Automatic Rollovers: Challenges for Compliance

On December 29, 2004, the Internal Revenue Service (IRS) issued Notice 2005-5 to provide guidance on the application of the new automatic rollover provisions governing cash-out distributions from most retirement plans.

Background

Pension (including cash balance and defined benefit plans), profit sharing, 401(k) and other tax-qualified retirement plans are permitted to require a mandatory distribution, or cash-out, of a participant’s accrued plan benefit if that benefit is $5,000 or less at the time the participant separates from employment. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) changed the cash-out rules to require the plan administrator to set up an Individual Retirement Account (IRA) for the automatic rollover of any cash-out distribution in excess of $1,000 if the participant does not elect either a direct payment or a direct rollover.