Automatic Rollovers and After-Tax Contributions

[Just Me]

Any thoughts on how to treat after-tax contribuitons in a participant's account for the new automatic rollover rules? Are after-tax contributions part of the "account" when determining if it's under $5,000 (or $1,000)? If an account balance is subject to mandatory distribution and automatic rollover, and it includes after-tax amounts, are those required to be rolled over with the rest of the account, or distributed? The IRS notice isn't really clear on this.

Thanks all.

[Just Me]

No takers?

We are assuming that to the extent there are any after-tax amounts in the participant's account, they are completely ignored for the automatic rollover rule because that only seems to apply to amounts "to the extent they would be includible in income" if they were paid to the employee. So the after tax amount would be considered to determine if there should be a mandatory cash out under the plan rules, but excluded when determining if the cash out is subject to the automatic rollover rules.

Any thoughts would be appreciated.

Thanks.

[Alf]

I think they are included. In-bound rollover contributions are taken into account I think, so the auto rollover valuation sounds more inclusive than the regular cash-out rules.

[E as in ERISA]

? But this is the opposite. The automatic rollover rules aren't broader in every respect.

The mandatory distribution rules allow exclusion of rollovers, while the automatic distribution do not. So in that case they are broader.

But the mandatory distribution rules don't have an exception for after tax amounts and the eligible rollover rules (which the automatic distribution rules are a part of) have an exception for after tax amounts. So in this case they should be narrower as JM says.

I tend to agree with JM.

[JDuns]

I think that you may not be "required" to auto-roll the after-tax account, but if you are already auto-rolling the rest, I would recommend rolling it all.

(1) The IRS and DOL clearly prefer to have retirement savings stay in plans.

(2) If the former participant doesn't cash the check, you have a lost participant to keep track of (which you could have avoided).

(3) the rules clearly permit auto-rolling everything (accounts less than $1000 or setting the plan's default as rollover for elective distributions (if the J&SA rules do not apply)) so I don't see a down side.

[Just Me]

JDuns -

Thanks for your thoughts. The tricky part is whether you are "required" to do the auto-roll in the first place, as you mentioned:

I think that you may not be "required" to auto-roll the after-tax account, but if you are already auto-rolling the rest, I would recommend rolling it all.

Say for example a participant in a thrift plan (after tax contributions) has this account balance upon termination, and the plan has a $5,000 mandatory cash out rule:

$600 after tax contributions

$200 taxable stuff (earnings, match, whatever)

$300 rollover account

Since his total account is less than $5,000 it is subject to mandatory cash out (similar examples could be found if the mandatory cash out level was lower). However, the taxable portion plus the rollover account (which must be considered for the auto-roll) is only $500. Since auto-rolls only apply to amounts that would otherwise be taxable (the 401(a)(31) rules), it would seem that no auto-roll is required even though the total distribution is in excess of $1,000.

Do I have this right? (Anybody feel free to comment please). THANKS!