Automatic Rollovers

Who is affected?
The new rules affect plan sponsors of retirement plans qualified under Code section 401(a), governmental deferred compensation plans under Code section 457(b), and tax-deferred annuity plans under Code section 403(b).

What must be done?
Plan sponsors must comply with the new automatic rollover requirements either by automatically rolling over to IRAs certain cashout distributions from their plans, or by eliminating from their plans the distributions subject to the requirements. This may require affected plan sponsors to amend their plans, provide notices to participants regarding the rollovers, and select IRA providers who will accept the rollovers.

When must it be done?
The new rules become effective March 28, 2005. Plan amendments must be signed by the last day of the first plan year that ends on or after March 28, 2005. (So, depending on the plan year, amendment deadlines may be as early as March 28, 2005 and as late as March 27, 2006.) Later amendment deadlines may apply to governmental and church plans.

Participant notices must be provided, and IRA providers must be selected, before the first affected distribution is made on or after March 28, 2005.

The Details
Many retirement plans require the immediate distribution of vested benefits without the participant's consent if the value of the benefits does not exceed $5,000. Although the distribution is made without the participant's consent, in most cases the participant must be allowed to elect whether to receive the benefits in cash or to roll them over into another employer plan or IRA. These mandatory distributions are often referred to as "cashouts."

Federal law requires that a cashout over $1,000 made on or after March 28, 2005 be rolled automatically into an IRA unless the participant affirmatively elects to receive it in cash. In addition, plans must be amended to provide for the automatic rollovers by the end of their first plan year ending on or after March 28, 2005. (For calendar year plans, the amendment deadline is December 31, 2005.) The Internal Revenue Service has provided model amendment language for this purpose. Federal law also requires that plan sponsors select an IRA provider willing to accept these small cashouts and that the sponsor provide advance notice to participants of the consequences of their failure affirmatively to elect to receive a cashout in cash.

Because the automatic rollover requirements apply only to cashouts that exceed $1,000, a plan sponsor may avoid the new requirements by amending its plan to eliminate cashouts above $1,000. Presumably, the amendment must be signed by the deadline for signing an amendment providing for automatic rollovers.