Beginning March 28, 2005, new mandatory rollover rules go into effect for distributions from qualified retirement plans. These new rules make an IRA rollover the default distribution option for small distributions to participants who fail to elect how their distribution should be paid. When a retirement plan participant terminates employment the plan is allowed to distribute the participant’s vested balance without the participant’s or the participant spouse’s consent if the participant’s vested balance does not exceed $5,000 and the participant has been given the opportunity to elect to receive payment of the amount or roll over the benefits without tax or penalty to an individual retirement account.
In the past, many Plan Sponsors simply did involuntary cash-outs by issuing a check, net of 20% federal income tax withholding, directly to the participant. Beginning March 28, 2005, mandatory distributions of more than $1,000 but not more than $5,000 must instead be rolled over to an IRA established for the participant if the participant fails to elect to cash distribution or a rollover following receipt of an explanation of the automatic rollover provisions.