Plan Termination - Automatic Rollover

[Guest Midas]

In the absence of participant election, do the automatic rollover rules apply to plan termination lump sum distributions regardless if the plan has amended to the $1,000 threshold limit to eliminate the need for automatic rollovers?

The only reason I ask is because we subscribe to Accudraft for our document provider and our most recent document updates included the following statement regarding an update to the automatic rollover amendment...

"A consensus has now developed in the pension community that the automatic rollover rules of Internal Revenue Code Section 401(a)(31)(B) apply in the case of a plan termination even if the plan has been amended in such a manner that the automatic rollover rules do not apply while the plan is in operation (e.g., by reducing the cash-out threshold to $1,000 or less)."

This is the first I have heard of this. I thought if there was truly a "consensus" that someone out there would have heard this.

Has anyone?

[WDIK]

I cannot speak as to Accudraft's reason for citing a community consensus, but it appears to me that the updated language provided by Accudraft merely clarifies that the automatic rollover rules apply upon plan termination to amounts over $1,000 in the absence of a participant's consent. This seems to be a logical conclusion.

Consider:

1) A plan is amended to limit involuntary cashouts to amounts under $1,000.

2) A terminated participant with an account balance of $4,000 does not provide consent, so the plan cannot make a distribution.

3) Subsequently the plan terminates.

4) The participant noted in item two still does not provide consent.

5) The automatic rollover rules apply because the amount to be paid is over $1,000.

Are there other alternatives for such a scenario?

(I guess if the plan is a defined beneift plan subject to PBGC that the missing participant program would apply.)

[Guest Midas]

WDIK - I think you clarified it nicely. That makes sense. Thank you!!

[E as in ERISA]

Under that theory, you'd do an automatic rollover of any balances in a terminated plan that are over $1,000 and don't respond with a distribution form within a prescribed time period (not only the $4,000 accounts but also the $100,000 and $200,000, etc.).

I think the IRS is considering guidance.

I hope that they completely exclude terminated plans. In my view, those are not subject to 401(a)(31)(B). The "UNDER $5,000 cashout" is only one of several exceptions to the consent rules. "UNDER $5,000 cash outs" are excepted from consent rules because they never even fit into the terms of 411(a)(11) -- which applies to "OVER $5,000" distributions. And that is also confirmed under Reg. 1.411(a)-11©(3). Plan termination distributions generally DO fit under 411(a)(11) consent requirements. They have a completely separate exception under 1.411(a)-11(e) -- which generally requires consent -- unless the special rules are met. So I think that the language in 401(a)(31)(B)(ii) is a reference purely to "UNDER $5,000 cashout" distributions in 1.411(a)-11©(3) and not to termination distributions in 1.411(a)-11(e).

I think that the description in 401(a)(31)(B)(ii) of the transactions to it applies makes it clear that auto rollovers don't apply to anything but distributions under a plan's "UNDER $5,000 cashout" provisions. The way I read it, it says it applies to a distribution being made pursuant to provision that says any benefit with a PV that does not exceed $5,000 will be distributed. Isn't that a reference back to a "UNDER $5,000 cashout" distribution described in 1.411(a)-11©(3)? I don't see how that is a reference to any of the exceptions to the "OVER $5,000" rule -- under the other subsections of 1.411(a)-11 -- for death benefits, QDROs, RMDs, ESOP dividends, plan terminations, etc.

The only issue is that in some cases, you have a distribution that can be made under either the plan's cashout provision or the termination provision. If that is an issue, you could get rid of the cashout provision. Then I dont' think there would any question of the application of 401(a)(31)(B). Or if you have separate processes for cashouts and plan terminations, just make sure you're not applying the former.

[WDIK]

I yield to superior logic and citations.

[mbozek]

The auto rollover rule does not appear to require involuntary rollovers for terminated plans because it applies only if amounts not in excess of 5000 shall be immediately distributed to a participant. Unlike involuntary cashouts there is no requirement that distributions from a terminated plan be distributed at any time- the plan may continue indefinitey after termination and pay benefits upon request of participants. However the IRS could allow a terminated plans to use the invountary cashout for those recaltrant employees whose refusal to take a distribution prevents the plan from winding up its operations.