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Eligible Rollover Distributions
Rev. 08/21/09; E-mail Alert 2009-13

Unemployment Compensation Act of 1992 created Code Section 401(a)(31) which is about direct rollovers and 20% mandatory withholding. Generally, all distributions from qualified plans are eligible for rollover, and if an eligible rollover distribution is paid to a participant it is subject to 20% mandatory withholding. A list of distributions that are not eligible for rollover (and hence not subject to mandatory 20% withholding) was included in the law and has continued to evolve. For example, some of the changes to the original list would be hardships are no longer eligible for rollover while nonspouse beneficiary distributions, as of 2010, are. Another change is that a direct rollover may now, since 2008, be made directly from a qualified plan to a Roth IRA. An “Eligible Rollover Distribution” is generally any distribution from a Qualified Retirement Plan except those listed on the following chart.

 

ELIGIBLE ROLLOVER DISTRIBUTION RULES
LIST OF TRANSACTIONS NOT ELIGIBLE FOR ROLLOVER

 
1. One of a series of substantially equal periodic payments made at least annually over:
  · The employee’s life or the joint lives of the employee and his/her designated beneficiary,
  · The life expectancy of the employee or joint life and last survivor expectancy of the employee and his or her designated beneficiary, or
  · A period of 10 years or more.
2. Required minimum distributions under 401(a)(9), (regardless of if there is a beneficiary named).
3. Distribution of cash in an annual total amount of less than $200.
4. Hardship distributions.
5. Distribution of only employer securities or only a participant loan distributed to the participant in kind is eligible for rollover, but not subject to withholding.
6.

Corrective distributions plus earnings:
  · excess annual additions,
  · excess deferrals,
  · excess contributions, and
  · excess aggregate contributions.
7.

Deemed distribution of a participant loan, 72(p). However, plan loan offset amounts can be eligible rollover distributions, 1.402(c)-2, Q/A-9.
8. Cost of current life insurance protection (aka PS 58).
9. Section 404(k) dividends.
10.

Nonspouse beneficiary rollover from qualified plan to inherited IRA:
  · Prior to 2007: this transaction not permitted, 
  · 2007 to 2009: PPA permits, IRS N. 2007-7: direct rollover transaction may be made, but not considered an eligible rollover distribution,
  · After 2009: WRERA changes nonspouse beneficiary rollovers into eligible rollover distributions as of 2010.
11. QDRO payment to an alternate payee who is not the employee, spouse or former spouse, for example, to the children.
12. A permissible withdrawal under Code Section 414(w).
13. Prohibited allocation of securities in an S Corporation that are treated as deemed distributions.
14. Distributions of premiums for accident or health insurance under Regulation 1.402(a)-1(e).

 

ADDITIONAL ELIGIBLE ROLLOVER DISTRIBUTION RULES

1. Required Qualified Plan Provision
All qualified plans must contain eligible rollover distribution provisions [(Code section 401(a)(31)] to permit the participant to roll all or any part of an eligible rollover distribution. However, qualified plans do not have to accept the contribution of a direct rollover that is from an eligible rollover distribution.

2. Mandatory 20% Withholding or Direct Rollover
"Eligible Rollover Distributions” from Qualified Plans are subject to a 20% Mandatory Withholding unless a direct rollover to another eligible retirement plan, such as an IRA or another qualified plan is arranged. In which case, 100% of the eligible rollover distribution may be moved to that plan.

Of course, “Eligible Rollover Distributions” must still have a triggering event occur in order for the plan participant to withdraw the funds from the plan.  Some triggering events include: termination from service, termination of the plan, attainment of retirement age in the plan, such as age 65, attainment of age 59 1/2, in-service and disability.  Exceptions to 20% Withholding:

  • All distributions not eligible for rollover (list above)
  • Making a direct rollover to an eligible retirement plan
  • Making a direct rollover to an IRA and taking a distribution from the IRA. There is no 20% mandatory withholding on an IRA distribution.
  • If the total of all eligible rollover distributions for the tax year is less than $200.
  • The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.

3. Direct Rollover of Pre-Tax and After-Tax Amounts
 A direct rollover into a traditional IRA or eligible retirement plan may include both amounts that would be taxable and amounts that would not be taxable if they were distributed to the participant, but not rolled over. To the extent the distribution is rolled over into a traditional IRA, it is not includible in the individual’s income. For more on portability, click here for our rollover chart.

Bill Grossman, ERPA, QPA

 

 

To learn more, call 973-492-1880 or e-mail info@mhco.com.

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