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Automatic Rollovers


Guest Patrick Foley
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Guest Patrick Foley

Since Code section 411(a)(11) doesn't apply, a church plan can provide for cashouts of benefits up to a ceiling higher than $5000. Notice 2005-5 confirms that the automatic rollover requirements apply to church plans. Though it is not very clearly written, section 401(a)(31)(B) seems to apply the direct rollover requirement only to cashouts up to $5000 -- meaning that church plan cashouts in excess of $5000 could continue to default to a cash distribution.

Has anyone else considered this question?

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Based on the following Q&A-1 and -2 in Notice 2005-2, I think the IRS position is that the automatic rollover requirements apply even where the mandatory cash out exceeds $5,000.

Q–1. To what distributions do the automatic rollover requirements of § 401(a)(31)(B) apply?

A–1. The automatic rollover requirements apply to any mandatory distribution that is more than $1,000 and is an eligible rollover distribution that is subject to the direct rollover requirements that are in § 401(a)(31). Thus, in order for a plan that provides for such mandatory distributions to be qualified under § 401(a), it must satisfy the automatic rollover provisions of § 401(a)(31)(B). Pursuant to Q&A–16 of § 1.401(a)(31)–1 of the Income Tax Regulations, an eligible rollover distribution in the form of a plan loan offset amount is not subject to the automatic rollover provisions of § 401(a)(31)(B).

Q–2. What is a mandatory distribution?

A–2. A mandatory distribution is a distribution that is made without the participant’s consent and that is made to a participant before the participant attains the later of age 62 or normal retirement age. A distribution to a surviving spouse or alternate payee is not a mandatory distribution for purposes of the automatic rollover requirements of § 401(a)(31)(B). Although § 411(a)(11) generally prohibits mandatory distributions of accrued benefits attributable to employer contributions with a present value exceeding $5,000, the automatic rollover provisions of § 401(a)(31)(B) apply without regard to the amount of the distribution as long as the amount exceeds $1,000.

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Getting below 100 employees is one reason to cash out.

Getting rid of dialog with terminated former employees is a second reason.

Lowering fees per participant is a third reason. Think PBGC premiums.

However, for a church plan, the second reason is the main one.

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Guest Patrick Foley

Thanks, Everett, for helping me read more carefully! The last sentence of Q&A-2 corrects my misunderstanding.

Severing connections with terminated employees is the main motivation for cashouts in most church plans I work with. With DB plans, benefits may not begin for many years and the chance of losing track of participants is great. Also, plan investments sometimes have trouble keeping pace with the increasing present value of vested deferred benefits in a DB plan. Small and medium-size church DC plans aren't set up to charge vested terms for administration and don't really want to go there.

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