DOL Safe Harbor for Automatic Rollovers

Patricia Keesler

Benefits Law Group

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Congress enacted a provision requiring tax-qualified retirement plans to automatically roll over certain mandatory distributions to an individual retirement plan or IRA. EGTRAA amended section 401(a)(31) of the Code to require that, absent an affirmative election by the participant, a mandatory distribution of an account balance of more than $1,000 and less than $5,000 must be directly transferred to an individual retirement plan of a designated trustee or issuer. If the accounts are distributable and if the participant does not elect to roll over the account directly or to receive a distribution, instead of merely sending a check to the participant (minus the applicable withholding) the plan must transfer the account to an individual retirement plan in the name of the participant. Section 657(a) of EGTRRA also added a notice requirement in section 401(a)(31)(B)(i) of the Code requiring the plan administrator to notify the participant in writing, either separately or as part of the notice required under section 402(f) of the Code, that the participant may transfer the distribution to another individual retirement plan.

EGTRAA provides that this requirement is not effective until the DOL issues guidance, and requires the DOL to issue this guidance by June 7, 2004. The DOL issued proposed regulations on March 2, 2004. The proposed regulation provides that the rules shall be effective 6 months after the date the final rules are published in the Federal Register.

The proposed regulations issued on March 2, 2004, establish a safe harbor for plans with respect to (1) selecting an institution to provide the individual retirement plan and (2) selecting investments for such plans. The proposed regulations dictate that the mandatory rollovers be invested in an "investment product designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity". The DOL in its preamble notes that such safe harbor investment products would typically include money market funds, interest bearing savings accounts, certificates of deposits, and "stable value products." In addition, the investment product's fees must meet certain requirements.

Another condition that must be satisfied in order to meet the safe harbor proposed in the regulations is that participants must receive a summary plan description (“SPD”) or summary of material modifications (“SMM”) describing the plan's automatic rollover provisions, including an explanation that (1) the mandatory distribution will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity, as well as (2) a statement indicating how fees and expenses attributable to the individual retirement plan will be allocated, and (3) the name, address and phone number of a plan contact (to the extent not otherwise provided in the SPD or SMM) for further information concerning the plan's automatic rollover provisions, the individual retirement plan provider and the fees and expenses attributable to the individual retirement plan. Therefore, it will be important to update the SPM or issue an SMM in order to meet the safe harbor.

The DOL also issued a notice of proposed class exemption that permits a fiduciary of a plan who is also the employer maintaining the plan to establish an individual retirement plan at a financial institution that is the employer or an affiliate.

There was some initial concern with respect to how the USA Patriot Act ("Act") regarding the customer identification and verification provisions ("CIP”) would impact these rules. The Act could preclude banks and other financial institutions from establishing individual retirement accounts without the participation of the participant or beneficiary on whose behalf the fiduciary is required to make an automatic rollover. In many cases, the participant or beneficiary will be unable to be located. The proposed regulations state that the Treasury staff, along with staff of the other Federal regulators, have advised the DOL that they interpret the Act to require that the financial institution implement the CIP compliance program only after the former participant or beneficiary first contacts the institution to assert ownership or exercise control over the account. The proposed regulations state that "CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee." Thus, the former employee will not be deemed to have opened a new account for purposes of the CIP rule until s/he contacts the bank to assert ownership of the funds. Only at that time, the bank will be required to implement its CIP with respect to the former employee.

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