Retirement Plan Distribution FAQs

What is an auto rollover (Default) IRA

Introduced as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001, the auto rollover IRA allows plan sponsors and administrators to issue forced distributions for non-responsive terminated employees whose balances are less than $5,000. Plans must be previously designed to allow the use of auto rollover or Default IRAs.

These innovative IRA products help you:

  • Avoid unnecessary retirement plan administration costs
  • Reduce your fiduciary exposure
  • Protect participants’ deferred tax status
  • Redirect your staff’s time and resources to other business processes

Always at the forefront of distribution processing innovation, PenChecks assisted in introducing the auto rollover IRA concept, and helped develop the ensuing Department of Labor regulations.

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What is a Missing Participant IRA?

First introduced under ERISA, the Missing Participant IRA auto rollover saves you the time and aggravation of tracking down missing participants while lowering your fiduciary risk. Initially, these IRAs were rare because banks prefer to accept deposits with an original signature. Since EGTRRA, these IRAs have become much more common. Unlike the auto rollover (Default) IRA, the Missing Participant IRA auto rollover does not have a $5,000 participant threshold. However, the retirement plan must be terminating.

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Why should I establish a Missing Participant IRA auto rollover on behalf of a participant?

A Missing Participant IRA auto rollover offers an ideal solution for plans that are terminating because all plan assets must be distributed even when participants can’t be located. A Missing Participant IRA:

Reduces fiduciary exposure

Plan trustees must manage and oversee the account balances of all terminated employees who leave their retirement plan. However, the trustee’s fiduciary risk ends when an IRA is established on behalf of missing participants, as long as the participant is given proper notice under DOL regulations and the IRA is set up according to DOL safe harbor rules.

Reduces administrative costs

The costs to establish, administer, and liquidate the plan and establish a Missing Participant IRA can be assessed to the participant’s account as long as they are reasonable and are properly disclosed to participants.

Avoid unnecessary taxable events
When a plan is terminated, cutting a lump sum check, withholding taxes, or escheating the funds may cause undesirable tax penalties for the participant in question. Missing Participant IRA auto rollovers eliminate your risk of creating a taxable event and any potential ensuing red tape while allowing the terminated participant’s funds to maintain tax-deferred status.

Eliminate and avoid hassle of uncashed checks
If a plan trustee elects to use the cashout provisions of its plan and simply write a lump sum check to the last known address of missing participants, in addition to creating a taxable event for the participant, these checks often go uncashed, which creates a liability for the terminating plan. Additionally, the cashout provisions only apply to small account balances.

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