ROLLOVER DIRECTION – Revenue Ruling OKs Direct Rollover as Default

July 17, 2000 ( - Plan sponsors will find a bit more leeway in handling distributions, thanks to Revenue Ruling 2000-36. Currently, most plans simply distribute small distributions in cash to terminating participants, unless instructed otherwise by the participant. The Ruling clarifies circumstances under which a plan may establish a direct rollover as the default method of payment without running afoul of the law.

The Revenue Ruling outlines circumstances in which a participant separates from service and is eligible to receive a distribution of less than $5,000.

In the situation described, the plan is amended so that the default payment method is a direct rollover to an Individual Retirement Account (IRA), unless the participant elects otherwise.

The plan amendment is permissible since the default status of an optional form of benefit is not a section 411 (d)(6) protected benefit, according to the Ruling.

The Ruling does assume that:

  • each distributee will receive an explanation of the default procedure and the direct rollover option within specified time periods
  • provisions governing this procedure, including the ability to affirmatively “opt out” by the participant must be described in the plan’s summary plan description.

Note that the selection of an IRA trustee, custodian or issuer and IRA investment for purposes of this default direct rollover would constitute a fiduciary act.

– Nevin Adams

The full text of the Revenue Ruling is posted below:

Revenue Ruling 2000-36

Part I

Section 411. — Minimum Vesting Standards

26 CFR 1.411(d)-4: Section 411(d)(6) protected benefits. (Also, section 401; section 1.401(a)(31)-1.)


Will an amendment to change the default method of payment to a direct rollover for involuntary distributions when a distributee fails affirmatively to elect to make a direct rollover or to elect a cash payment under the facts described below cause the plan to fail to satisfy section 401(a)(31) or section 411(d)(6) of the Internal Revenue Code?


Employer X maintains Plan A, a qualified defined contribution plan that does not include any after-tax contributions or other amounts that would not be included in gross income upon distribution. Plan A provides for an involuntary distribution to an employee upon separation from service if his or her vested account balance is $5,000 or less. Plan A includes a direct rollover option for all distributions. Plan A provides that if a separating employee’s vested account balance is $5,000 or less, and the separating employee does not elect a direct rollover either to another qualified plan or to an individual retirement arrangement (“IRA”), the vested account balance is to be paid in a single sum cash payment to the employee.

Employer X amends Plan A to provide that the default form of payment of any involuntary cash-out from Plan A greater than $1,000 but less than or equal to $5,000 will be a direct rollover (an eligible rollover distribution that is paid directly to an eligible retirement plan for the benefit of the distributee) to an IRA, but that separating employees will instead receive a cash payment if they so elect. Under the amendment, this default direct rollover applies only if the separating employee fails to request affirmatively (1) a cash payment to that employee or (2) a direct rollover to another qualified plan or an IRA designated by the separating employee. The amendment also provides that in the case of a default direct rollover, the plan administrator will select /1/ an IRA trustee, custodian, or issuer (the “trustee”) that is unrelated to Employer X, establish the IRA with that