Officials have released a new batch of tips for retirement plan administrators who want to close out small accounts owned by departing employees.
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 with less than $5,000 in plan assets to leave the 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 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.