Rollover of terminated money purchase plan balances into 401(k)

[holdco]

Good morning all!

Does anyone by chance know what the rule is for preserving distributions to a 401(k) plan? Specifially, we have a terminated money purchase plan with about a dozen account balances of missing participants (only one a bit over $1,000, the rest under). I know that under DOL guidance, you can roll over these amounts to IRAs, among other options. However, that guidance assumes that there's no other defined contribution plan into which the account balances can be rolled over, and we have a 401(k) plan. However, I thought that a distribution of this sort is limited to certain forms under the Internal Revenue Code.

If someone can shed any light on this problem, that would be great. Thank you!

[QDROphile]

Regulation 1.411(a)-11(e). It is a transfer, not a rollover. Distribution options are preserved.

[holdco]

Regulation 1.411(a)-11(e). It is a transfer, not a rollover. Distribution options are preserved.

Thanks so much, I wasn't aware of this provision. However, a quick follow-up. I understand that this is a transfer from a terminated plan, and because the participant with a balance in that terminated MPP can't be found, he can't consent to an immediate distribution from the terminated plan, so we can transfer it to our other defined contribution plan (the 401(k) plan). But how can you tell that distribution options are preserved under that regulation? And must that actual transfer to the 401(k) plan take a specific form (i.e., lump sum)? I will look at the 411(d)(6) regs, since that was the first idea I had. Thank you again!

[holdco]

Regulation 1.411(a)-11(e). It is a transfer, not a rollover. Distribution options are preserved.

How about 1.411(d)-4(e), Question 3? "An employer who maintains a MPP that provides for a single sum optional form of benefit may not establish another plan that does not provide for this optional form of benefit and transfer participant's account balances to such new plan." The only forms of distribution under our 401(k) plan are lump sum and direct transfer to another plan. The terminated MPP required payment in a QJSA of vested account balances, though it also allows for annuity purchases, direct rollovers, and lump sum payments in certain cases. There's no way we can buy an annuity given the tiny balances. Is there a special way we should distribute those balances?

The other option was rolling them over into IRAs, but we'd obviously like to try moving the balances into our 401(k) first.

[QDROphile]

How do you move the balances to IRAs? You can only do that with a distribution. If the balances are not more than $5000, then look into provisions for mandatory distribution of small balances. Finding an IRA provider won't be easy even if you resolve the distribution issues. I am not sure that I understand or agree with you comment about purchasing annuities. You don't have to cross that road until the time comes for distribution and the individual does not choose another option. Individuals do not choose annuities, especially for small balances. Somewhere there is an insurance company that will sell an individual annuity of any size, for a price.

[holdco]

How do you move the balances to IRAs? You can only do that with a distribution. If the balances are not more than $5000, then look into provisions for mandatory distribution of small balances. Finding an IRA provider won't be easy even if you resolve the distribution issues. I am not sure that I understand or agree with you comment about purchasing annuities. You don't have to cross that road until the time comes for distribution and the individual does not choose another option. Individuals do not choose annuities, especially for small balances. Somewhere there is an insurance company that will sell an individual annuity of any size, for a price.

I was referring to FAB 2004-02, which allows for distributions to IRAs in respect of terminated plans (and missing participants therein). That was our original thought. Most of the balances of the missing participants are under $200. I don't know what annuity one can buy in such a case, and it will probably be difficult to find an IRA provider too, as you wrote. That's why the FAB provides options like allowing the balance to escheat to a state unclaimed property fund, or be moved to an interest-bearing bank account. That said, the FAB assumes that there is no other DC plan into which the missing participants' balances can be rolled over. Our terminated plan had mandatory cash-out provisions, but we can't make any distributions because there is no one to distribute them to, at the moment.

So, we're looking to move the small balances over to the DC plan, which you label a transfer (I'm guessing, not a "rollover?"). Are you sure that moving a missing participant's account balance to another DC plan is not a distribution? I'm told that there are "rules" as to what "form" this transfer/distributions is to take in transit to the 401(k) plan. The key point is, there's no choice involved here, as we have no one making them, just a bunch of accounts with no one to claim them. I just want to nail down that whole "form" issue, assuming it is actually pertinent.

[QDROphile]

FAB 2004-02 does not inform about what is allowed or required under section IRC 411 with respect to distributions. I don't think you are getting the nuances of the requirements, or perhaps you just dislike the outcome so much that you are asking for confirmation of answers given. Either way, you should seriously consider engaging professional assistance rather than trying to reach conclusions from discussions on this board. Perhaps others will try to walk you throught the maze.

[holdco]

FAB 2004-02 does not inform about what is allowed or required under section IRC 411 with respect to distributions. I don't think you are getting the nuances of the requirements, or perhaps you just dislike the outcome so much that you are asking for confirmation of answers given. Either way, you should seriously consider engaging professional assistance rather than trying to reach conclusions from discussions on this board. Perhaps others will try to walk you throught the maze.

Let's make it even more simple. The terminated money purchase plan required distributions in the form of a QJSA. The current 401(k) plan allows for distributions only in the form of lump sums or direct rollovers. The missing participant balances are all, with the exception of one, under $1,000. FAB 2004-02 details the requirements on how to locate missing participants and roll over their funds, however small, into IRAs (amongst other alternatives), but it does not apply if there is another DC plan into which the balances can be transferred. Your pointing out Treas. Reg. 1.411(a)-11(e) was very helpful, and but begs the ultimate question...if we can transfer the participant's accrued benefit without his consent to our 401(k) plan (pursuant to that Reg.), must we also amend the 401(k) plan to provide for a distribution in the form of a QJSA?

I think the answer is yes, but I can't find the language confirming it. Obviously, we'd prefer to roll it over into an existing plan instead of enrolling everyone into IRAs, and of course we'd prefer not to amend anything if we don't have to. But I can't spot the 411 regs that explicitly provide for mandating the form of distribution from the terminated plan. Perhaps in your experience, you know this to be true? Or false?

Thanks for the insight.

[QDROphile]

You zeroed in very nicely. The 401(k) plan must accommodate the protected distribution provisions of the amounts transferred into the 401(k) plan. The MPP's annuity form is protected, but I think only for amounts greater than $5000 (subject to plan terms, as always). The amounts are transferred, not rolled over, from the terminating MPP. Some plans anticipate transfers and have ready-made provisions about protecting distribution options. If your 401(k) plan does not accept transfers, it will have to be amended to accommodate the terminating plan. Amounts not greater than $1000 (or $5000, depending on terms) can be distributed from the 401(k) plan pursuant to 401(k) plan terms. I did not review the FAB to see if it prevents the indirect distribution of the small accounts after the transfer, but I do not recall that it does and it would be overreaching to interfere with 401(k) plan mandatory distributions.

[Bird]

You might want to pore over every section of the 401(k) plan, especially the basic plan document if it's set up as a prototype or VS on prototype format. They often have language that says "if [the plan accepts transfers from MP plans]...then [annuity benefits are preserved]."

[holdco]

You zeroed in very nicely. The 401(k) plan must accommodate the protected distribution provisions of the amounts transferred into the 401(k) plan. The MPP's annuity form is protected, but I think only for amounts greater than $5000 (subject to plan terms, as always). The amounts are transferred, not rolled over, from the terminating MPP. Some plans anticipate transfers and have ready-made provisions about protecting distribution options. If your 401(k) plan does not accept transfers, it will have to be amended to accommodate the terminating plan. Amounts not greater than $1000 (or $5000, depending on terms) can be distributed from the 401(k) plan pursuant to 401(k) plan terms. I did not review the FAB to see if it prevents the indirect distribution of the small accounts after the transfer, but I do not recall that it does and it would be overreaching to interfere with 401(k) plan mandatory distributions.

Thank you again. Following up, the 401(k) plan document permits transfers from other 401 or 403 qualified plans, annuity contracts under 403(b), governmental plans, IRAs, Roths, etc. It prohibits transfers of assets from a money purchase plan unless the employee's spouse waives the QJSA. We can't get this waiver because we can't contact the participants. So, the plan does not in fact accept transfers from money purchase plans, and should be amended, correct?

In terms of your statement that amounts not greater than $1,000 may be distributed pursuant to 401(k) plan terms (in our case, by way of lump sum or direct rollover only), we only have a provision stating that if the balance is $1,000 or less, the amount may be distributed as soon as employment terminates. It does not specify the form of that distribution. Did you have some statute in mind that says the 401(k) plan isn't required to preserve the QJSA form of distribution once the MPP balances are transferred over, if they are less than $1,000? I guess for the one account that is over $1,000, the QJSA must be preserved?

[holdco]

You zeroed in very nicely. The 401(k) plan must accommodate the protected distribution provisions of the amounts transferred into the 401(k) plan. The MPP's annuity form is protected, but I think only for amounts greater than $5000 (subject to plan terms, as always). The amounts are transferred, not rolled over, from the terminating MPP. Some plans anticipate transfers and have ready-made provisions about protecting distribution options. If your 401(k) plan does not accept transfers, it will have to be amended to accommodate the terminating plan. Amounts not greater than $1000 (or $5000, depending on terms) can be distributed from the 401(k) plan pursuant to 401(k) plan terms. I did not review the FAB to see if it prevents the indirect distribution of the small accounts after the transfer, but I do not recall that it does and it would be overreaching to interfere with 401(k) plan mandatory distributions.

Thank you again. Following up, the 401(k) plan document permits transfers from other 401 or 403 qualified plans, annuity contracts under 403(b), governmental plans, IRAs, Roths, etc. It prohibits transfers of assets from a money purchase plan unless the employee's spouse waives the QJSA. We can't get this waiver because we can't contact the participants. So, the plan does not in fact accept transfers from money purchase plans, and should be amended, correct?

In terms of your statement that amounts not greater than $1,000 may be distributed pursuant to 401(k) plan terms (in our case, by way of lump sum or direct rollover only), we only have a provision stating that if the balance is $1,000 or less, the amount may be distributed as soon as employment terminates. It does not specify the form of that distribution. Did you have some statute in mind that says the 401(k) plan isn't required to preserve the QJSA form of distribution once the MPP balances are transferred over, if they are less than $1,000? I guess for the one account that is over $1,000, the QJSA must be preserved?

CORRECTION: The 401(k) plan permits lump sum distributions if the balance is $1,000 or less. Sorry, I missed that caveat. So what does this mean? It looks like the plan must nevertheless be amended to allow for transfers from the terminated MPP, but the transferred account balances need not be distributed in the form of a QJSA when the time comes? Is this really accurate, even with the 1.411(d)-4 regulations on preserving participant benefits, the anti-cutback rules, etc.? Then I've seen this quote in the Internal Revenue Manual: "In the case of a MPP under which the annuity form of payment cannot be eliminated, a distribution must be made in the form of an annuity that preserves the available options if the participant does not consent to distribution in the form of a lump sum. IRM 7.12.1.2.12(2). Assuming you are correct and we don't need to preserve the QJSA for the balances less than $1,000, then for the one balance greater than $1,000, we should?

What a terrible set of rules. =)

[holdco]

You might want to pore over every section of the 401(k) plan, especially the basic plan document if it's set up as a prototype or VS on prototype format. They often have language that says "if [the plan accepts transfers from MP plans]...then [annuity benefits are preserved]."

Thanks for the thought. I've copied below my reply to QDROphile...perhaps you have an additional suggestion? Thanks very much!

Thank you again. Following up, the 401(k) plan document permits transfers from other 401 or 403 qualified plans, annuity contracts under 403(b), governmental plans, IRAs, Roths, etc. It prohibits transfers of assets from a money purchase plan unless the employee's spouse waives the QJSA. We can't get this waiver because we can't contact the participants. So, the plan does not in fact accept transfers from money purchase plans, and should be amended, correct?

In terms of your statement that amounts not greater than $1,000 may be distributed pursuant to 401(k) plan terms (in our case, by way of lump sum or direct rollover only), we only have a provision stating that if the balance is $1,000 or less, the amount may be distributed as soon as employment terminates. It does not specify the form of that distribution. Did you have some statute in mind that says the 401(k) plan isn't required to preserve the QJSA form of distribution once the MPP balances are transferred over, if they are less than $1,000? I guess for the one account that is over $1,000, the QJSA must be preserved?

[Bird]

Yes, it seems the 401(k) plan must be amended to accept these transfers. I think* for amounts under $5,000 it's sort of a theoretical exercise because you don't have to make annuity payments for those amounts, and you could turn around and force out the accounts as lump sums in cash if less than $1,000 (and in fact force out amounts between $1000 and $5000 as lump sum rollovers...plan language permitting/requiring such actions).

*Warning - I'm only half paying attention, and refer you back to QDROphile's post about seeking professional guidance. I'd hesitate before amending the 401(k) plan as that may have qualification consequences...maybe the reg could be interpreted to read that you have to transfer only if the 401(k) can accept them, and you could in fact force out to IRAs from the MP...? Lots of nuance on this.

[holdco]

Yes, it seems the 401(k) plan must be amended to accept these transfers. I think* for amounts under $5,000 it's sort of a theoretical exercise because you don't have to make annuity payments for those amounts, and you could turn around and force out the accounts as lump sums in cash if less than $1,000 (and in fact force out amounts between $1000 and $5000 as lump sum rollovers...plan language permitting/requiring such actions).

*Warning - I'm only half paying attention, and refer you back to QDROphile's post about seeking professional guidance. I'd hesitate before amending the 401(k) plan as that may have qualification consequences...maybe the reg could be interpreted to read that you have to transfer only if the 401(k) can accept them, and you could in fact force out to IRAs from the MP...? Lots of nuance on this.

Thanks for the reply. I don't think we'll have any qualification issues with this kind of amendment. That said, even if the transferee 401(k) plan prohibits transfers of assets from MPPs without participant waiver of the QJSA and spousal consent, we can still move the balances from the terminated plan? All the consent laws that I see are in the context of distributions, not transfers, so if we amend that plan-specific provision, it looks like we'll be okay on that point.