IRS News Flash on IRA Rollovers

[Scott]

Maybe my brain isn't working too well today, but I'm having a hard time figuring out exactly what is meant by one part of the IRS' Februrary 16 News Flash on the IRA rollover provisions.

The News Flash says:

"Many plan sponsors have indicated a wish to comply with section 401(a)(31)(B) by reducing the mandatory cash-out amount to $1,000 (or $200) or by completely eliminating mandatory distribution provisions. . . . Plan sponsors are reminded that, under Notice 2005-5, amounts attributable to rollover contributions are included in determining whether a participant's accrued benefit is less than $1,000 for purposes of the automatic rollover requirement of section 401(a)(31) even though those amounts are not taken into account under section 411(a)(11) in determining whether mandatory distributions ar permitted."

As an example, let's say an employer amends its plan to reduce the cash-out amount to $1,000, and the plan provides that rollover contributions are not taken into account in determining whether a cash-out will be made. Assume a participant terminates employment with a balance of $4,000, $3,500 of which is attributable to rollovers. Under the plan, he can be cashed out without consent. Is the News Flash saying that if the participant doesn't make a rollover election and doesn't elect to receive it directly, it must be rolled into an IRA? Would it make any difference if the account balance was $10,000, and $9,500 of it was attributable to rollovers?

[Blinky the 3-eyed Fish]

Assume a participant terminates employment with a balance of $4,000, $3,500 of which is attributable to rollovers. Under the plan, he can be cashed out without consent. Is the News Flash saying that if the participant doesn't make a rollover election and doesn't elect to receive it directly, it must be rolled into an IRA?

In determining whether a balance is able to be cashed out (i.e. under $5,000) rollovers can be ignored, but for determining what to do with the cashout rollovers cannot be ignored. So here your balance for seeing what to do with the money is over $1,000, so if you are going to cash him out, it has to be via an IRA rollover.

Would it make any difference if the account balance was $10,000, and $9,500 of it was attributable to rollovers?

No, for the reason stated above.

[E as in ERISA]

So if you want to avoid automatic rollovers, you not only need to reduce the cashout limit to $1,000 or less you also need to get rid of any provision to ignore rollovers. If you don't get rid of the provision you'll end up having automatic rollovers.

[Blinky the 3-eyed Fish]

The provision to ignore rollovers it what determines if a balance is able to be cashed out in the first place. How is getting rid of that provision going to cause you more automatic rollovers? The opposite it true.

[E as in ERISA]

I thought I was saying the same thing as what you said in your original answer. Now you seem to be disagreeing?

For purposes of applying 411(a)(11) and determining whether you have an account subject to mandatory distribution, you can choose whether to include or ignore/disregard prior rollovers in the calculation of the account balance (whether it is $5,000 or $1,000). In the facts given, if the plan ignored rollovers, if the plan ignored prior rollovers there would be only a $500 balance and the account would be subject to mandatory distribution.

For purposes of applying 401(a)(31)(B) and determining whether the mandatory distribution is in the form of a cash out or rollover, you cannot ignore the prior rollover in determining whether you are over $1,000 or not. In the facts given, the account would be $4,000 or $10,000 and would be subject to automatic rollover.

Therefore, if you want to avoid automatic rollovers, you need to reduce the mandatory distribution limit to $1,000 or less AND make sure that your plan includes prior rollovers in making that determination. Otherwise, if you continue to exclude prior rollovers in the determination of whether the mandatory distribution rules apply, then you will likely have to make some of those mandatory distributions in the form of an automatic rollover.

[Bird]

But Katherine didn't say "more" automatic rollovers.

If you don't want to have ANY automatic rollovers (for amounts over $1,000, but presumably you still want to cashout under $1,000), you need to reduce the threshhold to $1,000, and NOT ignore prior rollovers when you determine whether a participant is over the threshhold.

[Blinky the 3-eyed Fish]

I see I read your post too quickly. Disregard mine.

Let me add that is a good point Katherine.

[Alf]

by reducing the mandatory cash-out amount to $1,000 (or $200)

Will someone please catch me up? Why does it say ($200)?

[WDIK]

Is it to tie in with the threshold for the mandatory 20% withholding?

[stevena]

We are using the $200 limit. Mostly because we wanted it to be $0, but didnt want to have to get consent on residual balances, so we had to pick a low number. That and the withholding limit made it seem reasonable.

[JDuns]

$200 is the maximum amount that may be cashed out without offering a rollover (which indirectly ties to the 20% withholding since that applies to rollover-eligible distributions).