► Rollover IRA
- Automatic rollovers for non-responsive participants
When employees leave a company with a defined contribution retirement
plan such as a 401(k), the majority rollover plan benefits to other
tax-qualified accounts themselves. A significant number neglect to do
so, however, allowing assets to remain in the plan after employment
ends. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA)
amended the IRS code to allow plan sponsors to establish Rollover IRAs
for missing and non-responsive plan participants with balances less than
$5000.
On 28 September 2004, the U.S. Department of Labor published guidelines
establishing safe harbor provisions for rollover distributions that
would satisfy the plan sponsor's fiduciary responsibilities to
participants under ERISA. The plan sponsor must provide information
about the automatic rollover process in the Summary Plan Description (SPD)
or Summary of Material Modification (SMM) given participants. They must
enter into a written rollover agreement with an IRA provider stipulating
the amount of the initial investment, as well as services to be
provided, fees and expenses.
The rollover IRA must be established at a state or federally regulated
financial institution, such as a bank or credit union, trust or
insurance company. The IRA must be rolled over to an investment vehicle
that preserves principal, minimizes risk and provides a reasonable rate
of return while maintaining liquidity; such as an interest bearing
savings account, certificate of deposit or money market fund. Fees and
expenses cannot exceed those normally charged by the provider for
comparable IRAs.
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► Lost or Unclaimed
IRA Individual Retirement Accounts
There is no limit to the
number of Individual Retirement Accounts that an individual can have. IRAs
may contain a variety of investments including bank accounts, certificates
of deposit, stocks, bonds, precious metals, commodities, and even real
estate; but half of all IRAs are administered by and invested in various
mutual funds. About one-third are held in brokerage accounts, while bank
deposits and life insurance annuities make up the remainder.
Earnings on Traditional IRAs grow on a tax-deferred basis until
withdrawals begin. About 15% of IRAs - totaling some $450 million - are
held by those aged 70 and above. The average account value is around
$100,000.
Due to the long term nature of this type of investment, each year large
numbers of owners and heirs - who may not be aware of a deceased family
member's IRA or rollover 401(k) - fail to claim accounts to which
they're entitled.
While unclaimed 401(k) retirement plan assets are subject to federal
guidelines mandated by ERISA, the Employee Retirement Income Security
Act of 1974, most dormant and forgotten IRAs at banks, brokerages and
insurance companies are not.
They come under the purview of state
unclaimed property statutes, whereby a trustee takes custody of the
funds based on a legal doctrine known as ‘escheat.’ It’s important to
note, however, that in some cases 401(k) plan assets can lose their ERISA
pre-emption and become subject to state escheat.
The rules for determining how a dormant and unclaimed IRA is treated
depend on the type of account and the owner’s state of residence.
Generally speaking, a Traditional IRA is considered unclaimed if a
withdrawal is not made by age 70˝; the age at which non-withdrawal
triggers a 50% tax penalty under the IRS code. Both Traditional IRAs and
Roth IRAs may be considered abandoned if one or more distribution checks
remain uncashed, which can occur when the owner reaches age 59˝ or
before, if early withdrawal is taken.
