Automatic Rollover IRA — Frequently Asked Questions
The Department of Labor (DOL) issued regulations in 2004 for safe harbor automatic rollovers to individual retirement accounts (IRAs). These regulations apply to qualified plan distributions under $5,000 (mandatory cash-out provision) which are eligible to be rolled over If a qualified plan provides for a mandatory cash-out, the plan MUST satisfy the automatic rollover provisions of the Code in order to continue to remain qualified.
Transamerica Retirement Solutions is providing this list of frequently asked questions to aid financial professionals' and plan sponsors' understanding of the safe harbor automatic rollover regulations and required actions. For more information about the regulations, please visit the Transamerica Center for Retirement Studies.
FAQs
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- What are the steps a plan sponsor must take to initiate an automatic rollover?
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1. What is a mandatory cash-out and which participants are affected?
A mandatory cash-out is a distribution that is made without the participant’s consent and before the participant attains the later of age 62 or normal retirement age. The automatic rollover provision applies only to terminated participants who have vested plan balances of more than $1,000 and less than $5,000 that are eligible rollover distribution amounts. Typically, mandatory cash-outs apply to terminated participants who have not selected a distribution or rollover option for their plan balance. A distribution to a surviving spouse or alternate payee under a Qualified Domestic Relations Order (QDRO) or a minimum required distribution is not a mandatory cash-out for purposes of the automatic rollover requirements. In addition, a plan loan offset is not subject to the automatic rollover provisions.
Generally, the amount of the mandatory cash-out subject to the automatic rollover rules is not greater than $5,000 nor less than $1,001, unless the plan provides that rollovers from non-related plans are excluded in determining the $5,000 threshold.
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2. How do the regulations affect a plan?
If a plan provides for a mandatory cash-out of balances less than $5,000*, then the plan must provide that if the participant fails to affirmatively elect to receive a distribution directly or roll that amount over to an eligible retirement plan after receiving the required notice, a mandatory distribution that exceeds $1,000 and that is an eligible rollover distribution will be rolled over to an IRA (the plan would still be able to provide for mandatory cash-outs of $1,000 or less).
* Plan sponsors using Transamerica’s plan documents have the mandatory cash-out provision in their plans. Others will need to check with their document provider (generally their third party administrator or record keeper) to determine if they have the provision.
If a plan does NOT have a mandatory cash-out provision, you may:
a) Keep the plan as is (do not offer the automatic rollover provision and comply with FAQ no. 5, below).
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b) Amend the plan to adopt the automatic rollover provision.
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3. What is a safe harbor automatic rollover and how does it satisfy the rules?
Prior to EGTRRA and before March 28, 2005 (January 1, 2006 for governmental plans and church plans), absent an election from the participant, the default distribution form for a mandatory distribution was cash. The regulations provide that the default form for such distribution is a rollover to an IRA.
In order to meet the safe harbor automatic rollover rules and get fiduciary relief, a plan must provide that, with respect to a participant who has received a distribution notice but fails to elect a form of distribution, the default for distributions of between $1,001 and $5,000 is a rollover into an IRA. Also, see FAQ # 4 for the other conditions for obtaining fiduciary relief. Mandatory cash-outs of $1,000 or less may, but are not required to be, included in an automatic rollover. (Note: not all automatic rollover IRA providers will accept distributions of $1,000 or less).
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4. How is the safe harbor automatic rollover provision beneficial to plan sponsors and what are the conditions for fiduciary relief?
Plan fiduciaries that comply with the safe harbor standards will be deemed to have met their fiduciary duties with respect to the selection of the IRA provider and the default investment choices under the IRA. Following are the conditions for fiduciary relief under the safe harbor rules:
a) The mandatory cash-out distribution must be rolled over to an individual retirement plan (IRA account or annuity) of a state or federally regulated financial institution (bank, savings association, credit union, insurance company or an investment company registered under the Investment Company Act of 1940).
b) The plan fiduciary must enter into a written agreement with the IRA provider. The agreement must address the investment of the rollover amounts, and the fees and expenses attendant to the IRA.
c) The IRA provider written agreement must provide that the:
i) investment products will be those designed to minimize risk, preserve principal while providing a reasonable rate of return, and maintain liquidity, such as money market funds, interest-bearing savings accounts, certificates of deposit and fully benefit-responsive stable value funds
ii) fees and expenses attendant to the safe harbor IRA must be reasonable and comparable to those charged by the IRA provider for other IRAs.
d) In advance of an automatic rollover, participants must be provided with a Summary Plan Description (SPD) or a Summary of Material Modifications (SMM) that includes information concerning procedures for automatic rollovers, an explanation of the nature of the investment product, an explanation of the fees and expenses attendant to the safe harbor IRA, how the fees and expenses will be allocated (e.g. paid by the IRA holder, distributing plan or employer), and the names, addresses and phone numbers of the contacts for the plan and the IRA provider.
e) Plan sponsors may not engage in prohibited transactions (e.g. self dealing) when selecting an IRA provider or choosing the initial investments for the IRA.
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5. Can a plan sponsor choose not to adopt the automatic rollover provision?
Yes.* Plans can comply with the regulations by maintaining their plan’s cash-out threshold to $1,000 (and under), thereby requiring participant consent for all distributions exceeding $1,000. This will enable your plan to avoid having to process automatic rollover IRAs.
* Check with your document provider to see if your plan has this option. Plans on the Transamerica document do have this option.
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6. What is required of plan sponsors who choose the safe harbor automatic rollover provision?
In general, if a plan sponsor chooses to adopt the safe harbor automatic rollover provision, it must:
a) Ensure that the plan provides for the automatic IRA rollover provision.
b) Distribute a SMM (Summary of Material Modifications) to plan participants.
c) Select an IRA provider to handle automatic rollovers.
d) Have a signed agreement with the IRA provider in place.
e) Establish processes and procedures to accommodate automatic rollovers by the time the first automatic rollover is to be processed.
Transamerica and our partners are here to help plan sponsors comply with the regulations. Transamerica or your recordkeeper will provide you with sample documents and full instructions.
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7. What are the steps a plan sponsor must take to initiate an automatic rollover?
TRS or your recordkeeper will distribute a step-by-step instruction sheet for plan sponsors.
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8. What are the plan sponsor’s responsibilities once the participant’s account is rolled into a safe harbor IRA?
Once the IRA provider establishes the participant’s account and the account is funded, under the DOL’s safe harbor rules, the plan sponsor will no longer be responsible for the account.
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