Rollover Rules Clarified
> Rev. 07/23/04, E-mail Alert 2004-15

When the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was enacted, it greatly enhanced the portability of distributions from tax deferred savings vehicles, including qualified plans. However, the practitioner community was left with some unanswered questions regarding the application of the new law. With the release of Revenue Ruling 2004-12, the IRS has provided guidance on the treatment of rollovers post-EGTRRA.

In particular, the Revenue Ruling resolves how the rollover from another type of tax deferred vehicle needs to be treated by the recipient plan. Items such as the application of the joint and survivor annuity rules, required minimum distributions, and the applicability of penalties for premature distributions are addressed. The Revenue Ruling applies only to those situations where the recipient plan separately accounts for rollover contributions.

Restrictions on Distributions
Generally, the rollover contribution will assume the attributes of the receiving plan; however, the contribution will not be subject to the distribution rules associated with that plan. Therefore, the terms of the plan document of the receiving plan will govern how the contribution is treated post-rollover.

Example 1

A participant receives a distribution from a Profit Sharing Plan that is rolled over to the new employer’s Money Purchase Plan. Although contributions to a Money Purchase Plan are usually not eligible for an in-service distribution, such a rollover will be eligible for in-service distribution, if separately accounted for and the plan document so provides.

Example 2

A participant rolls an IRA account into his employer’s Profit Sharing Plan. The Profit Sharing plan only provides for distributions upon the attainment of Normal Retirement Age or the death of the participant. Although IRA account distributions can occur at any time when the assets are held in the IRA, they cannot be distributed from this Profit Sharing Plan until one of the above distributable events occurs

It is important to note that the rule stated above is applicable only in the case of a “rollover” (including a direct rollover). Assets that are transferred from one plan of the Employer to another plan of the same Employer retain the attributes of the plan making the transfer .

Example 3

An employer merges their Money Purchase Plan into their Profit Sharing Plan. The assets that are attributable to the Money Purchase Plan remain subject to the Joint and Annuity Survivor requirements and the in-service distribution restrictions applicable to Money Purchase Plans regardless of distribution rules that apply to the Profit Sharing assets .

Funds transferred between §403(b) arrangements pursuant to Revenue Ruling 90-24 (“90-24 transfers”) are also an exception according to the Revenue Ruling. The 90-24-transfer rule states that when an employee transfers assets between 403(b) accounts, they must retain the most stringent withdrawal restrictions provided under the two contacts. However, funds that are rolled over due to the occurrence of a distributable event are not subject to the 90-24-transfer restrictions.

Joint and Survivor Annuity Rule Issues
If the Qualified Joint and Survivor Annuity rules apply to the receiving plan, those rules also will become applicable to the rollover contribution .

Example 4

A participant rolls funds from a Money Purchase Plan, which is subject to the Qualified Joint and Survivor Annuity rules, to a Profit Sharing Plan that has elected to be exempt from those rules. Spousal consent to the distribution of these assets was received at the time of the rollover. Any future distributions from the Profit Sharing Plan of these rollover amounts will be exempt from the Qualified Joint and Survivor Annuity rules.

Example 5

A participant rolls a distribution from a Cash or Deferred Profit Sharing Plan that is exempt from the Qualified Joint and Survivor Annuity rules into a Profit Sharing Plans that is subject to them. The assets attributable to the rollover, as well as the assets that originate in the new Profit Sharing Plan, are subject to the Qualified Joint and Survivor Annuity rules.

Required Minimum Distribution Rules
The assets that are rolled over become subject to the required minimum distribution rules associated with the recipient plan.

Example 6

A participant has an account balance in an IRA. The IRA required minimum distributions must commence no later than the April 1 st following the year in which age 70½ is attained. The account is rolled over to a Profit Sharing Plan. The participant is not a 5% owner of the entity sponsoring the plan. If the plan provisions of the Profit Sharing Plan allow the participant to defer the commencement of the required minimum distributions until the later of the April 1 st following age 70½ or actual retirement, the assets that originated in the IRA will be allowed this same treatment.

Additional Tax for Premature Distributions
The early distribution penalties and their exceptions will also apply to rollovers under the rules associated with the recipient plan.

Example 7

A participant, age 50, rolls funds from an IRA into a Cash or Deferred Profit Sharing Plan. The participant then requests and qualifies for a hardship distribution for the purchase of a principal residence from the Cash or Deferred plan. The distribution, which is taxable and not an eligible rollover distribution, is subject to the 10% premature distribution surcharge. However, if the funds had been left in the IRA they would have been eligible for the “first-time homebuyer” exemption from the 10% premature distribution penalty.

Distributions of assets from a §457(b) Eligible Deferred Compensation Plan sponsored by a governmental entity are exempt from the 10% premature distribution penalty tax. However, the Revenue Ruling clarifies that a rollovers into a governmental 457(b) plan that originate from any qualified plan that is subject to the penalty tax remain subject to that penalty tax upon early distribution.

Example 8

A participant in a Defined Benefit Plan rolls his lump sum payout into a governmental 457(b) plan. In a subsequent early distribution, assets attributable to contributions to the 457(b) plan are exempt from the 10% additional tax; however, the funds that were rolled into the 457(b) from the defined benefit plan remain subject to the additional tax.

In summary, Revenue Ruling 2004-12 has provided practitioners and accountholders with some needed guidance in the treatment of rollovers under the expanded portability rules of EGTRRA.