Automatic Rollover Requirements
View or download the PDF version of this Alert.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)
imposed new requirements on qualified retirement plans that provide for
“mandatory distributions” of amounts equal to $5,000 or less. EGTRRA requires
that mandatory cash-outs of amounts between $1,000 and $5,000 be automatically
rolled over to an individual retirement plan (that is, an individual retirement
account or individual retirement annuity), unless the participant elects
otherwise. This requirement is effective for distributions made on and after
March 28, 2005.
|"Mandatory distributions between
$1,000 and $5,000 which would previously have been sent to a participant
as a matter of course, must not be mailed out to any participant
who has not made an affirmative election to receive it."
The new requirements call for immediate action by most plan sponsors.
Administrative procedures will need to be modified without delay if compliance
is to be maintained. For example, mandatory distributions between $1,000
and $5,000 which would previously have been sent to a participant as a matter
of course, must not be mailed out to any participant who has not made an
affirmative election to receive it.
On September 28, 2004, the DOL published final safe harbor regulations
effectuating the changes made by EGTRRA to automatic rollovers of certain
mandatory distributions. On December 28, 2004, the IRS issued Notice 2005-5
providing guidance relating to such automatic rollovers. This Alert contains
a brief description of the requirements contained in both the DOL and the
IRS guidance as well as a discussion of the actions plan sponsors must take
to maintain plan compliance.
A mandatory distribution (or cash-out) is an immediate distribution of
amounts of $5,000 or less made due to an employee’s termination of service
and before normal retirement age (or age 62, if earlier) and which does
not, under the terms of the plan, require consent of the participant or
spouse. Note that there is no requirement that a plan provide for mandatory
cash-out of small benefits. However, if a plan includes such a provision,
it becomes subject to the new automatic rollover rules for mandatory distributions
greater than $1,000.
Department of Labor Regulations
The new requirements have generated a great deal of concern since plan
sponsors, in most cases, will be taking on the fiduciary duties of choosing
a default IRA provider and an initial investment vehicle for the automatic
rollover amounts. In this regard, final DOL regulations establish a fiduciary
safe harbor providing relief to plan fiduciaries in connection with automatic
rollovers of mandatory distributions. Under the final DOL regulations, if
the conditions of the safe harbor are satisfied, the plan fiduciary will
be deemed to have fulfilled his or her fiduciary duties with respect to
both: (a) the selection of the individual retirement plan provider and (b)
the selection of the investments for such plan.
|"The new requirements have generated
a great deal of concern since plan sponsors, in most cases, will
be taking on the fiduciary duties of choosing a default IRA provider
and an initial investment vehicle for the automatic rollover amounts."
The standards for the fulfillment of fiduciary duties set forth in the
regulations apply solely in determining compliance with the safe harbor
and are dependent upon a fiduciary satisfying the conditions set forth in
the regulations. They are not intended to represent the exclusive means
for a fiduciary to satisfy his or her ERISA duties with respect to automatic
rollovers. For a summary of these provisions, see
Appendix A included in this Alert.
The IRS provided guidance on automatic rollovers in its Notice 2005-5,
released on December 28, 2004. A summary of the requirements provided in
IRS Notice 2005-5 and the IRS sample amendment is provided in
Appendix B included in this Alert.
Important Considerations and Required Action
By March 28, plan sponsors and administrators need to consider the available
options, decide on modifications to plan design and discontinue automatic
cash-outs exceeding $1,000. Alternatives to consider and required actions
include the following:
Implement the new automatic rollover – Plan sponsors who choose to implement
the automatic rollover provisions must do the following:
If the choice is made to implement the automatic rollover provisions,
it is advisable to take advantage of the DOL’s safe harbor provisions in
order to protect plan fiduciaries from liability should the IRA investment
results prove unfavorable.
Avoid the new automatic rollover requirements
- Plan sponsors may also choose to take action to avoid the automatic
rollover requirements. Basically, this can be accomplished in one of two
- Amend the plan to eliminate the plan’s mandatory distribution provisions
- Amend the plan to limit involuntary cash-outs prior to a participant’s
normal retirement age to $1,000 or less. Benefit amounts between $1,000
and the plan’s involuntary cash-out threshold would remain in the trust
(plan) until such time as the participant elects a voluntary distribution,
attains normal retirement age or becomes subject to the minimum distribution
- Rollover amounts ARE INCLUDED in determining if the benefit is less
than $1,000 even though rollover amounts are not taken into account for
determining whether a mandatory distribution is permitted.
- For calendar year plans, amend by December 31, 2005. IRS did not provide
a sample amendment.
Required action – Whether automatic rollover provisions are to be implemented
or not, the following actions are necessary:
- The manner in which retirement plan distributions are processed must
be immediately changed to ensure that no checks of amounts in excess of
$1,000 are mailed after March 27 to participants who have not affirmatively
elected to receive them.
- Benefit distribution packages that are currently being mailed must
be immediately modified. For example an addendum may be added to current
distribution packages to direct participants to ignore statements indicating
that a benefit check will be mailed to them if they take no action. The
addendum could also be used to advise participants to expect further information
at a later date if they do not respond.
As you can see, the new requirements have left plan sponsors with many
issues to consider and important decisions to be made. We recognize that
this is a lot of information to digest all at once. Please give us a call
as soon as possible to discuss any questions or concerns you may have. Keep
in mind that some decisions will need to be made before March 28.
Summary of Provisions of DOL Safe Harbor
• Amount of Mandatory Distributions – The amount of the distribution
may not exceed $5,000 (plus amounts attributable to prior rollover contributions).
Additionally, it is worth noting that, although the EGTRRA provisions addressed
cash-outs between $1,000 and $5,000, the final DOL regulations extended
the fiduciary relief to all mandatory cash-outs of $5,000 or less.
• Rollover Distribution to an Individual Retirement Plan – The
plan fiduciary must open an individual retirement plan in the participant’s
name. The IRA provider is required to be a state or federally regulated
financial institution such as a bank, an insured credit union, an insurance
company or an investment company registered under the Investment Company
Act of 1940. The distribution must be rolled over to an individual retirement
plan under such institution. Plan sponsors may select more than one provider
to receive automatic rollovers.
- The plan fiduciary must enter into a written agreement with the IRA
provider, including provision for the rolled-over funds to be invested
in an investment product designed to preserve principal and provide a
reasonable rate of return. The written agreement must address fees and
related expenses. The plan fiduciary is not required to monitor the provider’s
compliance with the terms of the agreements after the rollover occurs.
- The investment product must be designed to minimize risk and maintain
liquidity. Acceptable investments include: money market funds, interest-bearing
savings accounts, certificates of deposit and “stable value” products
that guarantee liquidity.
- Fees and expenses must be reasonable and should be comparable to those
charged by the IRA provider for comparable individual retirement plans
established for reasons other than receipt of automatic rollovers.
- The participant on whose behalf the automatic rollover has been made
must ultimately have the right to enforce the terms of the agreement establishing
the individual retirement plan with regard to his rolled over funds.
• Participants must be provided with information – Plan sponsors
must furnish participants with a summary plan description or a summary of
material modifications describing the plans automatic rollover procedures
including: the nature of the investment product; the allocation of fees
and expenses between IRA holder, distributing plan and plan sponsor; and
information about who to contact if further information is desired.
• Safe harbor relief is conditioned on the plan fiduciary not engaging
in any prohibited transaction in connection with the selection of IRA provider
or investments. In connection with this issue, the DOL released a class
exemption allowing certain plan sponsors to select their own services and
products for rollovers from plans they maintain for their own employees.
Summary of Provisions of IRS Notice 2005-5
• Range of plans affected by IRS guidance – The automatic rollover
requirements set forth in IRS Notice 2005-5 apply to all qualified plans,
and other tax-favored plans including single-employer, multiemployer, government
and non-electing church plans containing mandatory distribution provisions.
This includes 401(a), 401(k), 403(b), church plans and governmental plans
including governmental 457(b) plans. However, the deadline for implementing
these requirements is extended for both governmental and non-electing church
• Required Plan Amendment – Plans containing mandatory distribution
provisions must, generally, be amended to comply with the new automatic
rollover requirements by the last day of the plan year ending on or after
March 28, 2005. This could be as early as March 31, 2005 for plans with
fiscal years ending March 31.
In this regard, the IRS notice contains a sample amendment which will
be considered a “good faith” amendment. This sample amendment is for employers
who want to amend their plan to accommodate the automatic rollover of mandatory
distributions of over $1,000.
• Sample amendment provided in IRS Notice 2005-5 – Following is
the sample “good faith” amendment provided by the IRS to implement the new
IRA rollover rules:
Section 401(a)(31)(B) Sample Amendment
“In the event of a mandatory distribution greater than $1,000 in accordance
with the provisions of section _____, if the participant does not elect
to have such distribution paid directly to an eligible retirement plan
specified by the participant in a direct rollover or to receive the distribution
directly in accordance with section(s) _____, then the plan administrator
will pay the distribution in a direct rollover to an individual retirement
plan designated by the plan administrator.”
• Transition Relief – Although the automatic rollover requirements
apply to mandatory distributions made on or after March 28, 2005, the IRS
notice provides transition relief for plan sponsors who need more time to
establish and implement the necessary administrative procedures. In the
event that a plan sponsor does not process automatic rollovers of mandatory
distributions on or after March 28, 2005 due to lack of sufficient administrative
procedures, the plan will not be treated as failing to operate in accordance
with its terms provided, the eligible mandatory distributions are made on
or before December 31, 2005.
• Required Participant Notices – Prior to making a mandatory distribution,
the plan administrator must provide each participant individually with a
written notice stating that, absent his or her affirmative election, the
distribution will be automatically rolled over to an IRA. This notice is
required to identify the trustee or issuer of the individual retirement
plan. The IRS has specified that this notice may be provided as part of
the rollover notice (already required by IRC Section 402(f) to be given
to participants receiving distributions). This notice is required in addition
to the general explanation required by the DOL in order to take advantage
of the safe harbor relief (Appendix A, above). This notice may be sent by
- The IRS notice makes clear that a plan amendment to eliminate mandatory
distributions may be made without violating the anti-cutback provisions
of the Internal Revenue Code.
- An eligible rollover distribution in the form of a plan loan offset
amount is not subject to the automatic rollover provisions.
- Distribution to a surviving spouse or alternate payee is not subject
to the automatic rollover rules.
This Alert was written by
Terry Moore, Director of Employee Benefits
Services and Marlene Grossman, Assistant Director of Employee Benefits Services
in the New York office. Please contact Ms. Moore at (212) 801-6534, Ms.
Grossman at (212) 801-9285 or your Greenberg Traurig liaison if you have
any questions regarding the subject matter of this Alert.
© 2005 Greenberg Traurig
For more information, please review our Executive Compensation
& Employee Benefits Group description, or feel free to contact one of our
This GT ALERT is issued for informational purposes only and is not intended
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.