IRS Issues Rules on Automatic Rollovers From Retirement Plans

Earlier this week, the Treasury Department and the IRS issued guidance on the new automatic (or default) rollover rules for qualified retirement plans.


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These new rules were added to the Internal Revenue Code as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but they will not be effective until March 28, 2005, which is the effective date of related final regulations published by the Department of Labor.

The guidance issued this week answers many questions regarding the application of the new requirement and will make it easier for plan sponsors to comply in a timely manner.

The new automatic rollover rule requires that mandatory distributions of more than $1,000 from a qualified retirement plan be paid in a direct rollover to an Individual Retirement Account (IRA) unless the distributee elects to have the amount rolled over to another retirement plan or to receive the distribution directly. EGTRRA also requires that the plan administrator notify the distributee in writing that the distribution may be paid in a direct rollover to an IRA.

This guidance issued responds to comments received by the Department of Labor, Treasury, and the IRS. For example, the guidance clarifies that the automatic rollover requirement applies to governmental and church plans although a transition rule is provided for these plans to comply. The guidance provides that all plans have until the end of 2005 to establish administrative procedures for processing the automatic rollovers and clarifies that rollover IRAs can be set up without the participant's participation. Finally, the guidance includes a sample amendment that plan sponsors can use to amend their plans to comply with the new rule.

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