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Automatic Rollover
Safe Harbor Regulations Issued
Beginning March 28, 2005, mandatory retirement plan
distributions between $1,000 and $5,000 must be automatically rolled over to a
designated traditional individual retirement account ("IRA"), unless the
participant affirmatively elects to receive the distribution or directly roll
over the distribution to another IRA or eligible employer plan. The U.S.
Department of Labor ("DOL") recently issued final regulations that set the
effective date of this automatic rollover requirement and provide safe harbor
relief for plan fiduciaries.
Under the DOL's final regulations, a plan
fiduciary is deemed to satisfy his fiduciary duties under ERISA with respect to
both the designation of an IRA provider and the initial investment choice for
the IRA if the arrangement meets the following seven requirements:
(1) Amount - The cash-out amount
(excluding prior rollover contributions and related earnings) must be less than
$5,000.
(2) Type of Account - The
mandatory cash-out must be deposited in a Code section 408(a) individual
retirement account or a Code section 408(b) individual retirement
annuity.
(3) Written Agreement with IRA
Provider - The plan fiduciary must enter into a written agreement with the
"cash-out" IRA provider. The agreement must address the investment of the
mandatory cash-out and related fees and expenses.
(4) Type of Investment - The
initial investment choice for the "cash-out" IRA is limited to investment
products that preserve principal and provide a reasonable rate of return and
liquidity, such as money market funds, interest-bearing savings accounts,
certificates of deposit and stable value products. Mapping from investment
products selected by the participant to identical or similar products available
under the IRA is not permitted.
(5) Fees and Expenses - The
"cash-out" IRA may charge fees for set-up, maintenance, investment expenses,
termination costs and surrender charges; however, such fees must be equal to or
less than fees charged by the IRA provider for comparable IRAs established for
voluntary rollover distributions.
(6) Disclosure - Before March
28, 2005, participants must be given a summary plan description ("SPD") or
summary of material modifications ("SMM") that includes an explanation of the
mandatory cash-out process, the investment products selected for the IRA, the
manner in which the cash-out IRA fees and expenses will be allocated and the
name and address of a plan contact.
(7) No Prohibited Transaction -
The fiduciary's selection of an IRA must not result in a non-exempt prohibited
transaction. The DOL also issued a class prohibited transaction exemption that
permits banks and other financial institutions to select themselves or their
affiliates as the cash-out IRA provider for the plans they sponsor for their
employees, provided certain conditions are satisfied.
The USA PATRIOT ACT customer
identification requirements are not triggered until the participant contacts the
cash-out IRA provider to claim the account.
Guidance on automatic rollovers is
expected from the Treasury and Internal Revenue Service (IRS) prior to March 28,
2005. In preparation for the March 28,
2005 deadline, plan sponsors should consider the options available for amending
plan provisions, such as reducing the mandatory cash out amount to
$1,000.
The DOL rules do not apply to
governmental and church plans. However, Treasury and the IRS guidance will
apply to all types of plans, including governmental and church plans. Ice
Miller attorneys and others have been working with the IRS to address rules that
would be appropriate to governmental and church plans. If
you have questions or concerns about the potential application of these rollover
rules to governmental or church plans, please let us know.
To view the DOL's final
automatic rollover safe harbor rules, please follow this link.
For the text of the DOL's related
class prohibited transaction exemption, please follow this link.
In order to view the DOL's press release
regarding the final regulations and related class exemption, please follow this
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