Reduce Automatic Rollover threshold to $0

The client received a letter from the their record-keeper letting them know that Millenium Trust will handle the automatic rollovers effective next year and inquiring whether they want to reduce the automatic cash out threshold from $1,000 to $0.  If I understand correctly, this means that all terminated participants who did not make an election and have a balance below $5,000 will automatically be rolled over to Millenium, instead of processing a lump sum?   If the account is $200 and the distribution is $50, $150 will be rolled over instead of issuing a check to the participant.

Can that be done? Reduce the rollover threshold to $0? 

Based on my understanding of how this is handled in defined benefit plans:

I am not sure, but surely the plan can mandate that all benefits worth less than $1,000 be paid out in a single sum without there being a default IRA provider.  To involuntarily cash out benefits worth more than $1,000, there must be an arrangement with a default IRA provider.  If the default IRA provider will allow default rollovers down to just over $0, why shouldn't it be acceptable to make it so that smaller values will be subject to default rollover in the absence of an explicit election by the participant to the contrary (for a lump sum, net of mandatory withholding, or for a direct rollover to an institution or plan of the participant's choosing if the amount is at least $200;  under $200, no choices need be given)?

Can be done sure.

Is it prudent is the better question? 

Those small amounts and the IRA fees need to be thought about. 

If the plan is confident they have a good address for the person what is better for the participant sending them a check to an IRA that is going to eat the benefit up in a matter of a few years in fees? 

1 hour ago, ESOP Guy said:

Can be done sure.

Is it prudent is the better question? 

Those small amounts and the IRA fees need to be thought about. 

If the plan is confident they have a good address for the person what is better for the participant sending them a check to an IRA that is going to eat the benefit up in a matter of a few years in fees? 

If a participant has terminated employment with a small vested benefit/account balance, the law gives the plan administrator (consistent with applicable plan provisions) the authority to force them out.  Best is for the participant to say how they want it distributed.  Failing that, the plan administrator, having made a suitable effort to find and/or communicate with the participant, has the right to cash the small amount out.  Unless the plan administrator fails to exercise due prudence in the selection of the default IRA provider (which might not even be subject to the same degree of scrutiny as other fiduciary acts), the expenses charged by the default IRA provider are of no consequence to the plan administrator.  Remember, if the amount payable is over $200, there would have been an opportunity provided for the participant to choose between a lump sum or a direct rollover, and only if there is no timely response can the money be sent on the IRA provider, so the participant, by failing to keep in touch with the sponsor and/or to respond to the election that was offered, is at least partially at fault.  The plan will not afford veto power over the distribution to the participant - these are involuntary by nature.

ESOP Guy,

Is then my interpretation correct that basically all terminated participants with a balance below $5,000 will have to be rolled over, practically eliminating the lump sum option for involuntary cash-outs?

Thanks.

I think, at least with our (FTW) documents, that if you selected a $5000 cashout threshold, then up to $1000 would still be literally "cashed" out and $1000-$5000 would be auto rolled to an IRA.  I don't see an option to make the auto roll applicable from $0-$5000.

I guess with proper plan language you could indeed just force everyone into an IRA from $0-$5000 but I think that is a question for the recordkeeper or TPA.

33 minutes ago, Trisports said:

ESOP Guy,

Is then my interpretation correct that basically all terminated participants with a balance below $5,000 will have to be rolled over, practically eliminating the lump sum option for involuntary cash-outs?

Thanks.

 

 

 

All terminated participants with a balance below $5,000 (if that is the plan's limit on involuntary cashouts) must be paid out.  It would be reasonable for the plan to allow them to take a cash payment (with mandatory withholding) or a direct rollover - participant's choice.  If the participant is uncooperative and the balance is at least $1,000, you can force the rollover into the default IRA provider's product.  If the plan provides for involuntary cashouts, the affected people will be pushed out, one way or another, but not necessarily to an IRA and (if they make their wishes known) not necessarily to the default IRA provider.

It seems to me there are a lot of answers here but almost no one is directly answering the actual question.  Can you write a plan provision that say anyone with a balance over $0 and <$5k be forced out to an IRA?  We are assuming they got a form and did not reply. 

I am not aware of anything that say you can't do it.  I haven't ever seen it done but all the law I have read say if you force out $1k - <$5k it has to be an IRA but I have never seen anything that say you can't force <$1k to an IRA. 

If someone thinks you CAN"T force out <$1k speak up please. 

If you force out $1,000+ and the participant makes no election between cash and a rollover, then it goes to the IRA provider, but the participant would have the opportunity to elect a lump sum payment or a rollover to an IRA of their own choosing.

If it is under $1,000, it is my understanding that the plan can require an involuntary forceout.  If the amount is over $200, the participant must be given a choice between cash and a rollover of their own choice.  If under $200, it can be cash only.

If the plan says so (which, I think, it can unquestionably do) then you can force the money out even if it is under $1,000.  If not being put into a default IRA, not sure if there is a really good way to accomplish it, but I have a very strong suspicion that if Millennium Trust is saying "We will take default rollovers down to $0", then it is permissible.

44 minutes ago, ESOP Guy said:

It seems to me there are a lot of answers here but almost no one is directly answering the actual question.  Can you write a plan provision that say anyone with a balance over $0 and <$5k be forced out to an IRA?  We are assuming they got a form and did not reply. 

I am not aware of anything that say you can't do it.  I haven't ever seen it done but all the law I have read say if you force out $1k - <$5k it has to be an IRA but I have never seen anything that say you can't force <$1k to an IRA. 

If someone thinks you CAN"T force out <$1k speak up please. 

Sorry wrote that last sentence wrong:

If someone thinks you can't force out <$1k to an IRA please speak up. 

There wasn't any doubt in my mind you can force such a person out. 

I have worked with many, many plans that had an IRA forceout $0-$5K.

Here is a sample provision for this:

(b)  Application of Automatic Rollover rules. The Automatic Rollover rules described in Section 
8.06 of the Plan do not apply to any Involuntary Cash-Out Distribution below $1,000 (to the extent available under the Plan).

To override this default provision, check this subsection (b).
___        Check this (b) to apply the Automatic Rollover provisions under Section 8.06 of the Plan to all Involuntary Cash-Out Distributions (including those below $1,000).
 

When we terminated a DB plan a few years ago, the plan's attorney amended the plan to allow auto rollovers for non-responsive terminated participants with PVAB under $1,000 ($300 to $600).  Benefits were sent to Penchecks.

The usual problem with a forced rollover of a balance below $1,000 is that very few IRA providers are willing to accept such a small balance. If you've found one that will take a small amount, consider it a bonus: you have more options!

35 minutes ago, K2retire said:

The usual problem with a forced rollover of a balance below $1,000 is that very few IRA providers are willing to accept such a small balance. If you've found one that will take a small amount, consider it a bonus: you have more options!

Wasn't the original post here about Millennium Trust offering to do just that?  Or did the idea to move the threshold down to $0 come from the recordkeeper (possibly without Millennium Trust having their back)?  Agree - if the default IRA provider is OK with accepting miniscule default rollovers, why not?  You won't have to deal with intransigent participants letting the checks go stale when you shove a check into their hands to get them off your books (and nobody should be able to prevent you from getting a $500 balance off your books, one way or another).

ESOP Guy said: "If someone thinks you can't force out <$1k to an IRA please speak up."

I think you can force out <$1k to an IRA, but I'll speak up anyway...

On the ERISA side, the DOL's regs specifically allow automatic rollovers of $1,000 or less. See §2550.404a-2(d):

"(d) Mandatory distributions of $1,000 or less. A fiduciary shall qualify for the protection afforded by the safe harbor described in paragraph (b) of this section with respect to a mandatory distribution of one thousand dollars ($1,000) or less described in section 411(a)(11) of the Code, provided there is no affirmative distribution election by the participant and the fiduciary makes a rollover distribution of such amount into an individual retirement plan on behalf of such participant in accordance with the conditions described in paragraph (c) of this section, without regard to the fact that such rollover is not described in section 401(a)(31)(B) of the Code."

On the tax side, I don't believe the IRS has ever specifically stated that distributions of $1,000 or less can be automatically rolled over, but they also haven't said they can't be (and they've had plenty of time to do so...) And section 401(a)(31)(B) doesn't specifically prohibit it. (And presumably many plan documents have been approved with this language.)

(Copied from my response in a similar thread here.)

Generally if a balance is under $200 the participant can just be forced out without prior notice, but If the auto rollover provision all the way down to $0 then I assume that participants with balances of less than $200 would have to be notified first.  Is that correct?

Thank you for any guidance.