Automatic Rollover IRA — Frequently Asked Questions

On September 28, 2004, the Department of Labor (DOL) issued new regulations for Safe Harbor Automatic Rollovers to individual retirement accounts (IRAs).  These regulations apply to qualified plan distributions under $5,000 (mandatory cash-out provision) made on or after March 28, 2005 and which are eligible to be rolled over.  Recent Internal Revenue Service (IRS) guidance provides that an amendment to comply needs to be adopted by the end of the first plan year ending on or after March 28, 2005 (December 31, 2005 for calendar plans); government and non-electing church plans may comply later.  If a plan provides for a mandatory cash-out, plan sponsor compliance with the automatic rollover regulations is MANDATORY.

Transamerica Retirement Solutions (TRS) is providing this list of frequently asked questions to aid producers and plan sponsors’ understanding of the new regulations and required actions.  For more information about the new Safe Harbor Automatic Rollover regulations, please visit the TRS web site at:
http://www.ta-retirement.com/resources/AutoRollovers11.pdf


FAQs

 

 

 


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 $5,000 or less.  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. 

Generally, the amount of the mandatory cash-out is not greater than $5,000 unless the plan provides that rollovers from non-related plans are excluded in determining the $5,000 threshold.

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2. How will the new regulations affect a plan?

If a plan currently provides for a mandatory cash-out of balances less than $5,000*, there are two options**:

a)  Amend the plan to remove the mandatory cash-out provision and not offer the IRA automatic rollover provision.  This amendment should be signed before March 28, 2005.

-OR-

b)  Amend the plan to override the existing cash-out provision and adopt the automatic IRA rollover provision (the plan would still be able to provide for mandatory cash-outs of $1,000 or less).  This amendment should be signed before March 28, 2005.

*  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 TPA or record keeper) to determine if they have the provision.
**  Not all document providers are offering both options.  Check with the document provider to see what options are available.

If a plan does NOT have a mandatory cash-out provision, the choices are as follows:

a) Keep the plan as is (do not offer the automatic rollover provision)  -OR-
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 new rules? 

Prior to EGTRRA and before March 28, 2005, absent an election from the participant, the default distribution form for a mandatory distribution is cash.  The new 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 funds 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 investment funds for the IRA.

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5. Can a plan sponsor choose not to adopt the automatic rollover provision?

Yes.*  You can amend the plan to remove mandatory distributions (cash-out) exceeding $1,000.  This will enable your plan to comply with the new regulations without processing automatic rollover IRAs.

Recent IRS guidance states that an amendment to remove mandatory distribution exceeding $1,000 must be adopted by the end of the first plan year ending on or after March 28, 2005 (December 31, 2005 for calendar plans); governmental and non-electing church plans may comply later. 
If a plan does not currently have a mandatory cash-out provision, and the plan sponsor does not wish to adopt a rollover provision, no amendment is necessary. 

* 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) Amend the plan to provide 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.

Recent IRS guidance states that an amendment to provide for the automatic rollover provision needs to be adopted by the end of the first plan year ending on or after March 28, 2005 (December 31, 2005 for calendar plans); governmental and non-electing church plans may comply later. 

TRS and our partners are here to help plan sponsors comply with the new regulations.  TRS or your recordkeeper will provide you with sample documents and full instructions in a mailing to go out in late February or early March 2005. 

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7. How does a plan sponsor select an IRA provider?

Plan sponsors may choose an IRA provider that meets the DOL’s requirements and the requirements of FAQ #4.

Alternatively, TRS has established an alliance with Harrisdirect to provide plan sponsors with an automatic rollover IRA solution.  Harrisdirect’s safe harbor IRA meets the DOL’s requirements.  Plans with records kept at Diversified Investment Advisors will be offered the Diversified IRA for automatic rollovers.  Both Harrisdirect and Diversified will be set up to accept automatic rollovers with balances greater than $1,000.

Plan sponsors may choose Harrisdirect, a provider other than Harrisdirect, or have multiple providers, as long as each IRA provider meets the DOL’s requirements.  A written agreement with a qualified IRA provider must be in place prior to the first automatic rollover IRA being established but in no event later than December 31, 2005.

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8. 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 by early March 2005.

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9. 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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10. When is the effective date of the automatic rollover provision? 

A good faith plan amendment reflecting the automatic rollover provision or the removal of mandatory distributions exceeding $1,000 must be adopted by the end of the first plan year ending on or after March 28, 2005 (December 31, 2005 for calendar plans).  Although recent Internal Revenue Service guidance has extended the amendment deadline, we highly recommend having the necessary amendment signed before March 28, 2005.  Governmental and non-electing church plans may comply later pursuant to Q&A-5 and Q&A-8 of IRS Notice 2005-5. 

 Deadline  Event
March 28, 2005 Mandatory cash-out distributions for balances between $1,001 and $5,000 no longer allowed.
March 28, 2005 Recommended date to adopt plan amendment to remove mandatory distributions greater than $1,000 (if sponsor chooses this option)
March 28, 2005 Recommended date to adopt plan amendment to add automatic rollover provision (if sponsor chooses this option)
March 28, 2005 Recommended date to have written agreement with IRA provider in place (for sponsors who choose automatic rollover provision)
December 31, 2005 Mandatory deadline to adopt good faith plan amendment to remove mandatory distributions greater than $1,000 or to add the automatic rollover provision – for calendar plans.  Automatic rollover amendment must be in place prior to the first automatic rollover being established.
December 31, 2005 Mandatory deadline to have written agreement with IRA provider in place (for sponsors who choose automatic rollover provision).  Agreement must be in place prior to the first automatic rollover being established.

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