New Requirements for Transfer of Small Qualified Plan Accounts to IRAs
By Steven B. Lapidus, Greenberg Traurig, Miami Office
View or download the PDF version of this Alert.
The Job Creation and Worker Assistance Act of 2002 added a new provision
to the Internal Revenue Code requiring that qualified plans that provide
for the automatic distribution of small accounts provide that those accounts
in excess of $1,000 but not exceeding $5,000 be transferred into an individual
retirement plan if the participant does not elect to receive a distribution
directly or have the distribution transferred to another eligible plan.
This new requirement was made effective as of the effective date of final
regulations issued by the Department of Labor addressing certain fiduciary
responsibility issues under ERISA relating to such automatic transfers.
Those DOL regulations were recently issued with an effective date of March
28, 2005. Accordingly, all plans that provide for automatic distributions
of small accounts will need to be amended to comply with these new rules
with respect to distributions made on or after March 28, 2005.
|"Accordingly, all plans
that provide for automatic distributions of small accounts will
need to be amended to comply with these new rules with respect
to distributions made on or after March 28, 2005."
New Section 401(a)(31)(B)
Section 401(a)(31)(B) of the Internal Revenue Code generally requires
that if a qualified plan provides for a mandatory cash-out distribution
of accounts having a value of between $1,000 and $5,000, and the participant
does not elect to receive a distribution directly or to have his or her
account transferred directly to another qualified plan or IRA, then the
plan must (i) transfer the participant’s account to an individual retirement
plan of a designated trustee or issuer, and (ii) notify the distributee
in writing that the distribution may be transferred to another individual
retirement plan. As indicated above, this new provision is effective with
respect to mandatory distributions made on or after March 28, 2005.
New ERISA Fiduciary Responsibility Regulations
Section 2550.404a-2 of the final regulations recently issued by the Department
of Labor (“DOL”), provides that a fiduciary of an ERISA plan will be deemed
to have satisfied his or her fiduciary duties under ERISA with respect to
both the selection of an IRA provider and the investment of funds in connection
with automatic rollovers of mandatory distributions pursuant to Section
401(a)(31)(B) (i.e., mandatory cash-outs of between $1,000 and $5,000) if
the following requirements are met:
- The present value of the vested benefit being transferred does not
- The mandatory distribution is made to an individual retirement account
or individual retirement annuity (an “IRA”);
- Both the fiduciary selection of an IRA and the investment of funds
would not result in a prohibited transaction under Section 406 of ERISA
for which an exemption is not available; and
- The fiduciary enters into a written agreement with the IRA provider
to which the transfer is being made that provides that:
- The rolled over funds will be invested in an investment product designed
to preserve principal and provide a reasonable rate of return, whether or
not the return is guaranteed, consistent with liquidity;
- The investment product selected will seek to maintain, over the term
of the investment, a dollar value that is equal to the amount invested in
the product by the individual retirement plan;
- The investment product selected for the rolled over funds is offered
by a state or federally regulated financial institution, such as a bank,
credit union, insurance company or investment company registered under the
Investment Company Act of 1940;
- The fees and expenses charged to the IRA (e.g., establishment charges,
maintenance fees, investment expenses, termination costs and surrender charges)
will not exceed the fees and expenses charged by the individual retirement
plan provider for comparable individual IRAs;
- The participant on whose behalf the fiduciary makes an automatic rollover
will have the right to enforce the terms of the contractual agreement establishing
the IRA with regard to his or her rolled funds against the IRA provider;
- Participants are given a summary plan description, or a summary of
material modifications, that describes the plan’s automatic rollover provisions,
including an explanation that the mandatory distribution will be invested
in an investment product designed to preserve principal and provide a reasonable
rate of return and liquidity, a statement indicating how fees and expenses
attendant to the IRA will be allocated, and the name, address and telephone
number of a plan contact for further information concerning the plan’s automatic
rollover provisions, the IRA provider and the fees and expenses attendant
to the IRA.
|"The DOL regulation also
provides a safe harbor with respect to mandatory distributions
of $1,000 or less, even though such transfers to an IRA are not
required under Section 401(a)(31)(B) of the Code..."
The DOL regulation indicates that the foregoing rules merely provide
a safe harbor for fiduciaries and are not intended to be the exclusive method
by which fiduciaries may satisfy their fiduciary responsibilities with respect
to automatic rollovers of mandatory distributions.
The DOL regulation also provides a safe harbor with respect to mandatory
distributions of $1,000 or less, even though such transfers to an IRA are
not required under Section 401(a)(31)(B) of the Code, provided that there
is no affirmative distribution election by the participant and the fiduciary
makes a rollover distribution of the amount into an IRA on behalf of the
participant in accordance with the conditions described above.
What should employers be doing?
In light of the foregoing new rules, employers should take the following
actions on or before March 28, 2005:
- Either eliminate the mandatory cash out distribution of benefits that
do not exceed $5,000 or amend the plan to provide for the automatic transfers.
If mandatory cash outs are eliminated, the employer should consider whether
the accounts of participants who elect not to receive immediate distribution
of their benefits should be charged with their share of the reasonable plan
administrative expenses. In Field Assistance Bulletin 2003-3, the DOL indicated
that this would be permissible, even if the employer paid the administrative
expenses allocable to active participants. The IRS concurred in this conclusion
in Rev. Rul. 2004-10. Plans intending to follow this approach should be
amended to so provide.
- If the mandatory cash out of benefits will be retained, then on or
before March 28, 2005, the Employer should:
- Enter into a written contract with an eligible IRA provider to provide
for automatic transfers of mandatory distributions that participants do
not elect to receive directly or to be transferred to some other qualified
plan, to IRA’s for those participants that will be invested in a manner
that complies with, and that otherwise satisfies the requirements of, the
safe harbor requirements;
- Amend the Plan document to provide for the automatic transfers; and
- Amend the Summary Plan Description for the Plan to advise participants
of the automatic rollover procedures and the other information required
to comply with the safe harbor.
If you have any questions with regard to these new rules, or the steps
that your company should take to comply with them, please feel free to contact
© 2004 Greenberg Traurig
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& Employee Benefits Group description, or feel free to contact one of our
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to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.