An involuntary distribution of a separating participant’s vested account balance of $5,000 or less, under a qualified plan, 403(b) or 457(b) plan. This involuntary distribution occurs when the participant is non-responsive to plan communications about distributions.
The plan administrator must provide written notification to the plan participants of its intent to distribute the amount, the tax-treatment of such distribution and rollover options for the amount.
Section 657 of EGTRRA amended § 401(a)(31)(B) of the Code to require that mandatory distributions of more than $1,000 from a plan qualified be paid in a direct rollover to a traditional IRA of a designated trustee or issuer if the distribute does not make an affirmative election to have the amount paid in a direct rollover to an eligible retirement plan or to receive the distribution directly.
The plan administrator must notify the distributee in writing (either separately or as part of the § 402(f) notice) that the distribution may be paid in a direct rollover to an IRA
IRC § 411(a)(11) ; IRC § 457(e)(9)(A); Treas. Reg. 1.411(a)-11(e), IRS Notice 2005-05, Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor; Final Rule, Rev. Proc. 2013-12
Additional Helpful Information
Cash-out amounts between $1,000 and $5,000 must be rolled over to a traditional IRA
- When determining the $5,000 balance, rollovers to the plan, and attributable interest can be disregarded
- The following methods can be used to locate missing participants
- Social Security Administration’s Letter forwarding program
- commercial locator services
- credit reporting agencies
- internet search tools
- Spousal consent is not required for a cash-out
The automatic rollover requirements apply to any mandatory distribution that is more than $1,000 and is an eligible rollover distribution that is subject to the direct rollover requirements. Therefore, in order for a plan that provides for such mandatory distributions to be a qualified plan, it must satisfy the automatic rollover provisions.
A mandatory distribution is a distribution that is made without the participant’s consent and that is made to a participant before the participant attains the later of age 62 or normal retirement age. A distribution to a surviving spouse or alternate payee is not a mandatory distribution for purposes of the automatic rollover requirements.
Although the tax code generally prohibits mandatory distributions of accrued benefits attributable to employer contributions with a present value exceeding $5,000, the automatic rollover provisions apply without regard to the amount of the distribution as long as the amount exceeds $1,000.
Note from the IRS
“Previously, the IRS provided letter-forwarding services to help them locate missing plan participants, but with the August 31, 2012, release of Revenue Procedure 2012-35, the IRS stopped this letter forwarding program. The IRS will no longer process requests to locate retirement plan participants or beneficiaries.” irs.gov