New Retirement Plan Automatic Rollover Provisions
School Advisor, 2005 Issue No. 1

Some school district qualified plans, 403(b) arrangements, and eligible 457(b) plans provided for an involuntary cash out to participants who terminate employment with account balances less than $5,000. Beginning January 1, 2006, these plans cannot cash out benefits in excess of $1,000 unless the participant elects to receive a distribution. In the absence of the participant’s election, any involuntary distribution between $1,000 and $5,000 must be done as an automatic rollover to an IRA.

In reaction to these new provisions, plans are generally either: (1) reducing involuntary distributions to balances of no more than $1,000; (2) reducing involuntary distributions to balances of no more than $1,000, and forcing the rollover of balances over $1,000 and less than $5,000 to an IRA account, or (3) eliminating involuntary distributions altogether.

Plans generally must operationally comply with the new automatic rollover provisions (generally invoking one of the three options above) beginning on March 28, 2005. However, government plans have an extended due date of January 1, 2006, and in some cases longer. Good faith plan document amendments are also required by the extended governmental plan operational compliance date.