Editor’s Note: This is Part I of a two-part series.
The regulations effectively repealed Rev. Rul. 90-24 and significantly changed how and when 403(b) plan participants could change the investment of their 403(b) contracts/accounts. There has been much confusion as the marketplace has had to distinguish between “in service” exchange requirements and rollover requirements. There remains confusion about when a rollover out of the plan may take place and whether rollovers are mandatory plan features.
Accounting of rollovers has become a significant issue for 403(b) plans. Grandfathered (“unrestricted”) amounts may be lost if rollovers from one 403(b) plan to another are not separately tracked; that is, the rollover amounts will be subject to the withdrawal restrictions of the receiving plan unless there is separate accounting of the rollover amount in the receiving plan. Similarly, rollovers from another plan may become subject to the age distribution restrictions of the 403(b) plan, unless there is separate accounting of the rollover amount in the 403(b) plan and the plan document permits the segregated rollover amount to retain its unrestricted status and be eligible for unrestricted withdrawals at any time. While the ability to segregate and separately track rollovers is a good feature, not all product providers are capable of providing this service in all instances. Thus employers may have plans under which some providers may be able to segregate rollovers and others may not.
403(b) plan documents must permit eligible distributions from 403(b) plans to be directly rolled over into other eligible retirement plans. The Internal Revenue Code defines the types of plans that are eligible to accept direct rollovers from 403(b) plans. Participants may also choose to make indirect rollovers. Product providers, as payers of assets from 403(b) plans, should accommodate these requirements. It was recommended that plan documents also provide for rollovers into the 403(b) plan so long as the provider accepting the rollover could track the rollover contributions separately from other types of contributions, but this is a design decision of the plan sponsor.
Rollovers Into the Plan
Accepting rollovers into the plan is an optional feature which the employer may or may not include in its plan document. Employers are encouraged to include this feature in their plans, as it is a “low risk” feature and it gives participants a means to consolidate amounts from other plans, such as other 403(b) plans, 8 A direct rollover is the direct movement of all or some portion of a participant’s interest in a plan from the custodian, insurer or trustee holding the participant’s account to the custodian, insurer or trustee of another eligible retirement plan into which the participant wishes to have his account deposited. In this case, the participant does not receive the distribution and the amount is directly deposited into his or her new account under the new plan as a “direct rollover” contribution.
An indirect rollover occurs when a participant receives the distribution of his or her interest under the plan. The participant then has 60 days to redeposit all or any portion of the amount of the distribution into an eligible retirement plan. However, the participant will only receive 80% of the amount of the distribution because the law requires that 20% of any amount of an eligible rollover distribution that is not directly rolled into another plan must be withheld for federal income tax purposes. However, the participant may rollover up to 100% of the amount of the distribution (the 80% received plus the 20% withheld) into an eligible retirement plan within 60 days of receiving the distribution and qualify for indirect rollover status. Any amount treated as a direct rollover or as an indirect rollover defers federal income taxation until withdrawn.
If the plan permits rollovers into the plan, the document should specify that only providers that can accommodate separate accounting of amounts rolled into the plan should be permitted to accept rollover contributions under the plan.
The employer or its TPA must identify which product providers are permitted to accept rollovers under the plan and which are not. If the plan has any limits on rollovers (for example, if it restricts the source of rollovers to certain types of plans, or to a certain number of rollovers per year), the employer or TPA must inform the product providers of such restrictions.
Participants should also be advised of any restrictions on rollovers into the plan. Providers or the financial representatives should advise participants unless the TPA has been engaged to provide the communication and education services.
For “late rollovers”, rollovers made after the 60 day rollover period, the provider or TPA must have the employee certify the reason for the late rollover on a form prior to accepting the rollover into the plan. As a best practice, many providers, or TPAs have the employee certify all rollovers on a rollover certification form.
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 theBest Practices Guide for 403(b) and 457(b) Plans. Information about the Best Practices Guide for 403(b) and 457(b) Plans 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.