A recent IRS ruling on involuntary retirement plan cash-outs caught a lot of retirement plan administrators with their pants down. (See 2/7/05 issue.) Now, the IRS is giving those plan administrators a break for the 2005 plan year.
Here's the story: When employees leave the job, their employer can choose to cash out vested retirement benefits of less than $5,000 without the plan participant's consent. But a little-noticed provision in the 2001 tax law said that involuntary cash-outs of $1,000 or more must automatically be rolled into the employees' IRAs. That automatic-rollover default rule kicked in March 28.
But the IRS has decided to provide more time. It recently informed plan sponsors that they had until the end of the plan year ending after March 28—in other words, Dec. 31, 2005, for calendar-year plans—to comply with that new rule. The IRS also drafted a sample amendment for plan sponsors to adopt. (IRS Notice 2005-5)
To read the IRS notice and download the new sample amendment, go to www.benefitslink.com/IRS/notice2005-5.pdf.