Increased Portability of Rollovers

08/01/2001

The Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”) greatly enhances the ability of individuals to rollover their retirement benefits among the various types of tax qualified plans, tax-sheltered annuities (403(b) plans), and 457 governmental plans. The Act also will require certain mandatory rollovers to designated IRAs.  This Client Alert focuses on the impact of the Act on rollovers.
 
Current Law Affecting Rollovers
 
Presently, distributions from one type of plan can only be rolled over to the same type of plan or, in the case of a qualified plan or a tax-sheltered annuity, to an IRA.  Except for special conduit IRAs, IRAs can now only be rolled over to another IRA.
 
Increased Portability of Rollovers Enacted by the Act
 
For distributions made after December 31, 2001, distributions from one type of plan, including tax qualified plans, tax-sheltered annuities, 457 governmental plans, and IRAs, can generally be rolled over to any other type of plan.  Moreover, in addition to rollovers to an IRA, surviving spouses can roll over distributions to a qualified plan, a tax-sheltered annuity, or a governmental 457 plan in which the surviving spouse participates. The Act also allows after-tax contributions to be rolled over to another qualified plan or an IRA, but only in a direct rollover.  Finally, the Act allows the IRS to waive the 60-day period during which a participant must complete a rollover distribution if the failure to waive such requirement would be against equity or good conscience, e.g., in the event of a natural disaster or other events beyond the reasonable control of the participant.  A new rollover explanation notice will be issued for plans to distribute to participants entitled to distributions.
 
Mandatory Rollovers to Designated IRAs
 
Once the Department of Labor finalizes regulations (and not until then), the Act will require an automatic rollover to a designated IRA for involuntary distributions that exceed $1,000 and are less than $5,000 unless the participant elects a different distribution. The participant must be given written notice of the default rollover option.  The plans’ fiduciaries will retain fiduciary responsibility for the rolled-over benefit until the earlier of (1) the date all or a portion of the participant’s benefit is rolled over from the designated IRA to another IRA or (2) one year from the date of the rollover.  The Department of Labor is directed to prescribe regulations that provide safe harbors under which the selection of an IRA is deemed to satisfy ERISA’s fiduciary requirements, and these automatic rollover provisions will not become effective before such regulations are final.
 
Special 403(b) Rollover Rules

 
Effective for all distributions made after December 31, 2001, the Act has made the following changes which relate solely to 403(b) plan rollovers:

  • Current law prohibits a participant in a 403(b) annuity from making a tax-free rollover to or from a 457 plan or a traditional qualified plan. However, the Act changes this rule to permit a participant in a 403(b) annuity to roll over an eligible distribution to or from another eligible retirement account, which includes another 403(b) annuity, a 457 plan, a traditional qualified plan and an IRA.  Plans will be required to report rollovers to or from the 403(b) annuity to the IRS in the same manner as is required of other traditional qualified plans and will be required to comply with the same restrictions and guidelines applicable to rollovers from IRAs and traditional qualified plans, including providing a written explanation of the applicable rollover rules to individuals receiving a distribution.
     
  • In addition to the foregoing, the Act also permits an employee to rollover eligible rollover distributions from an IRA to a 403(b) tax sheltered annuity.  After-tax contributions continue to be ineligible for rollovers from an IRA to a tax-sheltered annuity.
     
  • The Act has changed the content of the notice that a plan must provide to recipients of eligible rollover distributions. Although the new notice rule applies to distributions made after December 31, 2001, no penalty shall be imposed for the failure to provide the additional information required by this amendment for any distribution made prior to 90 days after the IRS issues a revised safe harbor rollover notice.

Special 457 Plan Rollovers
 
Effective for all distributions made after December 31, 2001, the Act makes the following changes to the rules regarding rollovers:

  • Current law prohibits a participant in a Section 457 plan from making a tax-free rollover to or from another 457 plan or to or from a 403(b) annuity, a traditional qualified plan, or an IRA. The Act changes this rule for governmental 457 plans to permit a participant in a governmental 457 plan to roll over an eligible distribution to or from another eligible retirement account, which includes another 457 plan, a 403(b) annuity, a traditional qualified plan and an IRA.  These new rollover rules do not apply to nongovernmental 457 plans.  457 plans are required to report rollovers to or from the 457 plan to the IRS in the same manner as is required of other qualified plans and will be required to comply with the same restrictions and guidelines applicable to rollovers from IRAs and traditional qualified plans, including providing a written explanation of the applicable rollover rules to individuals receiving a distribution eligible for a rollover.
     
  • The Act also permits an employee to rollover eligible rollover distributions from an IRA to a 457 plan. Nondeductible, after-tax contributions made to an IRA are ineligible for rollover to a 457 plan.

Special Rule
 
Individuals born prior to 1936 may be entitled to special tax treatment of their distributions.  These special tax treatments will be lost if the individual rolls amounts from a qualified plan which has such special treatments to either a 403(b) plan or a 457 plan.
 
If you have any questions about the Economic Growth and Tax Relief Reconciliation Act of 2001, please contact one of the authors listed at the top of the page.

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