With so much talk these days about offering lump sums to terminated vested employees and de-risking defined benefit plans (see, for example, the September 2012 DB Digest), it might be worth taking a look at simple ways plan sponsors can shed some old, forgotten liabilities.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) reduced the maximum mandatory force-out limit from $5,000 to $1,000. For once, they amended the Internal Revenue Code in a way that kept money out of the IRS’s coffers. Instead, they decided that if participants don’t affirmatively elect to receive a lump sum of between $1,000 and $5,000, then the money should either stay in the plan or be automatically rolled over to a default IRA.
Even though these rules have been around for over a decade, many plans have never adopted an auto rollover provision.
Default IRAs are handy because they get the liabilities out of the plan and eliminate the need to keep track of long forgotten, barely vested participants and pay their Pension Benefit Guaranty Corporation (PBGC) premiums. In addition, as irritating as these small benefits are to plan sponsors, many IRA providers are clamoring to accept the auto rollovers, and because the providers manage the assets, there is usually no cost to the plan sponsor.
A word of caution. As with any lump sum payouts, it behooves plan sponsors to keep a list of who is holding the IRAs for these participants. Years down the road, you don’t want to be paying lump sums out again just because you have no record of where it was paid the first time.