The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Ohio is representative of a common question related to plan cash-outs. The advisor asked:
"What are the safe harbor rules related to plan cash-outs and automatic rollovers to IRAs?"
Highlights of Discussion
- Generally, a qualified retirement plan (QRP) may not distribute plan assets to a participant without the participant's consent prior to the individual attaining age 62 or, if later, the normal retirement age of the plan (Treas. Reg. 1.411(a)-11(a)(4)).
- Certain consent exceptions apply, one of which is the involuntary cash-out provision of Treas. Reg.1.411(a)-11(c)(3). If a participant separates from service, and his or her present value of accrued benefit under the plan is $5,000 or less, the plan may distribute or "cash out" the participant's entire vested account balance without consent.
- The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) requires plan administrators to directly roll over mandatory cash-outs that exceed $1,000 to IRAs, absent an affirmative distribution election from the affected plan participant.
- Automatic rollover requirements also apply to certain governmental plans, church plans and IRC §403(b) plans (IRS Notice 2005-5).
- The Department of Labor (DOL) issued final regulations at DOL Reg. 2550.404a-2(d) establishing a safe harbor for plan fiduciaries whereby they will be deemed to have satisfied their fiduciary responsibilities in connection with automatic rollovers of cash-outs, provided they satisfy the following six requirements:
1. The participant's vested account balance must be greater than $1,000 but cannot exceed $5,000. However, the final regulations clarify that the safe harbor granted under the final regulations extends to rollovers of balances under $1,000 as well. Plan sponsors may disregard rollover balances when determining the $5,000 threshold.
2. The plan administrator, as a fiduciary of the plan, must enter into a written agreement with the selected IRA provider. If such an agreement is signed, then the plan administrator is not required to monitor the provider's compliance with the terms of the agreement beyond the point of the rollover.
3. The plan administrator must invest the automatic rollovers in such a way as to protect principal and provide a reasonable rate of return. The investment product must be offered by a state or federally regulated financial institution, and must seek to maintain a stable dollar value equal to the amount invested in the product by the individual retirement plan. Examples of permissible investments include money market funds, interest-bearing savings accounts, certificates of deposit and other stable value products.
4. Fees and expenses related to the receiving IRA (and the underlying investments) cannot exceed the fees charged for comparable rollover IRAs that are not established under these automatic rollover provisions.
5. The plan administrator must give participants either an updated Summary Plan Description or Summary of Material Modification that discloses the plan's procedures governing automatic rollovers.
6. The employer's selection of the IRA and the investments cannot result in a prohibited transaction under ERISA Sec. 406. To address the situation where a financial organization, as an employer with its own retirement plan, follows these automatic rollover provisions, the DOL has issued Prohibited Transaction Exemption 2004-16.
Conclusion
Automatically rolling over a plan cash-out to an IRA is a fiduciary function. Fortunately, the DOL has provided a six-point safe harbor whereby plan administrators will be deemed to have satisfied their fiduciary responsibilities in connection with automatic rollovers of cash-outs provided they satisfy these six requirements.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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