December 29, 2004
BB 04—131

In this issue:

  • IRS Provides Automatic Rollover Guidance

IRS Provides Automatic Rollover Guidance

On December 28, the U.S. Treasury Department (Treasury) and the Internal Revenue Service (IRS) released Notice 2005-5 that provides guidance on the new automatic (or default) rollover rules for qualified retirement plans. Under the new rules, which are effective March 28, 2005 (but see discussion below of permitted delay of mandatory distributions), plan administrators are required to transfer mandatory distributions of more than $1,000 to an IRA in the absence of an affirmative election from the plan participant. Notice 2005-5 is expected to be published in Internal Revenue Bulletin 2005-3 on January 18, 2005.

The automatic rollover rules were enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA provided that this mandatory rollover rule would not become effective until the Department of Labor (DOL) prescribed a regulation supplying a safe harbor to protect plan fiduciaries when they select an institution to provide and select the investments for the IRA. The DOL regulations were published September 28, 2004, and also become effective March 28, 2005.

The IRS and Treasury guidance allows plans to delay mandatory distributions that would otherwise occur on or after March 28, 2005, without being treated as failing to follow the terms of the plan, if the plan administrator has not yet established the administrative procedures necessary to accomplish the automatic rollovers (including establishing agreements with one or more IRA providers as required by the DOL regulations). In any event, the administrative procedures must be established and (delayed) mandatory distributions made on or before December 31, 2005.

The Treasury and IRS guidance clarifies that the automatic rollover requirement will apply to governmental plans, including Code Section 457 plans, 403(b) plans and church plans, although a transition rule with a delayed effective date may apply. The guidance requires that plans adopt a good faith amendment that reflects the automatic rollover requirement by the end of the first plan year ending after March 28, 2005, (by December 31, 2005, for calendar year plans) and provides a model amendment that can be used.

The guidance also (1) clarifies that a mandatory distribution can be paid to an IRA or deemed IRA that is part of the same plan making the distribution, (2) indicates that the customer identification programs required under the USA Patriot Act will not apply until the former employee contacts the IRA institution to assert ownership or exercise control over the account, (3) allows use of the participant's most recent mailing address in the records of the employer and plan administrator for setting up the IRA account and mailing notices even if mailings to that address are returned as undeliverable, and (4) allows elimination or modification of the plan's mandatory distribution provisions without violating the anti-cutback rules of Code Section 411(d)(6).

For more information on these regulations, please contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.