The SECURE Act 2.0: The Most Impactful Provisions #14 — Automatic Portability for IRA Force-outs

Key Takeaways

  • Current law permits plans to force out distributions of accounts with less than $5,000 in benefits if a departed employee does not affirmatively elect to receive his or her benefits. (That amount is increasing to $7,000 in 2024.)
  • The “force-out” amounts must be rolled over into an IRA if the account balance is at least $1,000.
  • SECURE 2.0 permits the provider of the IRAs that receive the forced-out amounts to continuously reach out to recordkeepers to determine if the IRA owner has begun participating in a plan that is recordkept by a participating recordkeeper and, if so, to transfer the IRA amounts to the IRA owner’s account in the new plan.
  • The provider of the IRAs must act as a fiduciary for that purpose and therefore must act in the best interest of the IRA owner.
  • The provider can collect a reasonable fee from the force-out IRA for those services and the fee will not be considered a prohibited transaction.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional . . . that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article is about an effort by Congress to protect the benefits of former employees with small account balances who have been forced out of plans into default rollover IRAs.

The Senate Finance Committee’s summary of the provision is:

Section 120 [of SECURE Act 2.0], Exemption for certain automatic portability transactions. Under current law, an employer is permitted to distribute a participant’s account balance without participant consent if the balance is under $5,000 and the balance is immediately distributable (e.g., after a termination of employment). Current law also requires an employer to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise. Section 120 permits a retirement plan service provider to provide employer plans with automatic portability services. Such services involve the automatic transfer of a participant’s default IRA (established in connection with a distribution from a former employer’s plan) into the participant’s new employer’s retirement plan, unless the participant affirmatively elects otherwise. Section 120 is effective for transactions occurring on or after the date which is 12 months after the date of enactment of this Act.

At first blush, the provision seems straightforward . . . the force-out rollover IRA provider periodically communicates with recordkeepers to see if the IRA owner has become a participant in a plan that one of them recordkeeps and, if so, the IRA money is transferred to that participant’s account in the plan.

However, it is more complex than that. Without getting all the way into the weeds (and there are some detailed requirements), two key issues are that (i) the IRA provider must acknowledge that it is a fiduciary for this purpose and (ii) the fees for that service are a prohibited transaction (PT) but SECURE 2.0 provides an exemption from the PT. While Section 120 of SECURE 2.0 establishes some of the conditions for the exemptive relief (e.g., the fees must be reasonable and disclosed), it also says that the DOL can require additional disclosures.

In its Spring 2023 Regulatory Agenda, the DOL included the following:

Section 120 of SECURE 2.0 Act of 2022 amends section 4975 of the Internal Revenue Code (Code) to add a statutory exemption for the receipt of fees and compensation by the automatic portability provider for services provided in connection with an automatic portability transaction, as defined. This regulation implements the purposes of these amendments. With certain exceptions not relevant here, section 102 of Reorganization Plan No. 4 of 1978 transfers all authority of the Secretary of Treasury to issue regulations, rulings, opinions, and exemptions under section 4975 of the Code to the Secretary of Labor.

In other words, the DOL is acknowledging that it needs to act in response to the provision in SECURE 2.0 that allows it to establish additional requirements for the exemption. In that regard, the DOL says, in the Regulatory Agenda, that the next step is to have “Stakeholder Meetings” . . . meaning that it is soliciting input from interested parties on what the additional disclosures, if any, should be.

Since the exemption created by SECURE 2.0 is December 29, 2023, it would be reasonable to anticipate guidance before that date.

While the work in implementing this rollover process will fall primarily on the IRA provider, working in cooperation with the recordkeepers that will share information, plan sponsors can expect to be approached for approval for their plans to participate in this type of arrangement. . . . As with any fiduciary decision, plan sponsors should investigate the arrangement—the services and fees—and satisfy themselves that it is prudent to provide the service to its nonresponsive participants. Plan advisers should be prepared to help the plan fiduciaries engage in that process.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.