Editor’s Note: This is the second of a two-part series. Part 1, “Rollovers into the Plan,” is available here.
There remains confusion about when a rollover out of the plan may take place and whether rollovers are mandatory plan features. Following are important tips about them.
- The plan must permit participants to make a direct rollover of an eligible distribution. It is not an optional feature. Once eligibility for a distribution is confirmed, the employer has no further involvement in the transaction. However, a rollover may not be made until an eligible event authorizing a distribution has occurred. Participants may also make indirect rollovers.
- The direct rollover avoids the 20% federal income tax withholding which must otherwise be taken from the distribution and which then must be made up by the participant if she or he rolls the distribution within 60 days – an “indirect rollover.”
- The payer of a distribution must provide written notice to the participant prior to a distribution that is eligible to be rolled over that the rollover may be made directly to another provider, another type of plan or to an IRA. For 403(b) purposes, this means that the product provider must provide this notice. The IRS has provided a sample notice for this purpose.
- The IRS has issued sample rollover notices which may be used as a “safe harbor” notice to comply with the notice rules. (IRS Notice 2009-68 contains two notices, one which applies to distributions from designated Roth accounts and one which applies to distributions from non-Roth accounts.) Current copies of these notices may be downloaded from the IRS website at www.irs.gov.
- The employer should confirm that its providers have procedures in place to issue these required written notices to the participants.
- 501(c)(3) employers seeking to preserve the ERISA exemption should ensure that their authorized product providers will review and approve all rollovers and will provide the required rollover notices and tax reporting.
- Product providers should make sure that distribution forms have been updated to reflect the option for the taxpayer to “designate” where the rollover monies will be deposited specially if there are after-tax monies in the plan. So, for example, if a portion will be rolled over to a traditional IRA and a portion to a Roth IRA. This change was effective for distributions made after Dec. 31, 2014 for non-Roth monies and after Dec. 31, 2015 for the designated Roth accounts.
Bill Fisher is a member of the NTSA Leadership Council, serves as Chair of the NTSA Professional Education Committee, and is Director of Business Development for PenServ Plan Services, Inc.
More information on communicating a 403(b) plan to employees, as well as a host of other topics relevant to running and building your practice, can be found in the Best Practices Guide for 403(b) and 457(b) Plans. Information about the Guide is available here.
For a complete guide to 403(b) and 457 plans, contact NTSA for information on The Source, a reference manual for internal staff, advisory firms, TPAs, broker-dealers, and employers.