Do plans have to be amended by 3-28-05 for direct rollover rules?

[Belgarath]

I should clarify - by "direct rollover rules" I meant the new DOL regs regarding mandatory rollovers of amounts over 1,000 and less than 5,000.

I'm not clear on this. It seems pretty clear that the 402(f) Notice, and either an updated SPD or SMM must be done. But is an actual "good faith" amendment required to be adopted (for VS plans) by then?

By the way, in IRS Announcement 2004-33, the IRS said that a VS practitioner would be allowed to amend the plan on behalf of adopting employers, for changes in the Code, etc. - great provision! However, I don't see, offhand, that this was retained in the draft Revenue Procedure under 2004-71. Anyone know what happened, or if the IRS is planning on adding it back in?

[Belgarath]

See # 4 below.

P.S. - for anyone who is interested, I jotted down the following points when zipping through the regs - feel free to add, disagree, etc... This is not meant to be any kind of detailed analysis, but just some points that struck me.

The DOL has issued the final regulation on this subject. It clears up some issues, and ignores or confuses others. Big surprise. My initial reading indicates the following:

1. The DOL also issued a Prohibited Transaction Class Exemption - 2004-16. I don't see that this affects most TPA's - it is for banks, ins. companies, etc., to select themselves or affiliates as the IRA provider for mandatory distributions from their own plans.

2. The regulations provide that they can be used for amounts of less than 1,000 dollars. Note, however, that this is voluntary - only amounts in excess of 1,000 (and less than 5,000) are required to fall under the mandatory rollover rules.

3. These regulations provide a safe harbor, but are NOT the exclusive means by which a fiduciary could comply with the requirements. Realistically, it seems likely that the safe harbor would be used in most situations.

4. As to whether a participant loan would be considered a portion of the present value for purposes of the safe harbor, the DOL declined to rule, and referred this to Treasury. Personally, in the absence of guidance, I would say that a loan should be included.

After I sent this, I've revised my opinion on #4 above. Since there's an immediate offset once there's been a distributable event, then I don't think an outstanding loan should be included in the account balance. Wasn't really thinking about this when reviewing the reg.

5. IRA providers who want to receive funds will be required to provide a written agreement on which the plan fiduciary may rely in making the rollover under the safe harbor. The fiduciary is not required to monitor the provider's compliance with the terms of the agreement beyond the time to funds are rolled over.

6. Investment product, fees and expenses - it must be designed to preserve principal and provide a reasonable rate of return (but doesn't have to be guaranteed); must be offered by a state or federally regulated financial institution (bank, credit union, insurance company, Registered Investment Company); fees and expenses cannot exceed those charged for comparable IRA's of that provider for non-mandatory rollover IRA's; the participant will have the right to enforce the terms of the IRA contract against the IRA provider, not the plan fiduciary.

7. Information concerning the automatic rollover procedures must be provided in the 402(f) notice, as well as in a SPD or SMM. I do not know yet, and will need to determine, if plans must physically be amended prior to the 3-28-05 deadline. It would seem unreasonable for this to be the case.

8. In terms of state laws regarding signature and escheat laws, the DOL ducked the issue entirely. If you have a state law that says, for example, that no account may be established without a signature, then it is unknown how this will play out.

9. Re the requirements of the USA PATRIOT Act, the DOL has affirmed that both Treasury Department and other Federal regulators have interpreted the PATRIOT Act to only apply at such time as the former participant or beneficiary first contacts the IRA provider to assert ownership or exercise control over the account. Customer identification and verification procedures (CIP) will not apply at the time the IRA is being established. So if state law permits, and a willing provider could be found, this would allow IRA's to be established for lost or missing participants - the one major benefit I see to this whole bucket of manure. We'll see. If there are no providers who are willing to accept such IRA's, then the fiduciary is in an impossible position. Presumably the DOL would have to address this - but who knows when, or how adequately.

10. Beneficiary designations would NOT carry over from the plan to the IRA.

[mbozek]

If the IRA will be subject to state law/regulatory requirements that the owner has to sign the IRA application and the funds can be seized under state abandoned property laws or by creditors why bother with the hassle of amending the plan to permit the cashout of the funds? Its easier to limit cashouts to 1k and charge term participants accounts for the cost of maintaining the account.

[Bird]

Belgarath, thanks, that was a good analysis and I agree with your points.

I thought it was interesting that they backed down on the "expenses can't be higher than income" issue and went with the comparability standard.

I guess the document amendment deadline is an IRS issue, and I agree that it seems unreasonable to require one by 3/28/05.

Mbozek - my thoughts exactly. Why bother?

[Guest FormsRmylife]

Our analysis is that the DOL has left us with a December 2004 deadline for amending all plans currently providing for $5,000 cashout that do not wish to deal with IRA rollovers. If a plan provides for cashout, it must cashout. The law effective 3/28/05 will force the $1,000 - $5,000 cashout into an IRA. An affirmative amendment must be in place to either eliminate cashout or reduce cashout to $1,000. Since we generate distribution paperwork in December with a 12/28/04 Date of Notice for a 90 day election period, our December paperwork will need the correct cashout information as of 3/28/2005 for the participant. :angry:

Do we all agree that a plan can be operated as a cashout with restoration plan with forfeitures after one break in service if the plan cashes out $1,000 and under and retains >$1,000?

Do we all agree that spousal consent only applies to $5,000 and over in a plan doing cashouts for <$1,000 and retaining >$1,000?

[Bird]

Forms-

If a plan provides for cashout, it must cashout.

Ew, are you saying that's part of the new reg or has always been? My plans specifically say "may..."

Do we all agree that a plan can be operated as a cashout with restoration plan with forfeitures after one break in service if the plan cashes out $1,000 and under and retains >$1,000?

Not sure what a "cashout with restoration plan" is.

Do we all agree that spousal consent only applies to $5,000 and over in a plan doing cashouts for <$1,000 and retaining >$1,000?

Yes.

[KJohnson]

Bird,

My understanding is that no discretion is allowed. This is from the regs:

(v) Involuntary distributions. A plan may be amended to provide for

the involuntary distribution of an employee's benefit to the extent such

involuntary distribution is permitted under sections 411(a)(11) and

417(e). Thus, for example, an involuntary distribution provision may be

amended to require that an employee who terminates from employment with

the employer receive a single sum distribution in the event that the

present value of the employee's benefit is not more than $3,500, by

substituting the cash-out limit in effect under Sec. 1.411(a)-

11©(3)(ii) for $3,500, without violating section 411(d)(6). In

addition, for example, the employer may amend the plan to reduce the

involuntary distribution threshold from the cash-out limit in effect

under Sec. 1.411(a)-11©(3)(ii) to any lower amount and to eliminate

the involuntary single sum option for employees with benefits between

the cash-out limit in effect under Sec. 1.411(a)-11©(3)(ii) and such

lower amount without violating section 411(d)(6). This rule does not

permit a plan provision permitting employer discretion with respect to

optional forms of benefit for employees the present value of whose

benefit is less than the cash-out limit in effect under Sec. 1.411(a)-

11©(3)(ii).

And This

Q-4: May a plan provide that the employer may, through the exercise

of discretion, deny a participant a section 411(d)(6) protected benefit

for which the participant is otherwise eligible?

A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of

this section with respect to certain employee stock ownership plans, a

plan that permits the employer, either directly or indirectly, through

the exercise of discretion, to deny a participant a section 411(d)(6)

protected benefit provided under the plan for which the participant is

otherwise eligible (but for the employer's exercise of discretion)

violates the requirements of section 411(d)(6). A plan provision that

makes a section 411(d)(6) protected benefit available only to those

employees as the employer may designate is within the scope of this

prohibition. Thus, for example, a plan provision under which only

employees who are designated by the employer are eligible to receive a

subsidized early retirement benefit constitutes an impermissible

provision under section 411(d)(6). In addition, a pension plan that

permits employer discretion to deny the availability of a section

411(d)(6) protected benefit violates the definitely determinable

requirement of section 401(a), including section 401(a)(25). See Sec.

1.401-1(b)(1)(i). This is the result even if the plan specifically

limits the employer's discretion to choosing among section 411(d)(6)

protected benefits, including optional forms of benefit, that are

actuarially equivalent. In addition, the provisions of sections

411(a)(11) and 417(e) that allow a plan to make involuntary

distributions of certain amounts are not excepted from this limitation

on employer discretion. Thus, for example, a plan may not permit

employer discretion with respect to whether benefits will be distributed

involuntarily in the event that the present value of the employee's

benefit is not more than the cash-out limit in effect under Sec.

1.411(a)-11©(3)(ii) within the meaning of sections 411(a)(11) and

417(e). (An exception is provided for such provisions with respect to

the nondiscrimination requirements of section 401(a)(4). See Sec.

1.401(a)(4)-4(b)(2)(ii)©.)

[Guest FormsRmylife]

A "cashout with restoration plan" is a plan that can forfeit nonvested accounts following a participant employment termination upon the earlier of actual account distribution or 1 break in service. If the plan does not provide for a cashout with the participant's right to restore the account if he returns to employment within 5 years, the plan cannot forfeit the account until the participant has 5 breaks in service.

My question is are we sure we have met the requirements to escape the 5 breaks in service rule if we do not cashout up to $5,000, but only up to $1,000?

Reg. Sec. 1.411(a)-7(d)(4)(i) which permits us to forfeit the unvested account upon the involuntarily cashout a terminated participant references compliance with Code section 411(a)(11) and not Code section 401(a)(31) where the IRA transfer requirement lives; therefore, we should be OK. But, the IRS has not updated this regulation in a while.

Thanks K. Johnson for the support on the lack of discretion for cashouts.

[Bird]

KJohnson - thanks for the cites. The second one was, well, interesting.