Cash Out Provisions Change to Automatic Rollover - Time to Amend your Retirement Plan

Currently, plan sponsors can force distributions to terminated participants with vested account balances of $5,000 or less.  If a distribution form and special tax notice have been provided to a participant and the completed distribution form is not returned within 30 days, the plan sponsor can distribute as a lump sum the account balances of the participant without the participant’s consent.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included changes to the cash out provisions.  EGTRRA provided that these changes would be effective after the Department of Labor (DOL) issued safe harbor regulations.  The DOL has now issued the final safe harbor regulations, which are effective March 28, 2005.  Safe Harbor relief under the regulations are dependent on a fiduciary satisfying six conditions.  In general the conditions address: (1) the amounts of mandatory distributions; (2) qualifications for individual retirement account (IRA) providers; (3) permissible investment products; (4) permissible fees and expenses; (5) required disclosure to participants and beneficiaries; and (6) prohibited transactions.

After March 28, 2005, the new regulations continue to allow plan sponsors to cash out terminated participants, but the amount is reduced from $5,000 to $1,000.  For terminated participants with vested account balances which are between $1,000 and $5,000, plan sponsors can no longer cash out these accounts but can set up IRA rollover accounts.  The new regulations amount to a little bit more work for a plan sponsor to get terminated participant out of their plan, but it is a viable solution and should be easy once the financial companies digest the regulations and create a product to meet these situations.  The regulations are intended to preserve the retirement account balances and save taxes of terminated participants by reducing the number of force outs.  In addition, plan sponsors are expected to see savings in plan administrative expenses attributable to those participants.  

Plan sponsors are going to have to select an IRA investment to use for these force outs.  The IRS has stated that the plan sponsor cannot receive commission on the transaction.  The regulations also require that the investment option is a safe harbor investment, which includes money market or fixed accounts, certificates of deposit, and certain stable value products.  These investments must have minimal risk, liquidity, preserve the principal of the rollover and should not substantially restrict access to the account holder.  As with all ERISA transactions, plan sponsors must act as a prudent man.           

The fees and expenses which can be assessed against an IRA must be comparable to fees charged for traditional IRAs.  The DOL understands that in some instances providers will charge a one time small fee to set up an IRA.

Due to these changes all plans must be amended to reflect the law changes.  The IRS has promised to issue Model Amendments which plan sponsors can use prior to the end of 2004. 

ARS will issue plan amendment recommendations as soon as the IRS releases these model amendments.  ARS will probably recommend that the amendment continue to allow plan sponsors the option to cash out terminated participants which have vested account balances of less than $1,000 and to rollover to an IRA vested account balances of $1,000 to $5,000.

The plan sponsor must disclose these changes to plan participants and beneficiaries in advance of their implementation through either a Summary Material Modification completed for the plan amendment or through a change to the Summary Plan Description.

Administrative Retirement Services, Inc. will provide all users of their prototype the necessary amendment and Summary Material Modification to comply with these DOL regulations.
 

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