Withholding Rules for Small ERISA Balance Cash-Outs

Many employers automatically cash out retirement account balances for terminated employees if the balance is very small. Others roll the amounts over into an IRA. Those employers should understand that if total distributions to the participant for the tax year are under $200, they are not subject to the 20% mandatory withholding rules. However, if the employee's total distributions for the year equal or exceed $200, the 20% federal income tax withholding provision does apply. The IRS also provides model notice language that can be used to alert the participant to the plan's obligations. For more information on the income tax withholding rules that apply to IRA distributions, visit Tax Facts Online. : Q 3675.