Close Close

Regulation and Compliance > Federal Regulation > IRS

IRS Issues Automatic Rollover Guidance

Your article was successfully shared with the contacts you provided.

Officials have released a new batch of guidance for retirement plan administrators who want to close out small accounts owned by departing plan members.[@@]

The Internal Revenue Service has issued the guidance, IRS Notice 2005-5, to help explain how it interprets the rules for automatically rolling small 401(k) plan accounts and other small retirement plan accounts over into individual retirement plans.

The law applies to “mandatory distributions” of $1,000 to $5,000.

A mandatory distribution is the payment that a company makes when it forces a departing, working-age employee to leave its retirement plan.

In most cases, federal law requires retirement plans to hold on to retirement plan accounts with more than $5,000 in assets unless departing employees make other arrangements.

Congress tried to protect smaller retirement nest eggs by including a provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 that requires employers to put mandatory distributions of more than $1,000 in new individual retirement plans if the departing employees have not made other arrangements.

In September 2004, the U.S. Department of Labor issued final regulations that establish “safe harbor” rules for retirement plan fiduciaries who are involved with automatic rollovers of $1,000 or less as well as automatic rollovers of $1,000 to $5,000.

The new guidance gives 16 questions and answers for administrators, sponsors and others involved in automatic rollovers conducted under the new rules. The new guidance also includes an appendix that gives a sample automatic rollover amendment for affected retirement plans.

Topics addressed include the scope of the new automatic rollover requirements as well as plan member notification requirements, plan member identification requirements, and joint and survivor annuity requirements.

In one section, for example, officials spell out the procedure for plan sponsors that may end up having to establish individual retirement plans on departing participants’ behalf.

When establishing the plans, “the plan administrator may use the participant’s most recent mailing address in the records of the employer and plan administrator,” Kathleen Hermann and Angelique Carrington, 2 IRS officials, write in the IRS guidance. “

The trustee or individual retirement plan issuer should try to use the most recent mailing address to send a plan participant disclosure documents, but the trustee or plan issuer will not be treated as failing to satisfy disclosure requirements merely because the U.S. Postal Service says the documents are undeliverable, the officials write.

Normally, financial institutions that are setting up retirement accounts must comply with the strict customer identification requirements included in federal anti-money-laundering laws.

Issuers of new individual plans to departing employees who are hard to find can get around the identification requirements by waiting to ask for customer identification information when former employees come forward to claim the new individual plans, the IRS officials write.

The guidance does not address individual plan fees, but the IRS does discuss the account fee issue in the regulations completed in September 2004.

The IRS has posted the guidance on the Web at //