Playing it Safe with Rollovers of Mandatory Distributions

Posted by Saaib Uppal

UmpireSafeIn our previous blog entry Moving the Goal Posts of Humaneness, we discussed the IRS’s discontinuance of their Letter-Forwarding Service for “locating a missing taxpayer who may be entitled to a retirement plan payment or other financial benefit from an individual, company, or organization.”

We briefly discussed the remaining tools that plan sponsors have at their disposal, one of them being the option of pursuing an “Automatic Rollover” into an individual retirement account (IRA). In Field Assistance Bulletin (FAB) 2004-02, EBSA opines that after a plan fiduciaries have exhausted all reasonable methods to locate participants and are unsuccessful, they “must always consider distributing missing participant benefits into individual retirement plans (i.e., an individual retirement account or annuity).Establishing an individual retirement plan is the preferred distribution option because it is more likely to preserve assets for retirement purposes than any of the other identified options.”

Another instance in which the plan sponsor must deposit the participant’s account balance in an IRA, if the plan document so provides,  is in the case of mandatory rollovers for a terminated participant whose balance is between $1,000 and $5,000. When the participant fails to make an affirmative election with respect to a terminating balance less than $5,000, the plan sponsor can cash out the remaining balance without the participant’s consent. However, to meet its fiduciary obligation, the plan sponsor must ensure that certain relevant safe harbor regulations are met when executing rollovers into an IRA without a participant’s involvement.

What are these regulations so that the plan sponsor can “play it safe”? They are as follows:

  • The benefits must have a value of $5,000 or less. In fact, distributions of less than $1,000 that are automatically rolled over to an IRA (even though not required by the Code) will be covered by the safe harbor. If the distribution is due to a terminated defined contribution plan, accounts in excess of $5,000 will also be protected by the safe harbor.
  • The steps taken to meet the safe harbor regulations must be made clear to participants of the plan
  • The chosen IRA must meet the requirements of either Code section 408(a) or 408(b)
  • A written agreement must be entered into with the IRA provider addressing issues such as the investment of funds, fees, expense, and the fiduciary’s lack of an obligation to monitor the account
  • The selection of investments must be designed to ensure that principal is preserved while fees and expenses are comparable to similar customers
  • The investments must be products offered by a state or federally regulated financial institution
  • No prohibited transactions must result from the selection of the IRA provider or investments

It is the selection of the IRA provider and the selection of the default IRA  investment for the rollover funds that the DOL will be keeping its eye on. Before making a selection, it would behoove plan sponsors to look into the Qualified Default Investment Alternative (QDIA) rules as a guideline to gauge whether the selected investment meets the participant’s long–term retirement savings needs.

Don’t feel so confident about your knowledge of QDIAs? No worries because the next blog in our series will address that exact topic. You’ve decided to “play it safe” up until now.  Be sure to join us for our next blog post when we can bring it all home!

Photo by myfuture.com (License)

Comments are closed.