IRS Notice 2005-5 on automatic rollovers

[Everett Moreland]

http://www.irs.ustreas.gov/pub/irs-drop/n-05-05.pdf

[MGB]

I noted that Holland's unofficial comment at the CCA meeting in Hawaii (actually it was a question some of us posed to him a few weeks before that and he responded he would address there publicly) is included here. That is where you have an automatic cashout up to $1,000 and a discretionary employee-chosen lump sum up to $5,000 (note that you do not have to arrange for any relationship with an IRA provider this way). The question was whether or not the up-to-$5,000 discretionary lump sum was subject to QJ&S disclosure and spousal consent. The answer is no (which makes such an arrangment all the more attractive).

Also, they have the amendment language here.

I didn't notice anything else new. Did I miss something here? Seems like a lot of Q&As already covered elsewhere.

[E as in ERISA]

402(f) notice must identify issuer.

[Everett Moreland]

The requirement in A-15 that the special tax notice or other document identify the IRA provider seems to limit the effect of the grace period (to 12/31/05) in A-9.

[g8r]

Yes, the notice requirement does conflict with the grace period.

Also, it appears that the grace period only applies if you will be applying the rules by the end of 2005. If you are going to modify the cash-out rules in the manner mentioned by MGB, then you'd generally need to amend your plan by 3/28/05. Otherwise you'd have an operational violation for failure to follow the terms of the plan (assuming the plan currently provides for an automatic cash-out of amounts $5,000 or less).

And, there's no model or sample amendment provided for any adjustments of a plan's cash-out rules.

There are numerous other issues relating to that Notice that may warrant further clarification from the IRS.

[Belgarath]

We've been struggling with Q&A-15 as well. For example: Small employer with only a half dozen employees. 2 terminate employment. When distribution kits sent to them, apparently either the 402(f) notice OR another separate letter must identify the issuer of the IRA.

Now, as a small employer, how do I know who the issuer will be? It seems a little ridiculous for me to have to take the time to line up a vendor that may never be used, is it will only be used if the terminated participants fail to make an election! And it isn't uncommon for a small employer to never have this problem.

Would it be reasonable to have a notification in the distribution kit that says something to the effect of: If your distribution is a “cash out” benefit which is otherwise eligible for rollover, and is less than $5,000.00 (excluding existing rollover accounts within the plan) but more than $999.00, and you DO NOT MAKE AN ELECTION as to how to receive your benefit, the plan is required to act as though you had elected a direct rollover to an IRA in your name. If you have not made an election within (x) days, we will send you another letter advising you of the name, address, etc... of the IRA issuer. Please contact your Plan Administrator, John Doe, at ........... if you have any questions.

Would that work, or some similar approach? Or are employers stuck with identifying an IRA issuer prior to ever sending the distribution kit containing the 402(f) notice?

[g8r]

I've been rethinking my prior post and think it's wrong. If you don't know what to put in the notice, you use the grace period (suspend distributions and rollovers until you have the notice ready).

Belegrath, I understand your concerns. Until there are a number of IRA providers out there, you probably don't want to work out an agreement with a provider since, as you allude to, it may be years before you even have to deal with the issue.

The only solution I can think of is amend the plan to provide that amounts between $5,000 and $1,000 are only distributed with the consent of the participant. You won't have to deal with the auto IRA rollover rules -- but you won't be able to force a distribution on these people either. It's not a perfect solution, but I think it's what many plans will be doing until the dust suttles on this (which take a few years).

[Belgarath]

Of course, if you are dealing with prototypes or VS, then the amendment route isn't terribly attractive either!