Automatic rollovers

[Guest EdShill]

Does 401(a)(31)(B) apply to government plans? The focus of that provision seems to be on the $5,000 cash outs permitted by 411(a)(11) and the provision incorporates the actuarial factors of that provision (and 417) to determine the $1,000 and $5,000 present value levels. Government and some church plans are exempt from 411. Does that mean that those plans don't have to provide automatic rollovers?

[Everett Moreland]

From footnote 8 of the proposed EBSA regulations:

"The Treasury and the IRS have advised the Department that the requirements of Code section 401(a)(31)(B) apply to a broad range of retirement plans including plans established under Code sections 401(a), 401(k), 403(a), 403(b) and 457."

From footnote 7 of the final EBSA regulations:

"The staff of Treasury and IRS have advised the Department that the requirements of Code section 401(a)(31)(B) apply to a broad range of retirement plans including plans established under Code sections 401(a), 401(k), 403(a), 403(b) and 457. The Department notes that the safe harbor contained herein applies only to employee benefit pension plans covered under title I of ERISA. See infra note 20."

My impression is that the current IRS position is the automatic rollover rule applies to governmental plans. I believe that at least 2 law firms have asked the IRS to either exempt governmental plans from the automatic rollover rule or provide an extended effective date.

I'm sure other users of this board have a much better idea than I about what's going on with this at the IRS. I'd like to hear from them.

[mbozek]

There is no exception for govt plans. See flush language following IRC 401(a)(34) for qualification provisions that do not apply to govt plans. I dont see how the IRS can grant an exempton if the IRC does not allow it.

[Everett Moreland]

mbozek:

"Exemption" is a poor choice of word. It is much less than clear to me that a governmental plan is an "eligible plan" as defined in 401(a)(31)(B)(ii), which states:

"(ii) ELIGIBLE PLAN.--For purposes of clause (i), the term 'eligible plan' means a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411(a)(11)) does not exceed $5,000 shall be immediately distributed to the participant."

Because the "immediately distributed" concept does not apply to governmental plans, I would have thought the IRS would conclude that the automatic rollover rules do not apply to governmental plans.

[mbozek]

If govt plans were to be excluded from this provision then Congress would have exempted them, e.g., govt plans are not subject to nondiscrimination under 401(a)(4). Subjecting govt plans to mandatory rollover is consistent with requiring govt plans to permit a direct rollover under a31A. The reference to 411a11 is to define how the present value of the $5,000 nonforefitable is to be computed.

[Everett Moreland]

mbozek:

A related question: From the wording of 401(a)(31)(B)(ii) it seems to me that the automatic rollover rules don't apply once a participant has attained the later of age 62 and normal retirement age, because the benefit is no longer immedidately distributable. Is this your reading?

[mbozek]

I thought that the language related to involuntary cashouts of vested benefits over 1k and up to 5k. If a plan does not require invountary cashouts, a31B does not apply.

[Everett Moreland]

mbozek:

I think I didn't state my question clearly. Assume a plan forces lump sum distributions to former employees at age 65 (which is normal retirement age) and a former employee's account balance is $4,000 at age 65. I assume the automatic rollover rule does not apply to the forced distribution to this employee at age 65. Do you agree?

[mbozek]

no. See reg 1.411(a)-11©(4). After NRA/62 benefits in excess of 5k can be distributed w/out participants consent. Consent is never required if the benefit does not exceed 5k.

[Everett Moreland]

mbozek:

So by "no" are you saying that the automatic rollover rules continue to apply after the later of age 62 and normal retirement age, so long as the value of the benefit is $1,000-$5,000?