out - The Plan Sponsor can authorize a mandatory cash out. This option is available only if the Participant's vested balance does not exceed $1,000 and the Participant has failed to make an election.
- Option H - Plan Sponsor Directed Transfer to a Safe Harbor IRA - The Plan Sponsor can authorize a transfer to a Safe Harbor IRA. This option is available only if the Participant's vested balance exceeds $1,000 but does not exceed $5,000 and the Participant has failed to make an election.
Distribution Availability - Quick Reference
Important to Exit the Plan
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.