DOL Issues Final Automatic Rollover Safe Harbor Regulations

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), Congress enacted a provision requiring a plan to roll over the accounts of participants that exceed $1,000 (but do not exceed $5,000) and are distributable, if…

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Congress enacted a provision requiring a plan to roll over the accounts of participants that exceed $1,000 (but do not exceed $5,000) and are distributable, if the participant does not elect to roll over the account directly or to receive the distribution. This EGTRRA provision, however, was not effective until the DOL issued guidance, and EGTRRA required the DOL to issue this guidance by June 7, 2004, which it did in the form of proposed regulations discussed here. The DOL has announced that it has finalized those regulations (access them here) providing guidance and establishing a safe harbor pursuant to which a fiduciary of a pension plan subject to Title I of ERISA will be deemed to have satisfied his or her fiduciary responsibilities in connection with the provisions. Also, the DOL has issued a final class exemption permitting a fiduciary of a plan, who is also the employer maintaining the plan, to establish, on behalf of its separated employees, an individual retirement plan at a financial institution which is the employer or an affiliate. The effective date of the final regulations is March 28, 2005.

There are a number of interesting differences between the proposed and the final regulations, the most notable of which is the fact that the DOL has extended the safe harbor to rollovers of mandatory distributions of $1,000 or less. The DOL states in the final regulations that it “believes that the availability of the safe harbor for such distributions may increase the likelihood that such amounts will be rolled over to individual retirement plans and thereby may promote the preservation of retirement assets, without compromising the interests of the participants on whose behalf such rollovers are made.”

Another major change to these final regulations has to do with the fees and expenses that can be assessed against an individual retirement plan. The DOL explains that “[m]ost commenters objected to the provision limiting fees and expenses to income earned by the individual retirement plan” and argued “that the income to be generated by the investments permitted by the safe harbor against which expenses may be assessed would be very limited, while the costs attendant to maintaining such individual retirement plans would tend to be higher than individual retirement plans with respect to which the account holder contributes and maintains contact with the institution.” Commenters argued that this problem would limit the number of individual retirement plan providers that would be willing to accept rollover distributions in accordance with the safe harbor regulation.

Accordingly, the DOL has provided in the final regulations that “[a]ll fees and expenses attendant to an individual retirement plan, including investments of such plan, (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges) shall not exceed the fees and expenses charged by the individual retirement plan provider for comparable individual retirement plans established for reasons other than the receipt of a rollover distribution subject to the provisions of section 401(a)(31)(B) of the Code.” The DOL states that the “comparability standard” is sufficient to protect individual retirement plans from being assessed unreasonable fees. (Interesting assumption here in light of recent controversies over unreasonable 401(k) fees and expenses. )

Regarding the effective date provisions, the DOL provides that:

(1) The final regulation shall apply to the rollover of mandatory distributions made on or after March 28, 2005.

(2) The EGTRRA automatic rollover provisions will be effective March 28, 2005. The DOL states: “Section 657(c)(2)(A) of EGTRRA provides that the requirements of section 401(a)(31)(B) of the Code requiring automatic rollovers of mandatory distributions to individual retirement plans do not become effective until the Department prescribes a final regulation. Inasmuch as it appears clear that Congress did not intend fiduciaries to be subject to the automatic rollover requirements under the Code in the absence of a safe harbor, the Department as well as Treasury and IRS believe that the effective date of the Code’s rollover requirement must be determined by reference to the effective date of this regulation, which is the point in time when plan fiduciaries may first avail themselves of the relief provided by the safe harbor.

(3) Prior to the March 28, 2005 effective date, fiduciaries may rely in good faith on the regulation for purposes of satisfying their fiduciary responsibilities under section 404(a) of ERISA with regard to the selection of an institution to receive a rollover of a mandatory distribution and the initial investment choice for the rolled-over funds made before the effective date of this regulation. However, the class exemption is not available prior to the effective date for purposes of the prohibited transactionr relief afforded by the exemption.

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