Auto rollover on plan terminations

[Guest Do]

When a plan terminates and distributes benefits, do the distributions constitute mandatory distributions that are subject to auto rollovers to IRAs?

[Guest bwell]

I have been wondering the same thing. Read literally, Notice 2005-1 and Code Section 401(a)(31)(B)(ii) would seem to make the rules applicable to termination distributions. But I wonder if you could argue that the rules would not apply if the plan terminates prior to March 28.

[Everett Moreland]

See the discussion about this in Q&A 9 at the following cite:

http://www.mcguirewoods.com/news-resources...m.asp?item=1358

[Guest Do]

Thanks Everrett. The article suggests that auto rollovers would not apply to a plan with a termination effective date before March 28, even though the mandatory distribution occurs after March 28. I think that is a weak argument (and, frankly, not worth publishing). Thank you for the link anyway. At least it says the IRS doesn't agree with that interpretation either.

[E as in ERISA]

My gut reaction would have been that it doesn't automatically apply to terminations.

The "event of distribution" for a cashout is normally the termination of the participant. And I think that most cashout provisions would be couched in those terms -- something like the IRS' language: "If an employee terminates service, and the value of the employee's vested account balance ... is not greater than $5,000, the employee will receive a distribution ...."

The plan termination is a different "event of distribution." A plan that does not have cashouts would not be an "eligible plan" under 401(a)(31)(B). It could still make distributions upon termination. But since its not an "eligible plan" I don't think that it would have any auto rollovers.

If those plans don't have auto rollovers upon termination, then I don't see why a plan that has voluntarily chosen to have mandatory distributions upon termination of employment would be required to also rollover the distributions upon termination of the plan.

If a plan is terminated while the company is operational and employees have not terminated, then I think that most cashout provisions would not apply.

But the language in 411(a)(11) and 401(a)(31)(B) doesn't really flow well to clarify this. And in some cases participants might be terminating when the plan is terminating.

[mbozek]

A mandatory rollover to an IRA cannot be required where the benefits must be paid in the form of a J & S annuity under IRC 401(a)(11). Other benefits which can be paid as a LS upon termination are not immediatley distributable w/in the meaning of A31Bii because benefits can be paid under the terms of the plan as a wasting trust. But why would a plan object to a mandatory rollover of non J&S benefits to an IRA since the participants accounts can be assessed for the cost of the transfer and there would be no delay in cashing checks which would hold up a year end termination of the plan.

[E as in ERISA]

Because its hard for the plan to find a vendor to accept the auto rollovers.

[mbozek]

There are vendors who accept automatic rollovers- check the posts on the distributions board.