► Rollover IRA
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Automatic rollovers for terminated and abandoned plans
Mergers, acquisitions and business closures often result in the
termination or abandonment of employer retirement plans. Custodians are
left holding assets without the authority to terminate plans or
distribute benefits of so-called 'orphaned plans.' In response, the
Employee Benefits Security Administration (EBSA) has established rules
to provide for winding up the affairs of abandoned retirement accounts
and the distribution of benefits.
A plan is considered abandoned if no contributions to, or distributions
from, have been made for a period of at least twelve consecutive months;
and efforts to locate the plan sponsor have been unsuccessful because
the entity no longer exists, cannot be located or is unable to maintain
the plan. EBSA regulations provide for the appointment of a QTA -
Qualified Termination Administrator - to take custody of the dormant
assets. The QTA is an eligible IRA custodian: bank, trust company,
broker dealer or insurance company.
These rules - establishing Rollover IRAs for terminating and abandoned
defined contribution plans, and for missing and non-responsive defined
contribution plan participants, may cause retirement funds to lose their
ERISA-qualified status, subjecting them to state escheat statutes when
they go unclaimed.
A Notice of ‘Intent to Terminate Plan’ is sent to the last known address
of the plan administrator. The plan administrator has 30 days to appeal
the termination. The QTA then files a 'Notification of Plan Abandonment'
and 'Intent to Serve as Qualified Termination Administrator’ with the
Department of Labor, which becomes effective in 90 days if no objection
is made. A search is made for all plan participants, who are sent a
‘Notice of Plan Termination’ and given instructions on how to reclaim
their funds. If owner reunification efforts prove unsuccessful, plan
accounts may be transferred to a Rollover IRA.
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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.
