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March 9, 2005 | Communiqué | Pittsburgh
The automatic rollover provisions were added to the Internal Revenue Code of 1986 (Code), as amended at Code Section 401(a)(31)(B) by the Economic Growth and Tax Relief Reconciliation Act of 2001. The automatic rollover requirements apply to all tax-qualified plans under 401(a) of the Code, 403(b) plans, governmental 457(b) plans and church plans.
Beginning March 28, 2005, plan administrators can no longer make involuntary distributions over $1,000 if the participant fails to make an affirmative election between a distribution in cash or having it rolled over. The automatic rollover rules require the plan administrator to establish an account under an individual retirement plan (IRA) in the name of the plan participant and roll over the distribution (if it is more than $1,000) to the IRA. In order to avoid potential fiduciary concerns, the Department of Labor (DOL) has provided guidance in the form of final regulations. The Internal Revenue Service (IRS) has provided its own guidance, as well, including a sample plan amendment.
Under the DOL final regulations, the plan fiduciary’s responsibility with respect to a mandatory rollover ends when the funds are placed with the IRA provider under an agreement that satisfies certain “safe harbor” conditions. The “safe harbor” has five requirements:
(1) There must be a written agreement with the IRA provider that specifically addresses the investment vehicle for the rolled-over funds and the fees that will be charged;
(2) The investment fund under the IRA must be an investment product that is designed to preserve principal and provide a reasonable rate of return (examples include money market funds and stable value products);
(3) The fees and expenses charged by the IRA provider cannot exceed amounts charged by the provider for comparable IRA accounts that are not automatic rollovers;
(4) Participants must be provided with a summary of material modifications, before the automatic rollover procedure is implemented, that describes the investment vehicle in which an automatic rollover will be invested and the fee structure; and
(5) The plan sponsor must not engage in a prohibited transaction in the selection of the IRA provider.
The DOL regulations also extend the “safe harbor” to automatic rollovers under $1,000. The IRS guidance allows plan sponsors to delay implementation of the automatic rollover requirements beyond March 28, 2005, so long as no involuntary distributions over $1,000 are made in the interim period and automatic rollovers are made on or before December 31, 2005.
The IRS guidance indicates that plans must be amended to reflect the automatic rollover rules, but plan sponsors will generally have until the end of the first plan year ending on or after March 28, 2005 to adopt these plan amendments. According to this IRS Notice, a plan sponsor does not have to implement the automatic rollover requirements. A plan sponsor can amend the plan to reduce the automatic cash-out requirement to $1,000 or eliminate it altogether without violating the Code’s anti-cutback requirements.
The IRS cautions that there can be times when the automatic rollover amount will exceed $5,000. While a plan can disregard a participant’s rollover contribution to determine whether a mandatory distribution is permitted, the amount of the rollover contribution must be included in determining whether the distribution is $1,000 or less.
Concerns about compliance with the customer identification program (CIP) requirements under the USA Patriot Act (Act) are addressed in the IRS guidance. The CIP requirements (as interpreted by staff members of the federal regulators with responsibility for administration and regulations under the Act) will not require a financial institution to implement its CIP compliance requirements until the former plan participant first contacts the financial institution and asserts ownership of the IRA.
You should seek specific legal advice before acting with regard to the information provided in this alert, since such advice may often turn on the specific facts of your situation and your employee benefit plans.
This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise this Communiqué if there are subsequent changes in the law.
For more information, please contact Sarah “Sally” Lockwood Church at 412 394 7731 or firstname.lastname@example.org or James K. Goldberg at 412 394 7739 or email@example.com.
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