Distributions from terminated plans......

[Guest psgross]

What recourse do we have when we have a plan that has been terminated and there is one person who does not return paperwork to have his funds distributed? His balance is a little over $13,000 at the present time, so he doesn't qualify for the automatic cashout? We know where he is, we have sent him certified mail which he signed for, but he won't respond to our requests to fill the paperwork out so that we can distribute his funds and finally close the plan!

[Blinky the 3-eyed Fish]

There are many prior threads on this if you want to use the search feature.

But to reiterate the jist, you can cash him out. If J&S annuities are available, then you must purchase the QJSA. If not, then pay him out in a lump sum. Of course when faced with these threats, especially when an annuity is involved, a participant will be more likely to respond.

[Guest Do]

Blinky, since the distribution from a terminating plan is a mandatory distribution, isn't it subject to the automatic rollover law. Under Notice 2005-5, a mandatory distribution is a distribution without the participant's consent and made before the participant attains the later of age 62 or normal retirement age. Mandatory distributions to surviving spouses and alternate payees are not covered. In addition, mandatory distributions do not include distribuitons that are $1,000 or less or distributions taht are not eligible rollover distributions. So, if the distribution is made after March 28, I don't see how the plan can just pay out an annuity. I assume the participant's benefit is an eligible rollover distribution.

[Guest psgross]

Since this distribution is over $5,000, I don't believe the "mandatory" rollover wouldn't apply.........the mandatory is $1,000 - $5,000, isn't it?

[Guest Do]

psgross,

That's what I thought at first too, but I can't find any authority that says that. I really really really want that to be the rule, but I can't find authority. Most troubling is that the DOL safe harbor for the investment of automatic rollover IRAs applies only to benefits that are $5,000 or less. So, if the Internal Revenue Code (or the IRS in its guidance) says whenever you kick a nonspouse or non-alternate payee out of the plan, you have to rollover their benefits to an IRA, the plan fiduciary is on the hook for the investment of benefits in excess of $5,000.

[Blinky the 3-eyed Fish]

I was applying my answer to the fact that we have over a month and a half until 3/28 and that the payout could occur before then. As for the question, I haven't researched it so I withhold comment like a miser does with money.

[Belgarath]

Take a look at IRC 401(a)(31)(B)(ii). This seems to me to limit the applicability to 5,000, unless there is a rollover account, in which case, under 411(a)(11) the rollover amount can be ignored when determining the 5,000.

The IRS Notice, under the first paragraph (Purpose) specifies that it provides guidance to the automatice rollover provisions under 401(a)(31)(B) (my emphasis). I don't believe a mandatory distribution in excess of 5,000 for a plan termination falls under this Code section. Reading Q&A-2 by itself, and not in conjunction with all other guidance, might bring you to the opposite conclusion, bit my my humble opinion, that isn't correct.

[Guest Do]

You're in the right business. A miser is the perfect type of person to work in the business of saving money for retirement. But you're also an advisor, aren't you? You're in the business of dispensing advice. Don't be a miser with your comments!

[Guest Do]

Belgarath,

I agree that 401(a)(31)(B)(i)(I)'s reference to 401(a(31)(B)(ii) could mean that auto rollovers only apply to cash outs over $1,000 and $5,000 or less. I'm just not confident it's right however because 2005-5 doesn't say it. Your opinion helps, but, with all due respect, I wish there was more discussion or more opninions on it.

Blinky, it's time not to be a miser.

[KJohnson]

I see Belgarath's point, bu tI don't think that there is much question that Q&A 2 states that a mandatory distribution in excess of $5,000 would be subject to the automatic rollover rules. This Q&A provdes:

Q-2. What is a mandatory distribution?

A-2. A mandatory distribution is a distribution that is made without the

participant’s consent and that is made to a participant before the participant

attains the later of age 62 or normal retirement age. A distribution to a surviving

spouse or alternate payee is not a mandatory distribution for purposes of the

automatic rollover requirements of § 401(a)(31)(B). Although § 411(a)(11)

generally prohibits mandatory distributions of accrued benefits attributable to

employer contributions with a present value exceeding $5,000, the automatic

rollover provisions of § 401(a)(31)(B) apply without regard to the amount of the

distribution as long as the amount exceeds $1,000.

[Guest psgross]

But aren't "terminated plans" a different animal? In this instance the company is no longer in business so there is no plan sponsor to set up any rollover account and it is only this one person who refuses to return his paperwork! Can't we just pay him out his $13,000 and withhold the taxes? He has been given at least 2 notices by certified mail!

[KJohnson]

As Blinky noted, you sure can if you don't have annuity options in your plan and you do it before 3/28.

[Belgarath]

KJohnson - I agree that the Q&A-2 has the precise wording you mention. It's just that I read it to mean something different - due to the reference to 411(a)(11), which provides that you can't have a mandatory distribution in excess of 5,000, except as provided in (D) which allows it for rollovers. I think this is what Q&A-2 is meant to reflect, although it is stated much more clearly in Q&A-14.

Has anyone put in a call to Ms. Herrmann or Ms. Carrington on this specific issue? If not, and I get a few minutes tomorrow I'll make a call to see what, if any, response I receive.

[KJohnson]

But that is not the only exception to 411(a)(11). The non-consensual distribution of amounts in excess of $5,000 in a terminating DC Plan (not subject to 412) is another exception to the Rules of 411(a)(11). See 1.411(a)-11(e)(1).

[Belgarath]

I apologize for not making my resoning (such as it is) clear. The reference to 411(a)(11) made by 401(a)(31)(B)(ii) is solely for determining the present value of the account under 411(a)(11). 1.411(a)-11(e) is not concerned with how the present value is determined - it merely allows a distribution, within certain parameters, for amounts over 5,000 in a terminating defined contribution plan.

And this would appear to be consistent with the DOL's safe harbor regulation.

But anyway, I'm going to call the IRS shortly, and will keep you posted as to what I find out - if I find out anything. Thanks.

[KJohnson]

O.k., you actually forced me to go back and look at 401(a)(31)(B) which provides:

(B) Certain mandatory distributions.—

(i) In general.— In case of a trust which is part of an eligible plan, such trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that if—

(I) a distribution described in clause (ii) in excess of $1,000 is made, and

(II) the distributee does not make an election under subparagraph (A) and does not elect to receive the distribution directly,

the plan administrator shall make such transfer to an individual retirement plan of a designated trustee or issuer and shall notify the distributee in writing (either separately or as part of the notice under section 402 (f)) that the distribution may be transferred to another individual retirement plan.

(ii) Eligible plan.— For purposes of clause (i), the term “eligible plan” means a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411 (a)(11)) does not exceed $5,000 shall be immediately distributed to the participant.

It seems to me that (ii) and the reference to 411(a)(11) only serves to define "eligible plan". Once you have determined what an eligible plan is, then any distribution from that eligible plan in excess of $1,000 must be made in the form of an automatic rollover. In other words (ii) defines the plan and not the distribution--(i) defines the distribution.

I guess this could lead to the strange situation of a plan that did not have automatic cashouts in the traditional 411(a)(11) sense would also have to apply the automatic rollover rules to any involunatary distribuiton upon termination. However, a plan that does not have cash outs would not since it is not an "eligible plan". I am not sure that this makes sense. Then again, I am not sure that exempting such distributions makes sense given the policy behind the rule in the first place (keeping amounts in plans or IRAs).

I would be interested in what the drafters of 2005-5 have to say.

[mbozek]

Dont know how you can have automatic IRA rollover upon terminaton for benefits that must be paid as J & S annuity. Other benefits not subject to J &S would be subject to automatic rollover requirement if plan provides for distribution of assets upon termination instead of using wasting trust. Use of automatic rollover will permit timely distributions at year end to IRA to terminate plan for 5500 purposes without waiting for check to be cashed by participants.

[KJohnson]

1) Agreed on the first sentence but I think the whole premise of the thread was a distribtion that met 1.411(a)-11(e)(1).

2) I agree with the second sentence as well except that if a plan did not provide for cashouts, I am not sure if they would be an eligible plan and would be required to make non-consensual plan termination distributions in the form of an automatic rollover.

[mbozek]

How can a plan cashout assets upon termination when participants refuse to elect a distributon other than through immediate distributions which are eligible rollover distributions? Only other way I know of is to forfeit plan assets.

[KJohnson]

I agree that they are eligible rollover distributions. But only "eligible plans" have to comply with the automatic rollover rules and an eligible plan is defined as "a plan which provides that any nonforfeitable accrued benefit for which the present value (as determined under section 411 (a)(11)) does not exceed $5,000 shall be immediately distributed to the participant." Where I have a question is when you have a plan that does not contian such a provision but provides for non-consensual distributions for whatever amount upon termination of the plan pursuant to 1.411(a)-11(e)(1). Is that plan subject to the automatic rollover rules? Just from reading the statute, I would say no. From a logic standpoint based on the purpose of the change in the law, I would say yes.

[Belgarath]

I did not hear back from the IRS yesterday, but as soon as (if) I do, I'll post whatever they tell me.

[Belgarath]

Just fyi - no response yet from the IRS - I placed a followup call today.

[GBurns]

Belgarath,

I do not know who you speak to at the IRS etc, but have you ever independently verified whatever those persons tell you?

My reason, is that the GAO etc surveys show a high error rate at the CSR level, while a look at case law from Tax Court etc shows that there is also a high error rate at other levels. So I wonder what the error rate is "in between".

[Belgarath]

I would be talking to one of the two principal authors of the Notice. Assuming they ever deign to return my calls. And in this case no, I wouldn't be doing any independent verification, as for our clients (mostly small employers) it's very nearly unheard of for a plan termination to have a nonresponsive/missing participant with an account balance in excess of $5,000. So if I get an answer, I'm merely going to accept it, as it isn't really that important to our business.

[Belgarath]

FYI - Ms. Carrington returned my call today. She said that at this point, they had no answer, but that they were hoping to discuss this within their "group" in the next two weeks. No estimated date on a firm answer.

[E as in ERISA]

My understanding is that they hadn't realized that it was an issue before.

[g8r]

The issue was raised with the IRS several weeks after Notice 2005-5 was issued (i.e., several months ago). So, I'm not holding my breath for an answer any time soon.

I think a literal reading of the IRS Notice would lead someone to conclude that a mandatory distribution upon termination of a non-J&S plan would be subject to the rule, even if it exceeds $5,000. The DOL regs don't really contemplate this issue although the the preamble to the regs states that there will be non-enforcement (i.e., that you can follow the regs) even though the amount of the rollover is over $5,000. But, I think that contemplates prior rollovers causing it to exceed $5,000, not a mandatory distribution upon plan termination.

To make it more confusing, if you actually look at the DOL reg, it refers to 401(a)(31)(B). So, if the IRS interprets that code section to apply to distributions on termination, then maybe the DOL safe harbor automatically applies (even though the preamble doesn't contemplate that it only applies to mandatory distributions due to the $5,000 rule).

[Guest Benefitsgal]

psgross: If the plan is a DC plan, did you consider the DOL guidance from this past fall (FAB 2004-02)? You might, after following the steps outlined in the FAB, be able to just escheat the account to the state.

[EGB]

We have a terminated DC plan, but have another DC plan in the controlled group. Would everyone agree that we would be required to transfer missing participants account balances (or non-responsive participant accounts) to the other DC plan (ie, we cannot rely on the FAB, due to the footnote in the FAB which states that it assumes there is not another DC plan in the controlled group, and due to 1.411(a)-11(e))? Could we safely use the automatic rollover regulations for amounts up to $5,000 and transfer amounts in excess of $5,000 to the other DC plan?

We would like to automatically rollover all amounts for missing/non-responsive account balances, but this does not appear to be an option.

The problem we have is that the other DC plan does not want to accept the trasnfers, so we need to determine what we are required to transfer and what can be avoided via the automatic rollover rules.

[E as in ERISA]

Are the participants terminated too? Does the plan have cashout provisions applicable to terminated participants? Both the plan's termination provisions and the plan's cashout provisions would apply? So you could auto roll them as cashout distributions? 401(a)(31)(B)(ii) appears to refer to a plan that has a cashout provision described in Reg. 1.411(a)-11(©(3). 401(a)(31)(B)(i)(II) appears to describe a distribution made pursuant to such a cashout provision. Termination distributions are made under a different exception to the consent rules. Reg. 1.411(a)-11(e)(11). But the IRS has not clarified yet. So you're safer if both plan provisions apply.

[EGB]

Some of the participants have terminated employment and some have not. I believe the automatic rollover provisions only apply to terminated participants (and I think we are talking about termination from employment as opposed to termination from participation in the Plan). The Plan has mandatory distributions for amounts of $5,000 or less, but currently does not have any provisions covering 1.411(a)-11(e).

Also, can we make a valid argument that the plan is not in the same controlled group as another 401(k) plan for purposes of 1.411(a)-11(e) since the plan was effectively terminated just prior to the acquisition that brought the sponsor of the Plan into the controlled group; of course, there are assets remaining in the Plan. I know this "day before" termination works in the context of the 401(k) regulations as they relate to making distributions of elective deferral money and the successor plan rules, but I am not aware of similar rules in the 411 context.

Does a plan have to contain 1.411(a)-11(e) provisions in order to use the rules contained therein? It seems that the best answer to this question is "yes." Because this is a terminated plan, we don't want to have to amend it, but will do so if needed.

[KJohnson]

Another non-consensual distribution that can be made from a Plan with account balances over $5,000 is when a particiant has reached the later of NRA under the Plan or age 62. 1.411(a)-11©(4). It appears that you could mandate such an involuntary distribution and not provide that automatic rollover under the following langauge of Q&A 2 of 2005-5 which provides that such an involuntary distribution is not a "mandatory distribution".

Q-2. What is a mandatory distribution?

A-2. A mandatory distribution is a distribution that is made without the

participant’s consent and that is made to a participant before the participant attains the later of age 62 or normal retirement age.