12/10/04 - DOL Issues Final Regulations Regarding Involuntary Rollovers
On September 28, 2004, the DOL issued a final regulation creating a "safe harbor" for the automatic rollover of an involuntary "cash-out" from a qualified retirement plan. The new regulation takes effect March 28, 2005.

Terminated employees' failures to roll over small sums in their 401(k) or other tax-qualified plan accounts can prove costly as administrative expenses continue to be incurred on small, inactive accounts. Typically, rolling these funds over to an IRA without the former employees consent would raise liability concerns under federal pension law.

The new safe harbor will protect plan fiduciaries who automatically "cash-out" a former employee's benefit without the employee's consent, providing the distribution is to an IRA and does not exceed $5,000. After March 28, 2005, if no election has been made by the former employee, the safe harbor will protect plan fiduciaries from liability under the Employee Retirement Income Securities Act of 1974 (ERISA) with respect to the selection of an IRA provider and the choice of specific investments providing the following conditions are satisfied:

1. The present value of the cash-out does not exceed $5,000;

2. The distribution is rolled over directly to an IRA;

3. The fiduciary and the IRA provider enter into a written agreement providing that:

• the funds rolled over will be invested in a product designed to preserve principal and provide a reasonable rate of return;
• the investment product will seek to maintain the amount invested in the product over the term of the investment (e.g., money market, interest-bearing savings account, CD, etc.);
• the investment product is offered by a state or federally regulated financial institution (e.g., a bank, an insurance company, a credit union, or an investment company);
• fees and expenses charged for the IRA will not exceed the fees and expenses charged by the provider for similar individual retirement accounts that are established for reasons other than the receipt of rollover distributions; and
• the participant will have the right to enforce the terms of the agreement establishing the IRA against the provider.

4. Participants have been furnished with a summary plan description ("SPD") or summary of material modifications ("SMM") that:

• describes the qualified retirement plan's automatic rollover provisions;
• describes the nature of the investment product in which the rollover will be invested;
• provides information regarding the fees and expenses associated with the IRA; and
• identifies the contact person of the qualified retirement plan making the rollover.

As soon as further guidance and model amendments become available, Trendcepts will contact each of our clients to ensure that required amendments are timely adopted and participants are properly notified of these new rollover rules.