The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 makes direct rollovers to IRAs the default option when plan sponsors make involuntary distributions of vested account balances greater than $1,000. Currently, plan sponsors can make involuntary distributions payable directly to the participant for participants whose vested account balance does not exceed $5,000. Plan sponsors should first provide terminated participants the necessary distribution forms and special tax notice. If the terminated participants do not complete and return the distribution forms within 30 days, the plan sponsor may make an involuntary distribution of that participant’s account.

Under the new rules in EGTRRA, plan sponsors will no longer be able to make involuntary distributions payable directly to the participant for accounts greater than $1,000. Plan sponsors will have to select a designated IRA and transfer the terminated participant’s account balance into the designated IRA. These provisions apply to distributions made after the Secretary of Labor issues final regulations as required in the tax act.

Until these final regulations are issued, we recommend that plan sponsors aggressively pay-out terminated participants whose vested account balances are less than $5,000.

If you need distribution forms and special tax notices, or if you have any questions, contact Administrative Retirement Services, Inc.