4002 / Is there a safe harbor for plans that are subject to the direct rollover rules?
DOL regulations provide a safe harbor for plan fiduciaries who comply with certain requirements outlined below.1
To qualify for the safe harbor, a plan fiduciary generally must meet six conditions:
(1) The distribution must not exceed $7,000 ($5,000 prior to 2024), not including balances rolled into the plan from another plan or an IRA. The safe harbor applies to balances of $1,000 or less, even though those balances are not subject to the automatic rollover rules;
(2) The distribution must be to an individual retirement account or annuity pursuant to a written agreement with the individual retirement plan provider that addresses the default investments and related fees and expenses;
(3) The distribution must be invested in a manner designed “to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity.” The investment must be offered by a state or federally regulated financial institution and must seek to maintain a stable dollar value (e.g., money market funds, interest-bearing savings accounts, certificates of deposit, and stable value products);
(4) The fees and expenses charged to the IRA may not be higher than fees charged by the IRA trustee or custodian for other rollover IRAs;
(5) The summary plan description provided to plan participants must provide an explanation of the plan’s automatic rollover provisions, including an explanation of the expenses and default investments in the rollover IRA and a plan contact for further information; and
(6) The selection of the IRA custodian or trustee and investment options must not result in a prohibited transaction under ERISA Section 406. The DOL has finalized a class exemption that will allow financial institutions to establish IRAs for their own employees.