I just found out that we offer a product called a "forced IRA". If an employee with a 401K leaves their employer and does not transfer their funds out of the employer's 401K, the employer sends our bank a check for the 401K amount which we then deposit into an IRA account in the name of the former employee.

We don't ever see the employee, we aren't sure any of the information obtained from the employer is current and we now have an account that is not following our CIP policy.

Has anyone ever heard of this sort of account? I just don't know where to start on this one.

Thanks.

Start with whether it's even legal.

Usually, upon separation, it is up to the employee to establish an IRA for the transfer. If they fail to do that, the employer cuts them a check and it is categorized as a premature distribution. I would really question whether the 401K administrator is doing this correctly and why the bank would accept such deposits.

rlcarey,

You're probably right the 401(k) side, I've never administered a plan, only participated in some. That said, the employee has to establish the IRA account, and direct the distribution to that account.

The part of the 'forced IRA' that concerns me legally is the establishment of an IRA without the employee, then sending funds to an account that the employee hasn't opened.

Due to a change in the law about two years ago 401(k) plans are now allowed to force out certain participants to IRA's.

My bank accepts these deposits from a the Retirement Plans Division of our parent company.

The regulators addressed these accounts in CIP Q& A #2. These accounts are not considered new accounts under the CIP regulation at the time they are opened. They become covered by CIP at the time you have actual contact with account owner.

I'll admit to still being confused on this. The company opens an IRA account for the purposes of distributing 401(k) funds. Who is the owner of the account? I'm asking because clearly, the employee is not opening the IRA account, the employer is. What transaction makes the employee the owner of the account, and what transaction triggers CIP?

I believe the documentation I received after leaving my last job stated that only 401(k) accounts with less than $1,000 can be forcibly closed by the employer. Any account with more than 1,000 that has to be given a "reasonable amount of time" to close, but "reasonable" is not defined. If the employer does force close the account, they should be issuing a check to the employee for the funds minus the penalty and taxes (as rlcarey stated). It would be the employee's responsibilty to roll that money into an IRA and come up with the funds to offset the penalty and taxes to obtain full tax benefit of the contribution.

I would have to say I would not be pleased if my 401(k) was rolled by my former emplyer into a bank IRA not owned by me paying ~5%.

Here is what the IRS has to say.


Involuntary cash-out of benefits not more than dollar limit.

A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000.

However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit.

Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits.

For distributions made on or after March 28, 2005, a plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account, unless the participant chooses otherwise. The plan administrator must notify the participant in writing that the distribution can be transferred to another IRA.

Thanks for all the info!