Effective March 28th, 2005, new regulations will go
into effect for automatic rollovers. These regulations
apply to terminated participants with account balances
over $1,000 but less than $5,000. Participants with these
non-forfeited account balances can no longer be forced
or cashed out of the program. Instead the regulations
address the formation of an IRA for automatic rollover.
The regulations state, “the plans fiduciary responsibilities
with respect to mandatory rollovers ends at such time
as the funds are placed with individual retirement plan
provider pursuant to an agreement that satisfies the
conditions of the safe harbor.”
There are six criteria that must be followed to comply
with the fiduciary requirements.
- Amount of Distribution – Distributions
greater than $1,000 but less than $5,000 are eligible
for automatic rollover to an IRA. This automatic rollover
may only occur after the terminated participant has failed
to make a benefit election.
- IRA Qualification – IRA guidelines under the
Internal Revenue Service Code 408 (a) or (b) must be followed
and the custodian must be a bank or financial institution.
- Investments – the safe harbor provisions indicate
that the IRA must be designed to minimize risk, preserve
assets for retirement and maintain liquidity. Typically
these would include money market funds and stable value
programs.
- Fees – The fees must be similar to the fees
that would normally be charged by a non-automatic rollover
IRA.
- Disclosure – The participants must be communicated
via the SPD or Summary Plan Description of the new automatic
rollover provisions.
- Prohibited Transaction Exemptions – The IRA
rollover may not invest in prohibited transactions.
Plan documents should be updated to comply with the
new regulations. Plan sponsors have until December 31,
2005 to establish procedures and amend their plans to
comply. |
