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February 17, 2009

Automatic Rollover

Your Guide

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Definition

A rollover from a cash-out distribution processed by the administrator of a qualified plan, 403(b) or 457(b) plan, without the participant’s ( and the participant’s spouse if applicable) consent, as a result of the participant being nonresponsive to plan notifications . While the plan administrator is permitted to cash-out balances of $5,000 or less, any amount that is between $1,000 and $5,000 must be processed as an automatic rollover to an IRA.

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 participant in writing (either separately or as part of the § 402(f) notice) that the distribution may be paid as a direct rollover to an IRA.

Referring Cite

IRC § 401(a)(31), IRS Notice 2005-5.

Additional Helpful Information

  • A plan can reduce it’s cash-out limit to $1,000 or less in order to avoid the automatic rollover requirements.
  • Rollover amounts  received from other plans and attributable earnings can be disregarded when determining the participant’s balance for cash-out purposes
  • In order for a plan that provides for 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).

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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