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Newsletter
November
2004 Volume
21 - Number 3
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This
newsletter is addressed to our clients their attorneys, accountants and other
professional advisors. Citations may be included for those who want to refer directly
to the source material. IN THIS ISSUE:
AUTOMATIC ROLLOVER REGULATIONS ARE FINAL The
final regulations are very similar to the proposed regulations, but with some
notable differences. ROLLOVER OF PARTICIPANT LOANS This article outlines the issues
involved with loans and defaulted loans that are considered deemed
distributions. MISSING
PARTICIPANTS IN DEFINED CONTRIBUTION PLANS Two
fiduciary obligations regarding termination of defined contribution plans:
locating a missing participant; and distributing an account balance with
respect to a missing participant. |
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AUTOMATIC
ROLLOVER REGULATIONS ARE FINAL Normally, retirement plans cannot distribute a terminated participant’s vested account balance or accrued benefit until the participant consents to the distribution in writing. The forced cash-out rule for balances under $5,000 is an exception to these rules. Please see the article “New Automatic Rollover Provisions” in our March 2004 Newsletter. The
Department of Labor (DOL) has issued final regulations for safe harbor
automatic rollover of a forced cash-out distribution. These final regulations
replace the proposed regulations issued in March this year and are effective
for distributions made on or after March 28, 2005, but a plan fiduciary may
rely on the final regulations before the required effective date of the final
regulations. The final
regulations are very similar to the proposed regulations. Below are some notable differences. · The
proposed regulations limited the fees and expenses that the IRA custodian
could charge for maintaining the IRA to the IRA’s income, except for the
establishment of the IRA. The final regulations eliminated this requirement.
However, the final regulations continue to require that fees and expenses for
the automatic rollover IRA may not exceed those fees the IRA provider charges
for comparable IRAs. · There must
be a written agreement, which must include the regulatory requirements for
satisfying the safe harbor. The written agreement must provide that the
participant has the right to enforce the terms of the agreement against the
IRA provider with respect to the rolled-over funds. · The
proposed regulations applied to forced cash-out amounts between $1,000 &
$5,000. The final regulations apply to distributions of $1,000 or less as
well. Some of
the changes include: The IRA must be a traditional IRA not a Roth or other
non-traditional IRA. The investments
selected must be designed to minimize risk, preserve assets and maintain
liquidity. Money market, certificate of deposit and interest bearing savings
accounts are listed as acceptable investments. The automatic rollover procedure must be disclosed to the
participant in an explanation that describes the procedure, investment,
expenses and how to get information that must be provided to the participant
prior to the distribution. The
rollover must not result in a prohibited transaction. Satisfying
the requirements of the safe harbor assures that the distributing plan
fiduciary satisfies ERISA’s fiduciary standards with respect to the selection
of the IRA provider; and the investment of the funds rolled over in the
forced cash-out. |
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ROLLOVER
OF PARTICIPANT LOANS A plan
may accept the rollover of a participant loan (loan note) that has not been
treated as a deemed distribution or offset. This can only be accomplished by
a direct rollover and only if both plans agree to the transaction. The
distributing plan would assign the loan note to the other plan’s trustee.
Because of the additional paperwork required for a rollover of a loan note,
very few plans are willing to accept such rollovers. A
participant loan in default is taxable to the participant as a distribution.
A loan in default is treated as either a deemed distribution or a loan
offset. A deemed distribution is a taxable event for the participant, but
continues to be part of the participant’s account balance and interest
continues to accrue on the loan. A loan offset is an actual distribution,
which reduces the participant’s account balance and is eligible for rollover.
The participant may rollover a loan offset by contributing the amount of the
loan offset to an IRA or qualified plan within the 60-day rollover period. A
deemed distribution is not eligible for rollover. A plan
treats a participant loan as a deemed distribution if the terms of the loan
fail to meet the statutory requirements for amount, amortization and
enforceable agreement or if the repayment fails to satisfy the amortization
requirement (e.g. missed payments) and the plan is unable to offset the loan.
If the participant incurs a distributable event when the participant defaults
on the loan, the plan will offset the loan instead. A plan
will also offset a deemed distribution when a participant incurs a
distributable event like termination of employment. However, the offset of a
deemed distribution is not eligible for rollover. This offset is merely a
legal transaction that permits the plan to close its books on the loan. The
offset of the interest that accrued subsequent to the deemed distribution is
also not eligible for rollover. |
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MISSING PARTICIPANTS IN DEFINED
CONTRIBUTION PLANS The DOL issued
Field Assistance Bulletin 2004-02 (FAB) to address two fiduciary obligations
relating to the termination of defined contribution plans: locating a missing
participant of a terminating defined contribution plan; and distributing an
account balance when efforts to secure a distribution election with respect
to a missing participant fail. Please note that the guidance only applies to
a terminating defined contribution plan that does not provide annuity options
and the employer does not maintain any other defined contribution plans. Search
Methods The DOL provides that reasonable costs for attempting to
locate a missing participant may be charged to that participant's account. Reasonable
attempts must be made to locate missing participants. There are specific
search methods that the DOL considers to be mandatory search methods and must
be exhausted in order for the administrator to satisfy its obligations under
ERISA. If a participant cannot be located after using all mandatory methods,
then other methods may be required based on the facts and circumstances such
as the value of the participant's account balance and the cost of using other
methods. The mandatory search methods
are: · Use
Certified Mail. · Check
Related Records for more up to date information. · Check with
the participant’s designated beneficiary. · Use the
IRS or Social Security Administration Letter-Forwarding Service. Other
search options may include Internet search tools, commercial locator services
and credit reporting agencies. Remember the use of other options depends on
whether they are reasonable considering the facts and circumstances. For
example, compare the cost of using the other options to the value of the
missing participant's account, especially if the cost will be charged to the
participant’s account. Distribution
Options The DOL considers the common practice of 100% federal
income tax withholding on the participant’s behalf an unacceptable method of
distributing the participants plan balance.
The new guidance provides for the following distribution options to
relieve a fiduciary of its obligations: · IRA
Rollovers · Federally
Insured Bank Accounts ·
Escheat to State Unclaimed Property Funds IRA
Rollovers are the preferred distribution option because they are
most likely to preserve assets for retirement purposes and the recently
issued regulations relating to automatic IRA rollovers may be used to satisfy
the fiduciary obligations with respect to the selection of the IRA. Federally
Insured Bank Accounts may be established in the name of a missing
participant provided that it’s an interest bearing federally insured bank
account where the participant would have an unconditional right to withdraw
funds. A plan fiduciary must give appropriate consideration to all available
information relevant to selecting a bank and accepting an initial interest
rate and bank charges. Transfer
to State Unclaimed Property Funds in the state of each
participant’s last known residence or work location is also an option for the
plan fiduciary. While the
IRA Rollover is the preferred method, the other options may be more viable.
In deciding between the state unclaimed property fund and federally insured
bank account, the DOL believes a fiduciary should evaluate the interest accruals
and fees of the bank account versus the greater likelihood of recovery by the
participant from the state unclaimed property fund. |
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