Compensation & Benefits
DECEMBER 2004
Internal Revenue Service Issues Guidance on
Automatic Rollovers of Mandatory Distributions
The Internal Revenue Service has published Notice 20055, which contains guidance on the automatic rollover
requirement for certain mandatory distributions from
tax-qualified retirement plans.
The most significant aspects of the guidance are: (1) a
postponement of the March 28, 2005 effective date of
the automatic rollover requirement to December 31,
2005 for plans that lack sufficient administrative procedures for completing automatic rollovers prior to
that date; and (2) a requirement that plans be amended
to reflect the automatic rollover requirement by the
end of the first plan year ending on or after March 28,
2005. Thus, the amendment deadline for calendar year
plans is generally December 31, 2005, with special
transition rules for certain plans. The Notice includes
a sample amendment that can be used for this purpose.
IRA and the selection of the initial investment of the
rollover assets within the IRA. (You can obtain a copy
of our Alert summarizing the Department of Labor’s
regulations at http://www.kl.com/files/tbl_s48News/
PDFUpload307/10735/CB1004.pdf.)
Notice 2005-5 provides Internal Revenue Service guidance regarding the implementation of the automatic
rollover rule.
DISTRIBUTIONS SUBJECT TO THE RULE
The Notice includes guidance regarding the types of distributions that are subject to the automatic rollover requirement:
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The automatic rollover requirement applies only to
mandatory distributions (i.e., distributions prior to the
later of age 62 or the plan’s normal retirement age
without the participant’s consent).
BACKGROUND
The automatic rollover requirement was enacted as part
of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA). Under the new requirement, a
mandatory distribution to a plan participant must be
rolled over to an individual retirement account (IRA)
established by the plan on the participant’s behalf if the
participant does not affirmatively elect to receive the
distribution.
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The new automatic rollover requirement becomes effective on March 28, 2005, which is six months following
the adoption by the Department of Labor of regulations
that permit plan fiduciaries to take advantage of fiduciary safe harbors with respect to the establishment of the
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The automatic rollover requirement applies to any
mandatory distribution that exceeds $1,000, regardless of the amount of the distribution. Thus, mandatory “cashout” distributions that exceed the $5,000
cashout maximum because rollover contributions are
excluded in determining whether the $5,000 maximum is surpassed are subject to the automatic rollover
requirement.
The automatic rollover requirement does not apply to
distributions to a spouse or to a distribution to a former
spouse or child pursuant to a domestic relations order.
The distribution that is technically deemed to occur
when a participant’s account balance is reduced to
Kirkpatrick & Lockhart LLP
repay a loan to the participant (e.g., following a default on the loan) is not subject to the rule.
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The automatic rollover requirement does not apply to
distributions that are not eligible for rollover, such as
required minimum distributions after age 70-1/2.
plan sponsors effectively have until December 31,
2005 to implement sufficient administrative procedures and make any required rollover distributions.
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PLANS SUBJECT TO THE RULE
The Notice identifies the retirement plans that are subject to the automatic rollover requirement:
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Tax-qualified plans established under Section 401(a)
of the Internal Revenue Code (e.g., 401(k) plans, profit
sharing plans and defined benefit pension plans), including plans maintained by state or local governments and plans maintained by churches (even those
that have not elected to be subject to the Employee
Retirement Income Security Act (ERISA)).
Deferred compensation plans sponsored by state or
local governments under Section 457(b) of the Internal Revenue Code. 457(b) plans maintained by taxexempt organizations are not subject to the automatic
rollover requirement.
403(b) plans, including 403(b)(1) annuity contract
plans, 403(b)(7) custodial account plans and 403(b)(9)
retirement income plans.
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Governmental 401(a), 457(b) and 403(b) plans are
not required to comply with the automatic rollover
requirement until the end of the first regular legislative session of the legislative body with the authority
to amend the plan that begins on or after January 1,
2006.
A church plan for which an election has not been
made to subject the plan to the requirements of ERISA
that is maintained by a church convention need not
comply with the automatic rollover requirement until
the 60th day after the close of the earliest church convention that occurs on or after January 1, 2006.
AMENDMENTS
Plans must generally be amended to reflect the automatic rollover requirement by the end of the first plan
year ending on or after March 28, 2005. Thus, the deadline for calendar year plans is December 31, 2005. Governmental plans need not be amended until the end of
the governmental plan transition period described above.
This deadline applies regardless of whether the plan is
individually designed or a prototype or volume submitter plan.
EFFECTIVE DATE
The Notice states that the automatic rollover requirement
will apply to any distribution subject to the new rule that
is made on or after March 28, 2005. However, the Notice
contains a number of transition rules that may postpone
the effective date of the new automatic rollover requirement for certain plans.
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If a plan lacks sufficient administrative procedures for
completing automatic rollovers (including the establishment of IRAs to accept automatic rollovers), the
plan will not be treated as violating the automatic
rollover rule provided that the distributions are made
on or before December 31, 2005. The Notice does not
expressly impose on plan sponsors any obligation to
make a good faith effort to adopt sufficient administrative procedures as soon as practicable on or after
March 28, 2005. Accordingly, it would appear that
The Notice is accompanied by a sample amendment that
plan sponsors can use to amend their plans. The remedial amendment period applicable to the automatic
rollover requirement (i.e., the deadline for submitting an
application for a determination letter that covers the automatic rollover requirement) will be the same remedial
amendment period that applies to amendments necessary to reflect the requirements of EGTRRA generally.
(This is currently the end of the first plan year beginning
on or after January 1, 2005, but the Internal Revenue
Service is in the process of extending that deadline in
connection with the overhaul of its determination letter
program.)
OTHER ISSUES
The Notice clarifies a number of other issues related to
the automatic rollover requirement.
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The IRA established to accept the automatic rollover
can be either a conventional IRA or a deemed IRA.
Many plan sponsors will prefer to avoid the automatic rollover requirement of EGTRRA by amending
their plans to eliminate mandatory distributions (or to
reduce the mandatory distribution cap to below
$1,000). The Notice confirms that the elimination of
a mandatory distribution feature is permissible (i.e., it
does not violate Section 411(d)(6) of the Internal Revenue Code, which prohibits the elimination of protected benefits).
The Notice confirms that the administrator of the plan
must provide a notice to any participant to whom a
mandatory distribution is going to be made. The participant notice must identify the trustee or issuer of
the IRA. The participant notice may be sent using
electronic media. The participant notice must be sent
to the participant’s most recent mailing address on
file with the employer and the administrator.
The plan administrator may execute the documents
necessary to establish the IRA on the participant’s
behalf.
MICHAEL A. HART
mhart@kl.com
412.355.6211
If you have questions or would like more information about
K&L’s Employee Benefit Plans/ERISA practice, please contact
one of our compensation and benefits lawyers listed below:
Boston
Stephen E. Moore
617.951.9191 smoore@kl.com
Los Angeles
William P. Wade
310.552.5071 wwade@kl.com
New York
David E. Morse
212.536.3998 dmorse@kl.com
Pittsburgh
William T. Cullen
Michael A. Hart
J. Richard Lauver
Charles R. Smith
Richard E. Wood
Linda B. Beckman
Sonia A. Chung
Douglas J. Ellis
412.355.8600
412.355.6211
412.355.6454
412.355.6536
412.355.8676
412.355.6528
412.355.6716
412.355.8375
wcullen@kl.com
mhart@kl.com
rlauver@kl.com
csmith@kl.com
rwood@kl.com
lbeckman@kl.com
schung@kl.com
dellis@kl.com
San Francisco
Laurence A. Goldberg 415.249.1043 lgoldberg@kl.com
Marc R. Baluda
415.249.1036 mbaluda@kl.com
Lynn H. DuBois
415.249.1037 ldubois@kl.com
Washington
Catherine S. Bardsley
William A. Schmidt
David E. Pickle
Lori G. Galletto
202.778.9289
202.778.9373
202.778.9887
202.778.9024
cbardsley@kl.com
william.schmidt@kl.com
dpickle@kl.com
lgalletto@kl.com
The attorneys resident in all offices, unless otherwise indicated,
are not certified by the Texas Board of Legal Specialization.
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should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
© 2004 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.