Rollover FAQs
Rev. 10/31/08; E-mail Alert 2008-14

Q. Do rollovers into a 401(k) plan from a SEP or a traditional IRA become “qualified plan” assets that are protected against creditors? Rev. 10/05/07, E-mail Alert 2007-13; Rev. 10/10/31; E-mail Alert 2008-14

A. Yes. Strangely, EGTRRA permits the rollover of a traditional IRA or SEP into a qualified plan, like a 401(k) plan. Once the IRA funds are in the qualified plan, they are treated as a rollover fund source just as a rollover from a 401(k) is treated. Thus, they are available for protection from creditors, loans and to purchase life insurance.


Q. An individual has been receiving the required minimum distribution (RMD) amount each year. This year, he requests $25,000 in addition to the RMD. Is the $25,000 an eligible rollover distribution subject to 20% mandatory withholding? Rev. 07/21/05, E-mail Alert 2005-14, Rev. 10/31/08; E-mail Alert 2008-14

A. RMD amounts are not eligible rollover distributions. Therefore, the 20% mandatory withholding requirement is not applicable. However, random distributions in excess of the RMD, such as the $25,000 in this case, are eligible for rollover to an IRA or an eligible retirement plan and, therefore, are subject to the 20% mandatory withholding.

Q. May an individual request that more than 20% of a rollover distribution be withheld? Rev. 07/21/07, E-mail Alert 2005-14

A. An individual who is personally receiving an eligible rollover distribution is subject to the 20% mandatory withholding requirement. However, if he or she wants a larger amount withheld-a flat dollar amount, for example, or a larger percentage (even up to 100% of the distribution)-the IRS rules require the payor to comply with the individual's request. Further, if an individual wants withholding on RMD distributions, the amount or percentage requested by the individual is to be withheld.



Q. May a retiring plan participant with a $1 million account balance that includes $80,000 in after-tax contributions request a direct IRA rollover of the pretax amounts only and take a distribution of the after-tax dollars? Rev. 05/12/05, E-mail Alert 2005-9

A. Yes. The Job Creation and Worker Assistance Act of 2002 (JCWAA) establishes an order for rollover amounts. Under the Act, an individual is permitted to first roll over pretax dollars. Once all pretax amounts are rolled over, the individual may directly roll over the after-tax dollars to another qualified plan or an IRA. In this example, as long as the participant arranges for the pre-tax amount of $920,000 to be directly rolled into an IRA, then the participant may either take the after-tax amount of $80,000 as a direct distribution or directly roll it over into the IRA.



Q. Must a rollover be included in the top-heavy account balance determination? Rev. 11/07/03, E-mail Alert 2003-21, Rev. 10/10/31, E-mail Alert 2008-14

A. If the rollover is from an unrelated employer after January 1, 1984, the answer is no. If the rollover is from a related employer, the answer is yes. If the rollover was made prior to January 1, 1984, the answer is yes.


Q. May I terminate the 403(b) arrangement and rollover accounts into the 401(k) plan? Rev. 04/11/02; Rev. 10/10/31, E-mail Alert 2008-14

A. Up until the final 403(b) regulations of 2007, the problem was that unlike a qualified retirement plan, termination of a 403(b) annuity contract or custodial account plan was not a distributable event. An employer may stop contributions; but, the employer must continue to administer the plan as a "frozen" plan until all assets are distributed. Plan assets may only be withdrawn when a distributable event such, as a participant’s separation from service, death or disability occurs. Thus, while individual participants can move their assets, an employer may not move the assets from §403(b) plans to qualified plans in bulk. In certain situations, participants had been able to transfer their accounts from their current 403(b) arrangement into another 403(b) annuity or custodial account. To do so, such a transfer had to occur pursuant to the rules described in Rev. Ruling 90-24, and the current 403(b) document must permit such transfers. The final 403(b) regulations have generally ended Rev. Ruling 90-24 transfers.
Update of November 9, 2007:
Note: The 2007 final 403(b) regulations change this answer. Provided the termination rules in the 2007 regulations are followed, a 403(b) plan termination now is a distributable event, permitting a rollover.