As participants become more engaged in the retirement process, they are increasingly likely to consolidate their retirement plan balances from prior employers into their current retirement plan. This benefits the participant by simplifying their retirement picture and it can benefit the Plan by increasing the average balance in the plan which often leads to reduced costs.
However, before allowing the rollover to occur, the Plan Sponsor must ensure that the funds are eligible for rollover into the Plan. Enter the IRS and Revenue Ruling 2014-9. Issued on April 4, 2014, Revenue Ruling 2014-9 offers guidance on this topic. By citing several examples in the Revenue Ruling, the IRS hopes the guidance will help Plan Sponsors satisfy their due diligence when determining if the funds are eligible to be rolled to their retirement plan.
As a Plan Sponsor, you must determine if the funds rolled to your plan are from a qualified plan. Here are some examples of what steps you can take to ensure you satisfy this requirement:
- Access the Form 5500 for the prior employer on the DOL’s EFAST2 website and see if the tax form indicates a Code 3C. Code 3C represents a plan that is not intended to be qualified under IRC Section 401, 403 or 408. If Code 3C is not reflected, then the funds are from a qualified plan and may be accepted.
- If the check is issued to the Trustees of your plan and is from the Trustees of the prior plan, you may rely on this when determining if the funds are from a qualified plan.
- When a check is issued from an IRA Trustee to the Trustees of your plan, verify the information on the check to identify the source of the funds. Retain a copy of this information for future reference.
- In the case of a participant who is over age 70½, you should confirm the participant took the Required Minimum Distribution (RMD) prior to rolling the funds to your plan. If the rollover is a plan-to-plan rollover, it is reasonable to conclude the RMD was taken prior to the rollover. When dealing with an IRA Rollover, there may be some additional confirmation may be required.
- If your plan does not allow for Roth contributions, you need to be sure the funds rolled into your plan do not include any Roth contributions.
- If a participant wants to roll their SIMPLE IRA into your plan, there are specific restrictions imposed on the SIMPLE IRA for this type of rollover.
- Rollover from a Traditional IRA may only be pretax funds.
If you determine at a later date the plan accepted a rollover that is deemed to be a qualified distribution, you need to contact your Third Party Administrator or Recordkeeper immediately. The funds (and income earned) must be removed from your plan promptly. Documentation of this error and the action taken to correct the issue should be retained for future reference.
Allowing employees to roll money into the plan is a great benefit to your employees, but remember to make sure the money qualifies so you don’t put your Plan in jeopardy.
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Written by: Teresa J. Leonard, QPA, QKA, ERPA, Vice President, Retirement Plan Services