n-05-05.pdf

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Part III – Administrative, Procedural and Miscellaneous

Automatic Rollover
Notice 2005-5
I. PURPOSE
This notice provides guidance relating to automatic rollover provisions
under § 401(a)(31)(B) of the Internal Revenue Code (“Code”) as amended by the
Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16
(“EGTRRA”).
II. BACKGROUND
Section 401(a)(31)(A) of the Code and §1.401(a)(31)-1 of the Income Tax
Regulations provide that a distributee of any eligible rollover distribution, as
defined in § 402(f)(2)(A), may elect to have such distribution paid directly to an
eligible retirement plan and that such distribution must be made in the form of a
direct rollover to the specified eligible retirement plan. Section 402(f)(1) requires
that the plan administrator provide a written explanation to the recipient of the
provisions under which the recipient may have the distribution paid directly to an
eligible retirement plan as defined in § 402(c)(8) in a direct rollover.
Sections 411(a)(11) and 417(e) permit plans qualified under § 401(a) to
include provisions allowing for the immediate distribution of a separating
participant’s benefit without such participant’s consent where the present value of
the nonforfeitable accrued benefit is less than $5,000.
Section 657 of EGTRRA amended § 401(a)(31)(B) of the Code to require
that mandatory distributions of more than $1,000 from a plan qualified under
§ 401(a) be paid in a direct rollover to an individual retirement plan (i.e., an
individual retirement account as described in § 408(a) or an individual retirement
annuity described in § 408(b)) of a designated trustee or issuer if the distributee
does not make an affirmative election to have the amount paid in a direct rollover
to an eligible retirement plan or to receive the distribution directly. Section 657(a)
of EGTRRA also added a notice provision to § 401(a)(31)(B)(i) of the Code which
requires that the plan administrator notify the distributee in writing (either
separately or as part of the § 402(f) notice) that the distribution may be paid in a
direct rollover to an individual retirement plan.
Section 657(c)(2)(A) of EGTRRA directed the Department of Labor to
issue regulations providing safe harbors under which 1) a plan administrator’s
designation of an institution to receive the automatic rollover and 2) the initial

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investment choice for the rolled-over funds would be deemed to satisfy the
fiduciary responsibility provisions of § 404(a) of the Employee Retirement Income
Security Act of 1974 (“ERISA”).
Section 657(d) of EGTRRA provided that the § 401(a)(31)(B) of the Code
requiring automatic rollovers of certain mandatory distributions to individual
retirement plans will not become effective until the Department of Labor issues
safe harbor regulations.
On September 28, 2004, the Department of Labor issued final regulations
(29 CFR § 2550.404a-2) pursuant to § 657(c)(2)(A) of EGTRRA. 69 FR 58017.
Section 2550.404a-2 of those regulations establishes a safe harbor under which
a fiduciary of an employee pension benefit plan subject to Title I of ERISA will be
deemed to have satisfied his or her fiduciary duties under § 404(a) of ERISA in
connection with an automatic rollover of a mandatory distribution described in
§ 401(a)(31)(B) of the Code. Section 2550.404a-2(c) provides the conditions
under which a fiduciary qualifies for the safe harbor described in the preceding
sentence. The safe harbor contained in § 2550.404a-2 applies only to employee
pension benefit plans covered under Title I of ERISA. The safe harbor contained
in § 2550.404a-2 also applies to automatic rollovers of $1,000 or less.
III. QUESTIONS AND ANSWERS
Q-1. To what distributions do the automatic rollover requirements of
§ 401(a)(31)(B) apply?
A-1. The automatic rollover requirements apply to any mandatory distribution that
is more than $1,000 and is an eligible rollover distribution that is subject to the
direct rollover requirements that are in § 401(a)(31). Thus, in order for a plan
that provides for such mandatory distributions to be qualified under § 401(a), it
must satisfy the automatic rollover provisions of § 401(a)(31)(B). Pursuant to
Q&A-16 of § 1.401(a)(31)-1 of the Income Tax Regulations, an eligible rollover
distribution in the form of a plan loan offset amount is not subject to the automatic
rollover provisions of § 401(a)(31)(B).
Q-2. What is a mandatory distribution?
A-2. A mandatory distribution is a distribution that is made without the
participant’s consent and that is made to a participant before the participant
attains the later of age 62 or normal retirement age. A distribution to a surviving
spouse or alternate payee is not a mandatory distribution for purposes of the
automatic rollover requirements of § 401(a)(31)(B). Although § 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 § 401(a)(31)(B) apply without regard to the amount of the
distribution as long as the amount exceeds $1,000.

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Q-3. How is the automatic rollover requirement of § 401(a)(31)(B) satisfied?
A-3. In order to satisfy the automatic rollover requirement of § 401(a)(31)(B), a
plan must provide that, when making a mandatory distribution that exceeds
$1,000 and that is an eligible rollover distribution, if, after receiving the notice
described in § 402(f), a participant fails to elect to receive a mandatory
distribution directly or have it paid in a direct rollover to an eligible retirement
plan, the distribution will be paid in a direct rollover to an individual retirement
plan.
Q-4. When do the automatic rollover provisions of § 401(a)(31)(B) become
effective with respect to mandatory distributions?
A-4. The automatic rollover requirements of § 401(a)(31)(B) apply to mandatory
distributions made on or after March 28, 2005. Thus, the automatic rollover
requirements of § 401(a)(31)(B) do not apply to mandatory distributions made
prior to March 28, 2005. Section 657(d) of EGTRRA provides that the
requirements of § 401(a)(31)(B) of the Code requiring automatic rollovers of
mandatory distributions to individual retirement plans do not become effective
until the Department of Labor prescribes final regulations implementing a
fiduciary safe harbor related to automatic rollovers. The final regulations issued
by the Department of Labor on September 28, 2004, provide that the regulations
apply to any rollover of mandatory distributions made on or after March 28, 2005.
Q-5. Do the automatic rollover requirements of § 401(a)(31)(B) apply to
governmental plans as described in § 414(d)?
A-5. Yes, the automatic rollover requirements apply to governmental plans
(within the meaning of § 414(d)) that are required to comply with § 401(a)(31),
even though these plans are not subject to the provisions of § 411. Thus, for
example, in order for a plan of a state or local government to be qualified under
§ 401(a), the plan must comply with § 401(a)(31)(B). However, governmental
plans will not be treated as failing to satisfy the requirements of § 401(a)(31)(B) if
the automatic rollover provisions are not applied to mandatory distributions from
such plans that are made prior to the close of the first regular legislative session
of the legislative body with the authority to amend the plan that begins on or after
January 1, 2006.
Q-6. Do the automatic rollover provisions of § 401(a)(31)(B) apply to
governmental eligible deferred compensation plans described in § 457(b)?
A-6. Yes, § 457(d)(1)(C) provides that, in order to satisfy the distribution
requirements of § 457(b)(5), a governmental eligible deferred compensation plan
described in subsection (e)(1)(A) must meet requirements similar to the
requirements of § 401(a)(31). However, the delayed compliance date set forth in

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Q&A-5 applies. The automatic rollover requirements of § 401(a)(31)(B) do not
apply to non-governmental § 457(b) plans.
Q-7. Do the automatic rollover provisions of § 401(a)(31)(B) apply to § 403(b)
plans?
A-7. Yes, § 403(b)(10) provides that rules similar to the rules of § 401(a)(31)
apply to § 403(b) plans. Thus, the automatic rollover provisions of
§ 401(a)(31)(B) apply to annuity contracts described in § 403(b)(1), custodial
accounts described in § 403(b) (7), and retirement income accounts described in
§ 403(b)(9). If a § 403(b) plan is a governmental plan within the meaning of
§ 414(d), then the delayed compliance date in A-5 applies.
Q-8. Do the automatic rollover provisions of § 401(a)(31)(B) apply to church
plans within the meaning of § 414(e) with respect to which the election provided
in § 410(d) has not been made?

A-8. Yes, the requirements of § 401(a)(31)(B) of the Code apply to non-electing
church plans even though these plans are not subject to the provisions of § 411.
However, a non-electing church plan maintained for which the authority to amend
the plan is held by a church convention (within the meaning of § 414(e)(3)) will
not be treated as failing to
satisfy the requirements of § 401(a)(31)(B) if the
automatic rollover provisions are not applied to mandatory distributions from such
plan that are made prior to the date that is 60 days after the close of the earliest
church convention that occurs on or after January 1, 2006.
Q-9. If a plan that provides for mandatory distributions does not make a
distribution to a participant who fails to affirmatively elect direct payment or a
direct rollover for a mandatory distribution on or after March 28, 2005, because
the plan administrator has not sufficiently established administrative procedures
that allow the plan administrator to accomplish the automatic rollover of a
mandatory distribution by that date, will the plan be treated as failing to operate in
accordance with its terms?
A-9. No, a plan will not be treated as failing to operate in accordance with its
terms (including the automatic rollover provisions) with respect to mandatory
distributions merely because it does not process mandatory distributions for
which the participant does not affirmatively elect direct rollover or direct payment
due to a lack of sufficient administrative procedures for automatic rollovers,
including establishing individual retirement plans to accept automatic rollovers,
provided the mandatory distributions are made on or before December 31, 2005.
Q-10. Can a plan administrator set up an individual retirement plan for a
participant who is receiving a mandatory distribution and who has not elected to
have such distribution paid directly to an eligible retirement plan in a direct
rollover or to receive the distribution directly?

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A-10. Yes, if a participant receiving a mandatory distribution fails to elect to have
such distribution paid to an eligible retirement plan in a direct rollover or to
receive the distribution directly, the plan administrator may execute the
necessary documents to establish an individual retirement plan on the
participant’s behalf with a financial institution selected by the plan administrator.
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For this purpose, the plan administrator may use the participant’s most recent
mailing address in the records of the employer and plan administrator. The
trustee or issuer of the individual retirement plan must provide a disclosure
statement to the participant and provide a revocation period as prescribed in
§ 1.408-6. The trustee or issuer of the individual retirement plan will not be
treated as failing to satisfy the disclosure requirements of § 1.408-6 merely
because the disclosure statement is returned by the United States Postal Service
as undeliverable after it was mailed to the participant using the address for the
participant provided by the plan administrator as the participant’s most recent
mailing address in the records of the employer and plan administrator.
Q-11. May a mandatory distribution be paid to an individual retirement account
under § 408(c) or a deemed individual retirement account under § 408(q) that is
part of the plan that is making the distribution?
A-11. Yes, a mandatory distribution may be paid to a participant’s individual
retirement account that meets the requirements of § 408(c) or to a participant’s
deemed individual retirement account that meets the requirements of § 408(q).
Q-12. Can a plan sponsor eliminate mandatory distributions from its plan without
violating the anti-cutback provisions of § 411(d)(6) of the Code?
A-12. Yes, § 1.411(d)-4, A-2(b)(2)(v), provides that a plan sponsor may amend
or change a plan to eliminate a provision which requires the plan to make a
mandatory single-sum distribution to participants pursuant to § 411(a)(11) without
violating § 411(d)(6).

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The staffs of the federal functional regulators that issued joint regulations
requiring financial institutions to implement customer identification programs
(“CIP”) pursuant to § 326 of the USA PATRIOT Act have interpreted these
regulations to require that when a plan administrator transfers funds of a former
employee to a financial institution pursuant to § 401(a)(31)(B), the financial
institution will not be required to implement its CIP until the former employee first
contacts such institution to assert ownership or exercise control over the account.
Accordingly, CIP compliance is not required at the time an employee benefit plan
establishes an account and transfers the funds to the bank or other financial
institution for purposes of a complying with the automatic rollover requirements of
§ 401(a)(31)(B).

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Q-13. If a plan is subject to the joint and survivor annuity and preretirement
survivor annuity requirements of § 401(a)(11) and the plan provides that an
accrued benefit greater than $1,000 but not greater than $5,000 will be
distributed to a participant only with the consent of the participant, would a
distribution of such an accrued benefit be subject to spousal consent
requirements?
A-13. No. Section 1.417(e)-1(b)(2)(i) provides that no spousal consent is
required before the annuity starting date if the present value of the nonforfeitable
benefit is not more than the cash-out limit in effect under § 411(a)(11).
Q-14. Are amounts attributable to rollover contributions that exceed $5,000
subject to the automatic rollover provisions of § 401(a)(31)(B)?
A-14. Yes. Section 401(a)(31)(B) applies to the entire amount of a mandatory
distribution. Thus, for example, the portion of the distribution attributable to a
rollover contribution is subject to the automatic rollover requirements of §
401(a)(31(B), even if that amount is excludable (under § 411(a)(11)(D)) from the
determination of whether the present value of the nonforfeitable accrued benefit
exceeds $5,000.
Q-15. Is a plan administrator required to notify a participant to whom a
mandatory distribution is going to be made that, absent the participant’s
affirmative election, the distribution will automatically be paid to an individual
retirement plan in a direct rollover?
A-15. Yes. Section 401(a)(31)(B)(i) requires that the plan administrator notify
the participant in writing (either separately or as part of the § 402(f) notice) that,
absent an affirmative election by the participant, the distribution will be paid to an
individual retirement plan. The notice must identify the trustee or issuer of the
individual retirement plan. A plan administrator will not be treated as failing to
satisfy this notice requirement merely because the notice is sent using electronic
media in accordance with A-5 of § 1.402(f)-1. Further, for an eligible rollover
distribution paid as an automatic direct rollover. a plan administrator will not be
treated as failing to satisfy this notice requirement or section 402(f) with respect
to an eligible rollover distribution merely because the notice is returned as
undeliverable by the United States Postal Service after having been mailed to the
participant using the participant’s most recent mailing address in the records of
the employer and plan administrator
.
Q-16. When must a plan that provides for mandatory distributions be amended
to include a provision that satisfies the requirements of § 401(a)(31)(B)?
A-16. Plans that provide for mandatory distributions and that do not already
include the automatic rollover provisions must adopt a good faith plan
amendment reflecting the automatic rollover requirements by the end of the first

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plan year ending on or after March 28, 2005 (or in the case of a governmental
plan in accordance with A-5). Included in the Appendix is a sample plan
amendment that individual plan sponsors and sponsors (or volume submitter
practitioners) of pre-approved plans can adopt or use in drafting individualized
plan amendments. This sample plan amendment, or a plan amendment that is
materially similar to this sample, will be a "good faith" plan amendment. The
adoption of this sample amendment by a sponsor (or volume submitter
practitioner) of a pre-approved plan will not cause such a plan to be treated as an
individually designed plan. If a plan is amended by a timely good faith
amendment reflecting the automatic rollover requirements, a plan amendment to
a disqualifying provision related 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, as interpreted in
published guidance. See § 2.03, Rev. Proc. 2004-25, 2004-16 IRB 791. To the
extent necessary, such a 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 of § 401(a)(31)(B).
DRAFTING INFORMATION
The principal authors of this notice are Kathleen J. Herrmann and Angelique V.
Carrington of Employee Plans, Tax Exempt and Government Entities Division.
Ms. Herrmann and Ms. Carrington may be reached at (202) 283-9888 (not a toll-
free number).
APPENDIX
Section 401(a)(31)(B) Sample Amendment

“In the event of a mandatory distribution greater than $1,000 in accordance with
the provisions of section _____, if the participant does not elect to have such
distribution paid directly to an eligible retirement plan specified by the participant
in a direct rollover or to receive the distribution directly in accordance with
section(s) _____, then the plan administrator will pay the distribution in a direct
rollover to an individual retirement plan designated by the plan administrator.”