Automatic Rollovers

[Gruegen]

1) Does anyone know if the DOL/IRS will be issuing a model amendment to comply with the new IRA automatic rollover regulations?

2) Does anyone know what financial institutions are willing to serve as IRA custodians for these small accounts?

Thanks.

[ERISAatty]

I haven't heard anything about a model amendment.

But the new Labor Reg. 2550.404a-2 states that:

(iii) The investment product selected for the rolled-over funds shall be offered by a state or federally regulated financial institution, which shall be: A bank or savings association, the deposits of which are insured by the Federal Deposit Insurance Corporation; a credit union, the member accounts of which are insured within the meaning of section 101(7) of the Federal Credit Union Act; an insurance company, the products of which are protected by State guaranty associations; or an investment company registered under the Investment Company Act of 1940;

2550.404a-2©(3)(iii).

So my understanding is that Banks and Insurance companies are automatically eligible to serve as trustees of the new IRAs (this would be similar to the law on the eligible trustees for Health Savings Accounts). I do not know if non-bank or insurance companies can apply to be the trustee of an automatically rolled-over IRA, as they can with regard to HSAs (see, e.g. I.R.S. Announcement 2004-72, Oct. 12, 2004).

[ERISAatty]

Second try - on more closely examining I.R.S. Announcement 2004-72, I see that the list of approved non-bank, non-insurance companies listed there DOES apply to IRA accounts, as well.

See, e.g.: http://www.natptax.com/200472.pdf

or

http://www.irs.gov/pub/irs-irbs/irb04-41.pdf (pages 1, and 650-662).

[Guest rmeigs]

2) Does anyone know what financial institutions are willing to serve as IRA custodians for these small accounts?

DC News just ran an article on financial institutions that are willing to deal with these small IRAs. The URL is www.dcnews.com/default.asp?page=1&SID=441530&ISS=11188. It is a free article.

[mbozek]

Given the problems with implementing an rollover program under the DOL regs and the fact that the IRAs will escheat to state abandoned property funds I dont know why an employer would bother with the administrative hassles of establishing an IRA rollover account instead of limiting cashouts to $1000.

[Kirk Maldonado]

Not to mention the risk of fiduciary liability and DOL audits.

[g8r]

It's interesting that the cited article only refers to 2 institutions that may be willing to accept the rollovers. I know that Penchecks has been accepting these for years, and I had heard (just a rumour) that Fidelity was considering it (but possibly only for their current clients).

As far as plan amendments, we don't know yet what the IRS is planning. Absent any guidance, it appears that an amendment would be needed (it would just need to be a good-faith EGTRRA amendment). But, I wouldn't do anything yet - I'd wait to see what they intend on issuing (good-faith language, a 402(f) notice, etc.). If you want to eliminate cash-outs or reduce the threshold to $1,000, I think an amendment would also be needed. Presumably, the standard for that would also be a good-faith amendment.

[Guest 1950]

Waiting to implement automatic rollovers is probably not only wise, but necessary for most. One of the requirements of the safe harbor in the new DOL regulation is that the plan fiduciaries have an agreement with IRP provider regarding investments, fees and expenses. We haven't found any provider that has an agreement ready to go. They're working on them... they all seem quite anxious to tap this built-in market. When that happens, this should be a snap, but until the IRP providers get their acts together, it's premature.

We have advised clients NOT to lower the mandatory cash out amount to $1,000 for fear that they won't be able to raise it later without violating the anti-cutback rules.

Has anyone determined whether the spouse of a deceased participant where the account balance is "in the notch" ($1,000 - $5,000) is subject to automatic rollover? We notice that IRC 401(a)(31)(B)(i)(II) refers to the "distributee" failing to elect a direct rollover or a direct cash payout, whereas the references in 401(a)(31)(B)(ii) are to the "participant." Hmm.

Also, has anyone determined what to do with outstanding participant loans? Participant loans can't be rolled over to an IRA, so if the loan is not in default (and if the plan doesn't automatically accelerate loans when a participant's employment is terminated), what do you do with those accounts? The logical solution would be that you get to offset the loan and do an automatic rollover with the rest of the account. But until the IRS speaks, drafing this into a plan seems like a lot of risky guess work.

Or am I missing something here???

[Kirk Maldonado]

1950:

You might want to look at Treasursy Reuglation Section 1.411(d)-4, Q&A-2(b)(2)(v) which provides as follows:

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).

[g8r]

I agree. I don't think the cited regulation provides ample room to modify the plan's cash-out rules w/out fear of being locked into a particular position.

I have had the same issue regarding the spouse of a deceased participant and it seems to me that the automatic cash-out rule would apply. But, it's less than clear.

On the loan, I'll have to look at the guidance. But, it seems that the rule applies when there is a distribution that is eligible to be rolled over and there may be some wiggle room to argue that the loan can't be rolled over. I know it can be rolled to a qualified plan but it can't be rolled over into an IRA and that may be enough to argue that the automatic IRA rollover rule doesn't apply to the loan.

[mbozek]

The reg cited by Kirk permits amendments which increase or decrease involuntary distributions amounts to the extent permitted under IRC 411(a)(11)and does not limit the frequency of the amendments.

[Guest 1950]

To KM: I agree that's what Reg. 1.411(d)-4, Q&A-2(b)(2)(v) says, but I'm not sure what to make of all that. I note that T.D. 8794 (which added this provision to the reg.) makes much to do about how it is not a cutback to increase the cash out limit to $5,000 on benefits that accrued when the plan provided (under then-current law) a cash out limit of $3,500. In other words, the IRS assured us that we could move the cashout limit to $5,000 even with respect to amounts accrued when the limit under the plan and the law was $3,500, without it being a cutback. I'm not sure what this proves, but it does seem that if it were ok to move the cash out limit up and down -- or down and then up -- from time to time whenever we wanted (keeping an eye on rules like Reg. 1.411(d)-4, Q&A-2©), so long as we never exceed the applicable limit, this rather specifically worded assurance wouldn't have been necessary. On the other hand, maybe it wasn't necessary ... maybe it was gratuitous. But what if it was necessary? I think you're probably right, but I'm not certain enough to rely on this reasoning when all it buys you is avoiding the inconvenience of having to do automatic rollovers. Luckily, we still have some time until March 28, 2005, for the IRS to speak.

To g8r: On the loan issue, you're obviously right. I was just agonizing on how to get the right answer from existing authority rather than common sense. Best I can do so far is Reg. 1.401(a)(31)-1 Q&A16 which says a plan -- meaning the distributing plan, not the receiving plan -- won't fail to satisfy the direct rollover requirement if it does not permit a participant to make a direct rollover of an eligible rollover distribution to the extent such distribution is comprised of a plan loan offset amount. That's probably close enough (for now). I suppose it leaves open a rather narrow case of what to do where the account balance (due to investment losses) is $1,200, of which $400 is the remaining balance of a plan loan (that has been paid down). With the loan, the balance is $1,200 and is subject to automatic rollover. Net of the loan, you could just pay him the $800 in cash. Hmm.

To mbozek: It doesn't limit the number of times you can make a permitted amendment -- though other provisions of Reg. 1.411(d)-4 might -- but that doesn't mean that this is permitted. I am reasonably comfortable that we'll get guidance that says you're right... but I'm on the fence until that guidance is issued.

[Guest rmeigs]

1) Does anyone know if the DOL/IRS will be issuing a model amendment to comply with the new IRA automatic rollover regulations?

According to an annoucement from Corbel, "The IRS announced it is drafting a model amendment that employers using prototype, volume submitter and individually designed plans may adopt to bring their plans into compliance. The Service expects the model amendment to be available in a couple of months. The IRS also expects to address some other issues when it releases the model amendment. "

[g8r]

1950 - Not to beat it to death, but what you are referring to in T.D. 8794 is below. It cites Q&A 2 as authority for being able to increase from $3,500 to $5,000. So, I think it actually reenforces the interpretation of the regulation that you can modify the cash-out rules without violating 411(d)(6). It would be nice if the IRS were to reiterate the rule in their upcoming guidance. But, Ieven if they don't, I feel confident that 1.411(d)-4 allows a modification of the cash-out rules.

G. Benefits Protected from Reduction or Elimination

Section 411(d)(6) provides, in general, that a plan shall be treated

as not satisfying the requirements of section 401(a) if the accrued

benefit of a participant is decreased, or an optional form of

benefit is eliminated, by an amendment of the plan.

Section 1.411(d)-4, paragraph (b)(2)(v) of Q&A-2 provides that a

plan may be amended to provide for the involuntary distribution of

an employee's benefit to the extent such distribution is permitted

under sections 411(a)(11) and 417(e). In accordance with that

provision, a plan may be amended for plan years beginning on or

after August 6, 1997, to permit the involuntary distribution of an

accrued benefit using a cash-out limit of $5,000, with respect to

benefits accrued before the amendment was adopted and effective.

Such an amendment is permitted even if the plan, prior to amendment,

did not permit involuntary distributions (as well as if the plan

permitted involuntary distributions if the present value of the

participant's benefit did not exceed the prior cash-out limit of

$3,500). Such an amendment will not violate the anti-cutback rules

of section 411(d)(6).