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Automatic Rollover Overview

What is an Automatic Rollover?

In broad terms, an Automatic Rollover is the transfer of a participant’s account from a qualified retirement plan into an individual retirement account (“IRA”) with no action required by the participant.

Is this legal?

Yes, Automatic Rollovers are legal. In fact, plans are required to do them (although plan sponsors are permitted to amend their plans to eliminate them).

In 2001, Congress passed the Economic Recovery Reconciliation Act (EGTRRA). As part of EGTRRA, the Internal Revenue Code was amended to provide that, in certain situations, a qualified plan is required to directly transfer a terminated participant’s account to an IRA (do an Automatic Rollover), unless the participant elects to either (1) receive a distribution directly or (2) have the plan do a direct rollover to an IRA or other eligible retirement plan.

What is the typical situation where a distribution is made in the form of an Automatic Rollover?

Typically, an Automatic Rollover would be done if a participant terminates with a small account balance ($5,000 or less) and either cannot be located (missing participant) or does not respond to the plan’s request to complete its distribution election forms (non-responsive participant).

Do Automatic Rollovers eliminate liability or create additional liability for plan fiduciaries?

Plan fiduciaries must act in the best interest of the participant. Under ERISA, the plan administrator (or other responsible plan fiduciary) maintains fiduciary responsibility for the participant’s account for up to one year after the rollover – unless the rollover qualifies as a Safe Harbor Automatic Rollover.

How is the plan fiduciary’s liability under a Safe Harbor Automatic Rollover different?

If the Automatic Rollover complies with the Safe Harbor Automatic Rollover Regulation, which became effective March 28, 2005, the plan fiduciary is deemed to have satisfied the requirements of ERISA and his/her fiduciary obligations end when the funds are transferred to the IRA.

Are there other advantages to using Safe Harbor Automatic Rollover?

Yes. Maintaining small account balances for terminated participants can be costly for the plan, both in time and money. Safe Harbor Automatic Rollovers:

• Reduce per participant administration costs
• Reduce asset costs based on average account balance
• May eliminate or avoid the need for an independent audit
• Eliminate the cost of annual disclosures to terminated participants

What types of distributions are subject to the Automatic Rollover rules?

In general, the rules only apply to “certain mandatory distributions” where

1. The amount of the distribution is greater than $1,000 but not greater than $5,000
2. The distributee is a plan participant
3. The distributee has not attained the later of age 62 or the normal retirement age under the plan

So, what is a mandatory distribution?

A mandatory distribution is a distribution that is made without the participant’s consent. Mandatory distributions are also called involuntary cash-outs or forced cash-outs. Plans generally allow mandatory distribution of amounts of $5,000 or less.

Distributions may exceed $5,000 if the participant’s account includes amounts attributable to a rollover from another plan or if a distribution is being made from a terminated defined contribution.

Can a plan do Safe Harbor Automatic Rollovers in the case of distributions of $1,000 or less?

Yes. Plans may be written to apply the automatic rollovers to mandatory distributions of $1,000 or less. This is a good idea since writing a check to a missing or non-responsive participant can result in uncashed checks.

What types of mandatory distributions are not subject to the Automatic Rollover rules?

1. Distributions to a spouse beneficiary
2. Distributions to a non-spouse beneficiary
3. Distributions to a terminated plan participant who has reached normal retirement age (or age 62 if the plan’s normal retirement age is less than 62)
4. Distributions from terminated defined benefit plans subject to the Pension Benefit Guaranty Corporation (“PBGC”)
5. Required minimum distributions

Do Automatic Rollovers made to Liberty Trust Company qualify as Safe Harbor Automatic Rollovers?

Absolutely. Our program is fully compliant with the Safe Harbor Regulation