Beginning March 28, 2005, a qualified retirement plan that by its terms requires the cash-out of a participant's benefit (a "mandatory distribution") upon the occurrence of a distributable event must provide that the mandatory distribution will be paid in a direct rollover to an individual retirement account ("IRA") if (a) the amount of the mandatory distribution is $5,000 or less but more than $1,000 and (b) the participant entitled to the mandatory distribution does not elect to have the amount paid in a direct rollover to another employer's retirement plan, an individual retirement account, or other eligible retirement plan, or to receive the mandatory distribution directly. U.S. Department of Labor regulations regarding certain aspects of this requirement were issued on September 28, 2004 (see our client memorandum dated November 11, 2004). On December 29, 2004, the Internal Revenue Service issued Notice 2005-5 regarding the requirement. The Notice provides as follows:
- A mandatory distribution is made without the participant's consent before he or she attains the later of age 62 or normal retirement age. However, amounts attributable to prior rollover contributions are not counted in determining the amount of a mandatory distribution, but are nevertheless subject to the automatic rollover requirement. A distribution to a surviving spouse or alternate payee is not a mandatory distribution.
- A plan that does not already include an automatic rollover provision for a mandatory distribution of $5,000 or less but more than $1,000 must adopt a good faith amendment reflecting the requirement by the end of the first plan year ending on or after March 28, 2005 (by December 31, 2005 for a calendar year plan). The Notice includes a sample amendment.
- There is a transition period for mandatory distributions that under a plan's terms would ordinarily be required to be made on or after March 28, 2005. If such a mandatory distribution is $5,000 or less but more than $1,000, and the participant has failed to elect to receive the mandatory distribution directly or failed to direct the plan to rollover the mandatory distribution to another eligible retirement plan, and the plan administrator is unable to make an automatic rollover because the plan administrator has not established administrative procedures to make an automatic rollover, then the plan administrator is not required to make the mandatory distribution until such administrative procedures are in place. Plans that comply with this limited exemption will not be treated as failing to operate in accordance with their terms. However, this exemption will lapse and a plan will be treated as failing to follow plan terms if such mandatory distribution is not made on or before December 31, 2005. Accordingly, the only legally permissible action is for the plan administrator to have appropriate administrative procedures in place and make the automatic rollover on or before December 31, 2005.
- An employer can eliminate mandatory distributions from a plan without violating the anti-cutback provisions of Code Section 411(d)(6).
- A plan administrator must notify the participant entitled to the mandatory distribution that, absent his or her affirmative election, the distribution will automatically be rolled over to an IRA if the amount is $5,000 or less but more than $1,000. The notice can be given either separately or as part of the so-called Code Section 402(f) notice, and must identify the trustee or issuer of the IRA.
- The plan administrator may execute the necessary documents to establish an IRA on behalf of a participant with a financial institution the plan administrator selects.
- A mandatory distribution can be rolled over to a regular IRA established under Code Section 408(c) or to a deemed IRA established under a qualified retirement plan pursuant to Code Section 408(q).
- An automatic rollover of a mandatory distribution may be made without spousal consent.
- The automatic rollover requirement applies to governmental plans, governmental deferral compensation plans described in Code Section 457(b), annuity contracts, custodial accounts, and retirement income accounts described in Code Section 403(b), and church plans.
Please contact any of the undersigned with comments or questions regarding the automatic rollover requirement and how to comply.
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