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Automatic Rollovers - Amendment Deadline


Guest DTrom

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Is it correct that if a plan is going to either discontinue mandatory distributions or lower the limit so as to avoid the automatic rollover regs, that the plan needs to be amended before 3/28/2005? That is, the amendment deadline relief in Notice 2005-5 only applies to plans that are intending to follow the new regs?

Thanks.

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It appears that the transitional relief to 12/31/2005 provided by IRS Notice 2005-5 is only to locate an IRA provider and to make the automatic rollover. It would seem if the plan mandatory cashout provision is not removed or lowered to $1000 before 3/28/2005, the plan would be required to comply with the automatic rollover for any terminated participant with an account balance between $1000 and $5000 on 3/28/2005, or later, and who does not consent to a cash payment or does not designate another eligible rollover destination.

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See IRS Notice 2005-5. Amendments are due the last day of the Plan Year ending after 3/28/05. So if your calendar year plan, you have until 12/31/05 to make the amendment. In my opinion, that means you have until 12/31/05 to make up your mind.

Austin Powers, CPA, QPA, ERPA

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I think BJ stated it quite accurately; I'll try to expand.

If your plan calls for mandatory distributions...

You can postpone mandatory distributions until you establish procedures etc until 12/31/05, but you still have to do a rollover.

If you have a terminated participant on 3/28/05 (or any date thereafter) and you haven't amended the plan, you must process the mandatory distribution(s) (as a rollover(s)).

Q&A 12 says that you can eliminate mandatory distributions. I don't see that there's a time limit on that; i.e. you should be able to do it whenever you want, prospectively. But if you have a termination after 3/28/05 and before you amend, you have to comply with the rollover rules. Therefore, if you want to assure yourself that you won't have to process a rollover, you had better amend by 3/28/05.

Ed Snyder

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Assuming your a calendar year, you don't have to amend until 12/31/05. IT says so right in the IRS Notice. Why are you saying amend sooner?

Because the IRS allows you to defer making the mandatory distriubtions until 12/31/05, and the amendments not due until then, you have until then to make up your mind. Of course, no matter what, no more mandatory cash-outs, they must be rollovers post 3/28.

Or am I missing something? Won't be the first time, so please do tell...

Austin Powers, CPA, QPA, ERPA

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As I understand, the new rules apply to mandatory distributions required to be processed after March 27, 2005. If the plan contains a mandatory cash out provision, this would apply to any terminated participant as of 3/28/2005 or later with a vested account balance between $1000 and $5000 who does not consent to a distribution or rollover. IRS indicated that plans have until 12/31/2005 to implement the automatic rollover procedure. Plans with a mandatory cash out provision may suspend mandatory distributions $1000 and $5000 from 3/28/2005 through 12/31/2005 until procedures can be implemented, however the automatic rollovers must be processed by 12/31/2005. ASPPA has requested IRS to consider extending the amendment period to reduce or eliminate mandatory distributions.

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BJ, we are in agreement with your analysis as to the timing of amendments, especially concerning those plan sponsors who wish to avoid the automatic rollover rules, at least for now, so that they can make a better decision if and when IRA vendors start coming up with a viable rollover solution.

Do you have any insight into ASPPAs request of the IRS? We need to get info out to our clients ASAP if they are going to need to be making amendment decisions by the end of March.

Thanks.

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Pre-effective date amendments are always preferable to post-effective date plan amendments in order to avoid operational violations of the plan's own rules. If your plan currently says terminated participants less than $5,000 get cashouts, then starting March 29 if you don't do those cash outs then you have to ask whether you have an operational violation for not following plan rules. EGTRRA allows a remedial amendment period for those switching to automatic rollovers. I believe that the IRS specifically allowed the December 31 transition period to make sure there would not be risk of an operational violation for those changing to automatic rollovers -- so that if they have an earlier plan amendment deadline like 3/31 then they don't have an operational violation after that for not complying. But that didn't specifically do the same for those eliminating. So it depends on the plan.

Corbel agrees with BJ: http://www.corbel.com/news/technicalupdates.asp?ID=293&T=P However, they are asking the IRS if relief is available.

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IRS Notice 2005-5 says you don't have to process anything until 12/31/05, and if you don't and that is contrary to your plan, you won't be treated as in violation. So don't do anything after 3/28/05 until you decide what you are going to do.

Are you guys aware of this provision in the notice, or am I missing something?

Austin Powers, CPA, QPA, ERPA

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No. I don't actually think that there is huge risk. The plan is eventually going to be amended to eliminate cashouts over $1,000 effective 3/29/2005, so operations will have been in compliance. Nothing will have happened in the intervening time period. So unless your plan or policies are really specific about how often you do cashouts, I don't know that there is an issue if you stop for a while. The IRS did say there is no cutback issue.

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I don't know if this is obvious or not, maybe for some it's the whole point of the thread, but if you have mandatory cashout provisions, and amend to remove them or limit the threshold AFTER 3/28, you're going to have to adopt an amendment (presumably the sample amendment), even if you don't have any terminations in the meantime. i.e. it's not just a processing issue, it's a document compliance issue - a plan that has mandatory cashout provisions after 3/28 must have the IRA rollover language, even if no cashouts occur, and even if the mandatory cashout language is removed at a later date.

Ed Snyder

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Yes. That's the issue.

But compare a money purchase plan that provides for a contribution -- with a last day rule. So during the year you have a plan provision that says you're going to make a contribution. But aren't you allowed to amend and eliminate that provision part year, because no one has met the last day requirement.

So on the auto rollover issue, the question is at what point do you need to have the amendment in place to be operating in compliance with plan terms. If what you're saying is true, why is March 28 the drop dead date? Isn't there an earlier time at which the participant is in the status described in the plan (terminated with less than $5,000)

What if a participant terminates on March 2, and the plan still says that terminated participants with balances less than $5,000 are cashed out? He needs to get at least a 30 day notice, so he's not up for distribution until at least April 1. Do we have a problem if we don't amend before March 2?

What if the plan provides 90 day notices? Should it have been amended by December 28 Anyone who terminates after that date will potentially get an automatic rollover.... even though at the date he terminated the plan said something different.

Doesn't the anti-cutback rule help fix this?

The IRS guidance didn't even come out until December 29. So I hope that they weren't expecting people to be clairvoyant.

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It seems under the current guidance that if the plan mandatory cashout provision is lowered or eliminated after 3/27/05 and there are terminated participants during the interim who do not consent to a distribution or rollover, the plan would still be required to make the automatic rollover by 12/31/2005 even though the provision has subsequently been eliminated.

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If that is true, why is 3/28 the drop dead date for the amendment? I understand that is the effective date of the auto rollover rule. But the auto rollover rule only applies if a plan has mandatory distribution provisions. So it is the document terms that are controlling -- and the risk of a potential violation of plan terms.

Why is there any difference in result between a plan amended as of 3/28 versus one amended 5/28 for a participants terminating on 3/2? In either case, at the time the participant terminates there is a provision saying that he will be cashed out -- when in fact that is never going to be cashed out. So as long as that doesn't actually occur, what is the legal basis for saying there is a difference between amending 3/28 or 5/28?

It seems that if there is a problem, then maybe the drop dead date is sooner?

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They don't answer this. I agree that its a good idea to amend and probably by 3/28 and that's what I stated at the outset. But I also think that the answer about the date for amending is somewhat grey and there may be some room for difference of opinion as I also stated earlier. Even Corbel seems to be indicating that there may be some question as they are asking for further guidance. The interplay of the 30 to 90 day notice rules and the fact that there is no cutback seem to also add to the greyness of the answer about what is the relevant answer. Any conclusive answer should be able to describe whether and how those rules affect the results.

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Why is there any difference in result between a plan amended as of 3/28 versus one amended 5/28 for a participants terminating on 3/2? In either case, at the time the participant terminates there is a provision saying that he will be cashed out -- when in fact that is never going to be cashed out. So as long as that doesn't actually occur, what is the legal basis for saying there is a difference between amending 3/28 or 5/28?

From an operational standpoint I don't think there is a difference. From a compliance standpoint, if the plan didn't have the mandatory cashout language removed or the limit lowered by 3/28, then it will have to be amended to include the automatic rollover language, even if it never processes an automatic rollover because the mandatory cashout language is removed.

Ed Snyder

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As with most required amendments in recent years, we will be over cautious and recommend to our clients that if they wish to amend so as to avoid the rollover rules they take a literal interpretation of the Notice and amend by 3/28/2005.

Then after spending many late hours getting everyone in compliance, further guidance will come from the IRS two weeks before the literal date which will extend the deadline, and we will once again be shaking our heads.

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The issue has to do with operating in accordance with the terms of the plan.

The IRS gave us relief (not really new -- see below) if you're going to comply with the auto IRA rollovers. You can operate the plan in a mannner that is contrary to the terms of the plan if (1) you are going to comply with the auto IRA rollover by 12/31/05 AND (2) you amend by the end of the first PY ending on or after 3/28/05.

If you don't want to comply with the auto IRA rollover rules by 12/31/05 (by eliminating cash-outs or lowering to $1,000), the issue is do you need to amend the plan first (i.e., can you operationally change the operation of the plan by modifying the cash-out rule and amend at a later date)?

Arguably -- and this is where guidance from the IRS would help -- the change is intergrally related to EGTRRA. We know amending to add the auto IRA rollover language is. And, the prior EGTRRA guidance already allows you to amend by the end of the PY in which it's put into place. That's why I'm not sure the latest notice really gave us anything we didn't already have. But, it's silent on an amendment to change the cash-out rules to eliminate them or reduce them to $1,000. If that amendment is integrally related to EGTRRA, you'd have until the end of the plan year in which the change is made to actually amend. So, a calendar year plan could suspend forced cash-outs of amounts over $1,000 beginning 3/28/05 and amend by 12/31/05. But, most of us would prefer something from the IRS stating that the amendment is integrally related to EGTRRA. And, we'd like relief for either of the amendments for non-calendar year plans. My guess is the IRS will issue something in the Employee Plans Newsletter --- but only time will tell and the clock is ticking...

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Guest GuyHocker

IMHO, it seems that we are confusing Q & A 9 and Q & A 16 in Notice 2005-5.

A. 9 references operational compliance. A. 16 refers to documentary compliance. Nowhere in the thread do I see the reference to EGTRRA and the "good faith" amendment timing.

In the thread the due date is referred to as 3/28/2005. Q&A 16 states the deadline for a good faith amendment to be the first PYE after 3/28/05 (which would be 3/31/05 for 3/31 PYEs, 4/30/05 for 4/30 PYEs, etc up through 12/31/2005). This deadline is further extended

Now the question becomes how narrowly will a "good faith amendment" be construed? Q. 16 asks When must a plan that provides for mandatory distributions be amended to include a provision that satisfies the requirements of § 401(a)(31)(B)? Wouldn't a "$1,000 amendment" satisfy?

In A 16, references are made to implementing mandatory rollovers. But the references are not exclusive. I quote: "Plans that provide for mandatory distributions and that do not already include the automatic rollover provisions must adopt a good faith planamendment reflecting the automatic rollover requirements by the end of the first plan year ending on or after March 28, 2005 (or in the case of a governmental plan in accordance with A-5)..." "If a plan is amended by a timely good faith amendment reflecting the automatic rollover requirements, a plan amendment to a disqualifying provision related to the automatic rollover requirements can be made within the plan's EGTRRA remedial amendment period to the extent necessary to satisfy the automatic rollover requirements,..."

So the issue becomes will a $1000 amendment be a good faith amendment? Since we will be utilizing this amendment to make a "good faith" attempt at satisfying a documentary revision necessitated by EGTRRA, I submit that a $1,000 amendment will be a good faith amendment.

Nowhere do I see in A 9 an extension of this documentary compliance date (earliest 3/31/2005, most often 12/31/2005), whether or not the plan will be implementing mandatory rollovers. In fact, I read A 9 as assuming we've amended the plan according to the good faith model and just can't operate it accordingly.

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At the end of this is a portion of Notice 2001-57. If you follow it, you end up at the same place as A16 of Notice 2005-5. Now, suppose reducing the cash-out to $1,000 is integrally related to EGTRRA (and I think it probably is). If so, then it's subject to the same good-faith amendment deadline.

The only relief provided by Notice 2005-5 is A9. And, I agree that it could apply even if the plan has already adopted the good-faith amendment. It would allow you to adopt the amendment now but not follow it until you are ready to deal with the IRAs (by the end of 2005). Or, you could wait to amend by the end of 2005 -- but you'd stuck implementing the automatic IRA rollover provision.

The point is that in either case, A9 ONLY applies where the plan provides for cash-outs and will implement the automatic IRA rollover rules (if you look at the question in A9, it's only allowing you to suspend distributions where the participant has not made an affirmative election). You are just suspending the automatic IRA rollover rule requirement until the end of 2005. By suspending that, you are ignoring the terms of the plan - prior to amendment the plan requires a cash-out and you can't do that b/c it would violate the law or the after the amendment the plan provides for the rollover but you can't do that b/c you don't have a provider yet.

The Notice is silent about lowering the threshold to $1,000. Again, I think such an amendment is integrally related to EGTRRA and could be adopted by the end of the first PY ending after March 28. But, it would have been great for the service to address this b/c large institutions would like some comfort. And, it would be even better to get some relief - i.e., maybe a 12/31/05 plan amendment deadline for either of these amendments regardless of the plan year (it would be relief for any plan year ending between 3/28/05 and 12/30/05).

________________________

From Notice 2001-57

There are two circumstances in which a good faith EGTRRA plan amendment is

required. First, a plan is required to have a good faith EGTRRA plan amendment

in effect for a year if the plan is required to implement a provision of EGTRRA for

the year and the plan language, prior to the amendment, is not consistent with

the provision of EGTRRA. Second, a plan is required to have a good faith

EGTRRA plan amendment in effect for a year if the plan sponsor elects to

implement a provision of EGTRRA for the year and the plan language, prior to

the amendment, is not consistent with the operation of the plan in a manner

consistent with EGTRRA. A good faith EGTRRA plan amendment is timely if it is

adopted no later than the later of (i) the end of the plan year in which the

EGTRRA change in the qualification requirements is required to be, or is

optionally, put into effect under the plan or (ii) the end of the GUST remedial

amendment period for the plan.1

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Guest dogsbody

Two days ago I got a return call from one of the drafters of Notice 2005-5. She said the Service expects to issue informal guidance before too long about amending plans to drop the cash-out level to $1000. She said that although the IRS won't issue a model amendment, they expect to say that amendments reducing the cash-out threshold to $1000 will not spoil coverage for volume submitter and prototype plans. She also said that they expect to issue some assurance that March 28 is not the drop dead date for amendments. I got the impression that internal discussions at the IRS still may be ongoing about the details of the guidance. She said that they had not anticipated so many sponsors wanting to drop the level to $1000, although they probably should have. The guidance may come in the form of an announcement on the IRS website.

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