Chapter 7...
Rollovers
Rollovers from a Previous Employer's Plan or Rollover IRA
Rollovers by Terminating Employees
Processing Rollovers
-- New Employee Rollover from a Previous Employer
-- A Terminating Employee's Rollover into an IRA or Another 401k
-- Processing Rollovers Via the "Activity" Window
-- Ex-Employee Accounts
A rollover is a tax-free transfer of all or part of a distribution from a qualified retirement plan to another qualified retirement plan or to a traditional IRA. A new employee might want to roll over money from a previous employer’s 401k plan or from a rollover IRA into your plan. Or a current employee, upon leaving your company, might want to roll over money from his or her 401k account at your company into another qualified plan or into a traditional IRA.
Your plan administration software's Asset Transfers-in Pac explains the policy for rolling over all or part of a distribution from a previous employer’s plan into your plan and provides the forms for doing so. Also, the 401k Distribution Pac (accessed via Reports, Forms--Outgoing Assets, 401k Distribution Pac) contains a Special Tax Notice that advises participants of important tax implications of their rollover decisions. You should review these documents with employees considering rollovers to ensure that the employees understand what is involved.
Rollovers from a Previous Employer's Plan or Rollover IRA
There are two significant benefits to the participant in rolling over his or her retirement savings into your company’s 401k plan:
• Combining retirement funds in the 401k will increase its dollar value and thus the amount the participant can borrow should a loan become necessary. Under current rules, borrowing from an IRA or ex-employer’s pension plan is not allowed.
• Combining assets in the 401k allows the participant to develop and implement a comprehensive long-term investment strategy and then track its performance.
IMPORTANT!!!Contributory IRAs cannot be rolled over into your 401k plan. Only IRAs that have only 401k assets can be rolled over. These latter plans, called rollover IRAs (also known as conduit IRAs), are ones whose only assets have come as a result of a participant’s termination from a qualified retirement plan. Contributory IRAs, by contrast, contain pre-tax funds elected by the participant to go into the IRA.
To initiate a rollover, the new participant requests an Asset Transfers-In Pac. He or she uses this form when the assets remain in the former employer’s plan or when they have been transferred to a rollover IRA as an interim measure. In this case, the employee never “sees” the money; the transfer is handled by the affected trusts.
The employee also uses the form if he or she took a lump sum distribution upon leaving the former employer. In this case, a mandatory 20% was withheld for tax purposes. The employee may roll over the remainder within 60 days after he or she receives the distribution. The employee may also make up the 20% that was withheld, depositing the full amount in your 401k plan. In this case, the 20% will not be included in the employee’s taxable income for the year.
If the employee’s assets remain with the former employer, he or she completes page 4 of the Asset Transfers-In Pac and sends it to the former employer. This page instructs the custodian to liquidate the account(s) and send the proceeds directly to you, the Plan Administrator, for deposit into the participant’s new 401k account. This transaction is tax-free and no backup withholding occurs.
IMPORTANT!!!Invalid rollover contributions can potentially result in disqualification of the plan that accepts them. However, a recent regulation offers you, the Plan Administrator, relief from this potentiality. You must “reasonably determine” that the rollover is valid on receipt, but you do not have to have a copy of a determination letter to do so. Additionally, if you find out later that the contribution was invalid, you must distribute it, along with earnings, to the employee within a reasonable period of time.
The employee completes pages 2 and 3 of the Pac and sends them to you. These pages tell you how he or she wants the rollover invested when it arrives. The participant can choose to have the rollover invested in accordance with his or her current options, or can select new investments.
If the employee is transferring assets from a lump sum distribution, he or she completes pages 2 and 3 and returns them to you. A check in the proper amount made out to the 401k plan trust should accompany the form.
Rollovers by Terminating Employees
The other occasion for a rollover is when a participant terminates employment with your company. The 401k Distribution Pac, is used in this case. The form discusses the distribution options, including rolling over the money into another employer’s 401k plan or into a traditional IRA. The IRA rollover can be a direct automatic rollover of the participant’s existing investment accounts into an IRA with the same investment account company or a rollover to a different IRA custodian.
A terminating employee can also elect to take a cash distribution and roll the money over into a new employer’s 401k plan or a traditional IRA within 60 days. This is handled by you as a distribution as described in Chapter 6; the mandatory 20% withholding, as explained in the Distribution Pacs, applies even if the employee says he or she intends to roll over the distribution.
If a participant dies and his or her spouse is the beneficiary, the surviving spouse can roll over the account balance into an IRA, but not into another qualified plan; if the beneficiary is a former spouse pursuant to a qualified domestic relations order (QDRO), he or she has the same options as the participant. Named beneficiaries other than spouses cannot roll over the distribution.
Rollover rules and the basic tax consequences of each on the recipient are explained in the Special Tax Notice within the Distribution Pacs. It is a good idea for the Plan Administrator to become familiar with the Special Tax Notice, but should always recommend employees take specific tax questions to a professional tax advisor.
New Employee Rollover from a Previous Employer
When you, the Plan Administrator, receive the distribution from a new employee’s rollover IRA or former 401k plan, you can process it immediately, or wait until you do the monthly processing of employee contributions.
The sequence is as follows:
1. Deposit the distribution check into the 401k trust bank account.
2. Determine the employee’s investment choices from his/her completed Asset Transfers-In Pac.
3. Complete the rollover transmittal using either the Rollover or Deposit to an Existing Account form (if the account has already been established) or Rollover or Deposit to a New Account form (if a new account is to be opened). Attach a check in the proper amount from the 401k trust bank account and send it to the investment account company.
4. Enter the rollover transaction into your plan administration software as described at the end of this chapter.
A Terminating Employee's Rollover into an IRA or Another 401k
For a terminating employee who wishes to roll over his or her 401k plan assets into a rollover IRA or a new employer’s 401k plan, the sequence is as follows:
1. The employee receives and completes the “Election for Distribution of 401k Benefits” in the 401k Distribution Pac.
2. If the employee chooses an automatic IRA, the Plan Administrator gives him or her an IRA application supplied by the investment account company. (It is a good idea to request multiple IRA applications from the investment account company and keep them on hand.) The signed and completed IRA application and signed IRA Rollover Authorization are sent to the investment account company. When the rollover is complete, the amount that was rolled over is entered as a distribution into your plan administration software as described at the end of this chapter.
3. If the employee chooses a rollover to a newly appointed custodian, when you, the Plan Administrator, receive the properly filled in and signed authorization for direct transfer, send a signed Asset Liquidation Authorization to the investment account company. When the check is received from the investment account company, deposit it into the 401k trust bank account, and issue a check out of the trust bank account to the newly-appointed custodian. The transaction is entered into your plan administration software as a distribution as described below.
Processing Rollovers Via the "Activity" Window
Rollovers into and distributions out of your plan administration software are entered through the “Activity” window for each employee. To access the “Activity” window, click on Employee Information in the “Welcome...” window. Highlight the employee’s name and click on Activity.
Choose New. The Entered On date will be today’s date (month, day, 4-digit year). The Posted to date is the month in which you want the transaction to take place (2-digit month and 4-digit year). Posted to Investment Account is the month it will be so posted.
Choose from the pull-down menu for Type what you are entering (rollover into or distribution out of the employee’s account). For Portfolio, enter the investment account choice, and enter the account number (if one is in the system it will automatically pop up). Then enter the dollar amount. If this is a distribution, use the minus (-) sign before entering the amount.
If the information is correct, click Post. The transaction is then posted, and you are ready to enter another.
By law, participants with balances over $5000 can leave their money in your 401k plan after they terminate employment with the company. A person who does so, however, may cause many unintended problems, including moving without giving you a forwarding address. They may also have difficulty changing investments. You, on the other hand, have the responsibility of trusteeing a former employee’s property indefinitely. For these reasons, we suggest you strongly encourage automatic IRA rollovers. “Your Money Is Still in Our 401k” can be sent as a reminder, along with a copy of the 401k Distribution Pac.
Terminated employees with LESS than $5000 in their 401k account can be cashed out, at the employer's discretion, without express written notice by the terminated employee. As of 2002, any portion of the employee's account balance that came from a rollover into the plan should NOT be considered in determining the $5000 balance.
