[18377]
December 30, 2004
TO: PENSION MEMBERS No. 68-04
PENSION OPERATIONS ADVISORY COMMITTEE No. 89-04
TRANSFER AGENT ADVISORY COMMITTEE No. 87-04
RE: IRS ISSUES GUIDANCE ON AUTOMATIC IRA ROLLOVERS
The Internal Revenue Service issued guidance on the automatic rollover rules enacted as
part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).1 We are
pleased to inform you that Notice 2005-5 reflects recommendations made by the Institute,2
particularly with regard to the manner in which employers may establish automatic rollover
IRAs on behalf of participants.3
Notice 2005-5 sets forth guidance in a question and answer format under Code section
401(a)(31)(B) ,4 the provision amended by EGTRRA that establishes the automatic rollover
requirements. As you are aware, the Department of Labor issued separate guidance in
September that established a fiduciary safe harbor under this provision.5 Among the issues
addressed by Notice 2005-5 are the following:
Establishment of Automatic Rollover IRAs. As suggested by the Institute, the Notice
provides that a plan administrator may execute the necessary documents to establish an IRA on
a participant’s behalf with a financial institution selected by the plan administrator. For this
purpose, the plan administrator may use the participant’s most recent mailing address in the
records of the employer and plan administrator.
1 IRS Notice 2005-5 is available at http://www.treas.gov/press/releases/reports/rollovernotice20055.endjs2169.pdf.
2 See Institute Memorandum (#15741) to Pension Members No. 12-03 and Pension Operations Advisory Committee
No. 15-03, dated March 12, 2003.
3 See discussion below and Q&A-10 in the Notice.
4 This provision requires that mandatory distributions of more than $1,000 (and generally less than $5,000) from a
qualified plan be automatically rolled over to an IRA designated by the plan administrator, unless the participant
affirmatively elects otherwise.
5 See Institute Memorandum (#18052) to Pension Members No. 49-04, Pension Operations Advisory Committee No.
64-04, and Transfer Agent Advisory Committee No. 74-04, dated September 29, 2004.
2
As the Institute also suggested, the Notice clarifies the manner in which the disclosure
statement delivery and revocation period requirements apply in the context of automatic
rollovers. Specifically, an IRA trustee will not be treated as failing to satisfy the disclosure
requirements for IRAs merely because the U.S. Postal Service returns the disclosure statement
as undeliverable after it was mailed to the participant’s most recent mailing address.
In addition, the Notice reiterates the Department of Labor’s prior statement regarding
the impact of the USA PATRIOT Act’s customer identification requirements on the automatic
rollover rules.6 Notably, a financial institution that receives an automatic rollover is not
required to implement its customer identification program until the former employee first
contacts the institution to assert ownership or exercise control over the account.
Transition Relief. While the automatic rollover requirements generally apply to
mandatory distributions made on or after March 28, 2005, the Notice provides relief for plans
that have not sufficiently established administrative procedures by that date. Provided that
mandatory distributions are made on or before December 31, 2005, a plan will not be treated as
failing to operate in accordance with its terms (including the automatic rollover provisions)
merely because it does not process mandatory distributions due to a lack of sufficient
administrative procedures for automatic rollovers (including establishing IRAs to accept
automatic rollovers).
Plans Subject to Automatic Rollover Requirements. In addition to qualified plans under
Code section 401(a), the Notice provides that the following types of plans are subject to the
automatic rollover requirements: (i) governmental plans under section 414(d), (ii)
governmental deferred compensation plans under 457(b), (iii) 403(b) plans (including custodial
accounts described in section 403(b)(7)), and (iv) church plans under section 414(e). The Notice
provides a delayed compliance date with respect to these plans.
Notice to Participants. Notice 2005-5 provides that a plan administrator must notify the
participant in writing (either as part of the section 402(f) notice or separately) that the
distribution will be paid to an IRA, absent the participant’s affirmative election. This notice
must identify the trustee or issuer of the IRA. A plan administrator, however, will not be
treated as failing to satisfy the notice requirement merely because the U.S. Postal Service returns
the notice as undeliverable after having been mailed it to the participant’s most recent mailing
address. The use of electronic media (in accordance with the section 402(f) regulations) to notify
participants also is permitted.
Plan Amendments. Under the Notice, plans that provide for mandatory distributions
must adopt a good faith plan amendment reflecting the automatic rollover requirements by the
end of the first plan year ending on or after March 28, 2005. Governmental plans are subject to a
later deadline as set forth in the Notice. The Notice provides a sample plan amendment that
qualifies as a good faith amendment.
The Notice further clarifies that the adoption of the sample amendment by a sponsor (or
volume submitter practitioner) of a pre-approved plan will not cause the plan to be treated as
6 See Institute Memorandum (#17163) to Pension Members No. 17-04 and Pension Operations Advisory Committee
No. 20-04, dated March 3, 2004.
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an individually designed plan. Where a timely good faith amendment is made, a plan
amendment to a disqualifying provision relating to the automatic rollover requirements can be
made within the plan’s EGTRRA remedial amendment period (to the extent necessary to satisfy
the automatic rollover requirements). The remedial amendment may be made retroactively
effective as of March 28, 2005, or, if later, the date on which the plan becomes subject to the
automatic rollover requirements.
Rollover of Amounts Greater than $5,000. The Notice clarifies that amounts attributable
to rollover contributions that exceed $5,000 are subject to the automatic rollover requirements.
Thus, the portion of a distribution attributable to a rollover contribution is subject to the
automatic rollover requirements even if that amount is excludable under section 411(a)(11)(D)
(the provision that determines the present value of the nonforfeitable accrued benefit exceeds
$5,000). In addition, the Notice provides that although section 411(a)(11) generally prohibits
mandatory distributions of accrued benefits attributable to employer contributions with a
present value exceeding $5,000, the automatic rollover provisions of section 401(a)(31)(B) apply
without regard to the distribution amount, so long as the amount exceeds $1,000.
Elimination of Mandatory Distributions. The Notice clarifies that a plan sponsor may
eliminate a plan provision requiring mandatory distributions under section 411(a)(11) without
violating the anti-cutback rules of section 411(d)(6).
Thomas T. Kim
Associate Counsel