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Rollovers to Qualified Retirement Plans

“My client changed jobs and was hoping to move at least a portion of his prior 401(k) plan balance to his new employer’s 401(k) plan? When he inquired about the rollover with the new employer, he was told that the plan cannot accept his rollover. I thought all qualified retirement plans had to offer rollovers. What could be the issue here?”  

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related to rollovers to qualified retirement plans.

Highlights of the Discussion

Some qualified plan distributions simply are not eligible for rollover (e.g., required minimum distributions, excess contributions, substantially equal periodic payments, etc.).[1]  But, in this case, I think the new employer may be refusing the rollover because its plan does not accept some or all rollover amounts—period.

While is it true that pursuant to Internal Revenue Code Section (IRC §) 401(a)(31) the IRS requires qualified plans to offer distribution recipients a direct rollover option of their eligible rollover distributions of $200 or more to an eligible retirement plan, it imposes no such requirement that an eligible retirement plan accept rollovers. Thus, a plan can refuse to accept rollovers if the language of the governing plan document does not address the ability of the plan to receive eligible rollover distributions. Even if a plan accepts rollovers of eligible amounts, a plan could limit the circumstances under which it will accept rollovers. For example, a plan could limit the types of plans from which it will accept a rollover or limit the types of assets it will accept in a rollover (See Treasury Regulation Section 1.401(a)(31)-1, Q&A 13). Plan administrators must apply their policies regarding the acceptance of rollovers in a nondiscriminatory and uniform manner to all participants.

Statistically speaking, 97 percent of all qualified retirement plans accept some types of rollovers.[2] That number declines based on the size of the receiving plan. It is more likely that a plan will limit the sources of rollover contributions. For example, 66 percent of all plans surveyed accept rollovers from IRAs; 46 percent accept rollovers from defined benefit pension plans; and 40 percent accept rollovers from governmental 457(b) plans.[3]

Some plans will limit when they will accept rollover contributions. For example, some plans make new hires wait until they satisfy the eligibility requirements to make deferrals before being eligible to bring in a rollover contribution.

The best guidance is to have your client confirm with the new plan administrator—perhaps through the HR Department—whether or not rollovers are allowed according to the plan document, and, if so, what type of contributions the plan will accept and when.

The IRS has a number of helpful links on its website covering rollover information; here are a few:

Conclusion

A plan can refuse to accept or limit rollovers coming in depending on the language of the governing plan document. When in doubt—check the plan document provisions regarding rollovers. Plan administrators must apply their policies regarding the acceptance (or nonacceptance) of rollovers in a nondiscriminatory and uniform manner to all participants.

[1] Treas. Reg.§ 1.402(c)-2(Q&A 3 and 4)

 

[2] Plan Sponsor Council of America, 61st Annual Survey, 2018

[3] Ibid

 

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Roth 401(k)s and the Five-Year Clock

“Can you explain how the ‘five-year clock’ applies to Roth 401(k) contributions?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related to designated Roth contributions in a 401(k) plan.

Highlights of the Discussion

Distributions of Roth 401(k) contributions (i.e., designated Roth contributions) can be taken tax and penalty free if the participant meets certain conditions for a “qualifying distribution.” A qualifying distribution is one that is made after a five-taxable-year period of participation (“the five-year clock”), and the participant has attained age 59 ½, has become disabled, or in the case of a beneficiary, following the participant’s death.

The five-year clock begins on the first day of the participant’s taxable year in which he or she first makes designated Roth contributions to the plan. If the first Roth contribution is a rollover of designated Roth contributions from another 401(k) plan, the starting of the five-year clock depends on whether the rollover is direct or indirect.

If the participant completes a direct rollover from a designated Roth account under another 401(k) plan, the five-year period is deemed to have begun on the first day of the taxable year that the employee made Roth 401(k) contributions to the other plan. In contrast, an indirect rollover contribution restarts the five-year clock under the receiving plan for a participant who has made no prior Roth 401(k) contributions to the receiving plan (Treasury Regulation 1.402A-1, Q&A 4).

Conclusion

Since the five-year clock for determining a tax-free, qualifying distribution of Roth 401(k) contributions begins on the first day of the participant’s taxable year in which he or she first makes a designated Roth contribution to the plan, it may be wise for a participant—if he or she has the option—to designate even $1 of elective contributions as a Roth 401(k) contribution right away in order to start the ticking of the five-year clock. And if a participant is rolling over Roth 401(k) contributions—a direct rollover is the only way to avoid restarting the five-year period.

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IRS Self Correction Program

“I’ve heard that plan sponsors now have more opportunities to self correct their retirement plans without IRS submission than before. Could you explain?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Texas is representative of a common inquiry related to a plan sponsor’s ability to self correct its retirement plan without any IRS filing or fees.

Highlights of the Discussion

New Revenue Procedure (Rev. Proc.) 2019-19, effective April 19, 2019, contains updates to the IRS’s Employee Plans Compliance Resolution System (EPCRS), primarily with respect to the Self Correction Program (SCP) contained within. The other correction programs under EPCRS are the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP). In the past, SCP was reserved for the correction of certain Operational Failures (i.e., failures in which the sponsor did not operate the plan according to the terms of the plan document). SCP is expanded under Rev. Proc. 2019-19 and, under specific criteria, now allows for self correction of

  1. Certain plan document failures for 401(k) and 403(b) plans;
  2. Certain plan loan failures; and
  3. More operational failures by plan amendment.

SCP-eligible plan document failures

Rev. Proc. 2019-19 was revised to allow self correction for 401(k) and 403(b) plans that fail to adopt a required or interim amendment timely. Keep in mind these document failures are always treated as “significant failures” in the IRS’s eyes. That means, in order to use SCP, the plans must be substantially corrected, in most cases, by the last day of the second plan year following the plan year of the failure (see Section 9 of the Rev. Proc. 2019-19).

EXAMPLE

A calendar-year plan missed an interim amendment that should have been adopted by March 15, 2018. The sponsor can correct under SCP no later than the end of 2020.

Plan document failures may be corrected under SCP only if the plan, as of the date of correction, has a favorable IRS approval letter (e.g., opinion, advisory, or determination). 403(b) plan sponsors must have timely adopted a written plan effective January 1, 2009, or have corrected the document already under VCP or Audit Cap.

SCP-eligible plan loan failures

Errors relating to the failure to repay a plan loan according to plan terms (a defaulted loan) may now be corrected under SCP. The correction methods are 1) a single-sum repayment of the loan, 2) re-amortization of the outstanding loan balance for the remaining loan period, or 3) a combination of the two.

The failure of a plan to obtain spousal consent for a plan loan, when necessary, may now be corrected through SCP. The plan sponsor must notify the affected participant and spouse, so that the spouse can provide spousal consent. If the plan sponsor does not obtain spousal consent, the failure must be corrected using either the IRS’s VCP or Audit CAP.

Finally, if a participant takes more loans from the plan than the governing document says he or she can, an Operational Failure occurs. The sponsor may choose to self correct this type of error by adopting a retroactive plan amendment.

SCP-eligible operational failures

Aside from those listed above, other operational failures may qualify for correction by plan amendment under SCP. In order to be eligible, the following three conditions must be satisfied:

  1. The amendment results in an increase of a benefit, right, or feature for participants;
  2. The increase is available to all eligible employees; and
  3. Providing the increase is permitted under the Internal Revenue Code, and satisfies the general correction principles of EPCRS Section 6.02.

Conclusion

Plan sponsors can use the expanded provisions of the SCP according to Rev. Proc. 2019-19 to correct more plan failures without having to file with the IRS and pay a user fee.

 

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