401(k): DOL Proposes Prohibited Transaction Exemption For Certain Plan Transfers

On November 7, 2018, the U.S. Department of Labor (“DOL”) issued a proposed exemption related to the consolidation of small retirement savings accounts in 401(k) plans and IRAs when workers change jobs. See “Notice of Proposed Exemption Regarding Clearinghouse, LLC (“RCH” or the Applicant) – Located in Charlotte, North Carolina”

Generally stated, prohibited transactions are certain transactions between retirement plans, such as 401(k) plans, and individuals or entities having a financial interest in these plans who are known as either “parties-in-interest” or “disqualified persons.” The DOL has the authority to periodically issue individual exemptions from the prohibited transaction rules in cases where it deems that the proposed exemption is in the interest of affected participants, and that appropriate safeguards have been set in place to prevent abuses.

The proposed individual exemption would permit automatic transfers of small 401(k) account balances (less than $5,000) from a “rollover” IRA containing an employee’s former employer’s plan balance, to his or her new employer’s 401(k) plan, provided the employee does not opt out. (Under the Internal Revenue Code (“Code”), participants having balances of more than $5,000 must consent to any distribution or transfer of their account balances.)

Essentially, RCH proposes an arrangement whereby employees, who have left their former employers and rolled their small 401(k) plan accounts into rollover IRAs (which transfers, under Code rules, also can occur automatically), are identified when they have become re-employed with a new employer. At such time, their rollover IRA balances are automatically rolled over into the new employers’ 401(k) plans.

RCH seeks the exemption because it receives a transfer fee in connection with its services, which, absent the exemption, would constitute a prohibited transaction.

Favoring the granting of the exemption is the policy concern that huge amounts of retirement money are lost each year due to “leakage,” which often occurs when employees withdraw their 401(k) balances of less than $5,000, and then fail to roll them over into an IRA or a new employer’s 401(k) plan.

If ultimately approved, the proposal should be popular with 401(k) recordkeepers, who are often eager to dispose of small accounts that cost more to administer than they earn in revenue.

Although individual exemptions technically apply only to the entity named in the application, most practitioners believe that, once granted, the exemptions would extend to other cases having the exact same facts and circumstances.

All proposed exemptions allow the public to present comments. Written comments and requests for a hearing should be sent to EBSA’s Office of Exemption Determinations, U.S. Department of Labor, 200 Constitution Avenue, NW, Suite 400, Washington, D.C., 20210, Attention: Application No. D-11938. Requests also may be sent either by e-mail to: e-oed@dol.gov, or by fax to (202) 693-8474. Such requests must be sent within 45 days from the date of the Notice, or by no later than December 24, 2018.

A DOL News Release provides additional information about the proposed exemption.