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:

• Rollovers of Retirement Plan and IRA Distributions
• The Rollover Chart
• Topic No. 413 Rollovers from Retirement Plans

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, 61^st Annual Survey, 2018

[3] Ibid