GT Alert

New Requirements for Transfer of Small Qualified Plan Accounts to IRAs

December 2004
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 exceed $5,000;
• 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:

1. 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;
2. 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;
3. 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;
4. 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;
5. 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; and
6. 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 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:
  1. 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;
  2. Amend the Plan document to provide for the automatic transfers; and
  3. 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 us.

© 2004 Greenberg Traurig

Additional Information:

For more information, please review our Tax Practice or Executive Compensation & Employee Benefits Group description, or feel free to contact one of our attorneys.

• Tax Practice Area
  • Tax Attorneys
• Executive Compensation & Employee Benefits Practice Area
  • Executive Compensation & Employee Benefits Attorneys