The Automatic Rollover of Small Accumulations Is Not Mandatory

A lot of plan administrators are expressing concern about the Department of Labor’s (DoL) regulations covering the rollover of accumulations of $5,000 or less, when participants separate from service. The regulations apply to distributions and rollovers occurring after March 28, 2005. 

Which plans are affected?  The typical plan funded with TIAA-CREF contracts using a TIAA-CREF sample plan document is not affected by these regulations.  A plan will not be affected by the new regulations, unless it:

  • has a provision in its plan document mandating the distribution or rollover of small accumulations when separating from service (TIAA-CREF sample plan documents do not); and
  • is funded with a group (GRA or GSRA) contract that has been endorsed to incorporate the provision.  Such provisions could not be enforced if the plan was funded with individually owned RA or SRA contracts.

Background. Some sponsors of retirement plans mandate the distribution of accumulations of  $5,000 or less when an employee separates from service. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) requires the account of a participant with total plan accumulations over $1000 be directly transferred to an IRA of an issuer selected by the plan sponsor (unless the participant elects to take a cash out, or roll over the accumulation to a plan or IRA he or she selected).  The plan must designate the IRA provider for receipt of automatic rollovers, if it wants to implement such a provision (TIAA-CREF does not currently provide such a product).

In a news flash issued on Feb. 16, 2005, the IRS stated that plans mandating the automatic rollover of small accumulations must adopt plan amendments reflecting the new regulations by the end of the first plan year after March 28, 2005 (Dec. 31, 2005 for calendar year plans).  The IRS provided sample language for these amendments in January in Notice 2005-5.  Administrators can obtain a copy of the notice from the IRS Web site at http://www.irs.gov/pub/irs-drop/n-05-05.pdf, or by calling the TIAA-CREF Administrator Telephone Center at (888) 842-7782.

Keep in mind that most plans funded with TIAA-CREF contracts will not need to be amended since they don’t mandate the distribution or rollover of small accumulations. (TIAA-CREF sample plan documents do not include provisions for the automatic distribution or rollover of small accumulations on separation from service.) And plans do not incur additional expenses for allowing separated employees with TIAA-CREF contracts, to continue to leave their accumulations in the plan, if they wish to do so.

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