Autorollover/Cash-outs and Rollover Accounts

[sloble@crowleyfleck.com]

Client has elected to comply with the EGTRRA autorollover rules by reducing the mandatory cash-out limit from $5,000 to $1,000 or less.

What is the rule for counting rollover accounts for purposes of determining whether the $1,000 threshold is met? I know you don't count them for purposes of the $5,000 autorollover.

Some advisors are saying that you must count rollover contributions for purposes of cash-out, but I think Code Section 411(a)(11) (referenced in 401(a)(31)(B)(ii)) indicates that a plan can be drafted to exclude rollover contributions from the definition of "nonforfeitable accrued benefit" and thereby exclude rollovers from the determination of whether the cash-out threshhold is reached. Furthermore, Q/A 14 of Notice uses the word "if" which suggests to me that a plan can be drafted differently.

If I am right, what are some reasons to include rollovers in the nonforfeitable accrued benefit? (There is no vesting in this plan--all contributions are vested.)

[Kirk Maldonado]

Q-14. Are amounts attributable to rollover contributions that exceed $5,000 subject to the automatic rollover provisions of § 401(a)(31)(B)?

A-14. Yes. Section 401(a)(31)(B) applies to the entire amount of a mandatory distribution. Thus, for example, the portion of the distribution attributable to a rollover contribution is subject to the automatic rollover requirements of § 401(a)(31)(B), even if that amount is excludable (under § 411(a)(11)(D)) from the determination of whether the present value of the nonforfeitable accrued benefit exceeds $5,000.

IRS Notice 2005-5.

[sloble@crowleyfleck.com]

Kirk: I am aware of this cite. I am just confused as to why some are advising that you MUST count rollover contributions for purposes of cash-out when the language you quote uses the word "if" and 411aD indicates a plan can be drafted otherwise.

[Belgarath]

I think there are two separate issues here:

1.What is and isn't a cashout benefit, and once you have determined that it IS a cashout benefit subject to an involuntary payout,

2. Is it subject to mandatory rollover rules.

So, you have an account balance of 800, with an additional rollover balance of 7,000. For part one, your plan can be written to define this as a cashout benefit by NOT counting the rollover account, or it can be written to include the rollover when determining whether it is a cashout, in which case it is over 5,000 and no longer a cashout.

Assuming you choose the former (as many people did so that they would be able to force a payout on small account balances) it is a cashout benefit subject to involuntary payout. Now you must COUNT the rollover amount to determine if you are over the $1,000 threshhold, as referenced by Kirk. Since you are over 1,000, mandatory rollover rules apply.

[Blinky the 3-eyed Fish]

Just change the cite to read:

...the portion of the distribution attributable to a rollover contribution counts for § 401(a)(31)(B) (over or under $1,000), even if you chose not to count it for determination of whether the present value of the nonforfeitable accrued benefit exceeds $5,000.

There was another long thread on this subject if you want to search.

[Kirk Maldonado]

My guess is that the drafter of the language used the word "if" when a more appropriate word would have been "though."

That would explain away the issue you raised, which was valid and based on a very careful reading of the wording of the language. In fact, I would wager that you paid more attention to this phraseology than the original drafter (and the reviewers).

I've seen people use those terms interchangeably so frequently that I automatically assumed that the author meant "though" rather than "if." Unfortunately, making assumptions about what others meant can be dangerous and can lead to embarrassing errors.

[Blinky the 3-eyed Fish]

I like "if" because a plan can elect on whether or not to exclude the rollovers from the determination of the $5K, so it may or may not be excludable.

[sloble@crowleyfleck.com]

I am ok with "if" but I want to make sure I understand the application of these rules. I have formulated the following conclusion--please let me know if you think there are flaws:

Even if a plan reduces the mandatory cash-out to $1,000 or less and defines "nonforfeitable accrued benefit" to exclude rollovers, this plan will still be stuck having to establish an IRA and comply with the mandatory rollover rules if and only if both of the following are true:

-The nonforfeitable accrued benefit is less than $1,000 AND

-The rollover account brings the total account balances to over $1,000

THANKS

[Blinky the 3-eyed Fish]

Correct, which is why if you are lowering the cash-out limit under § 411(a)(11)(D)in an attempt to avoid establishing IRA's, you should also include rollovers in the amount. I know for nearly all of our documents we excluded them with the EGTRRA amendment, so that will change.