(b)lines Ask the Experts – Rolling 403(b) Funds Back to a Prior 403(b)

“An employee left our charitable foundation to work for another. When she left, she took a distribution and rolled it over to the plan of the other foundation. However, after a few months, she decided that the new position was not for her, and, since we had not filled her position yet, we made her an offer to return, which she accepted. Can she roll the funds that she rolled over to her new employer’s 403(b) plan right back to our 403(b) plan?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Yes she can roll the funds back to your plan via the same direct rollover transaction that she used to roll over funds to the other employer’s plan, assuming that your plan accepts rollovers. However, your returning employee will want to confirm that she will not be charged to move her funds back to your plan, since: a) some plans have surrender (withdrawal) charges depending on the type of investment used, though this fee is often waived at termination of employment, and b) some plans charge a flat dollar fee for each distribution, and such a fee is often NOT waived for termination of employment. In those situations the employee may wish to consider leaving her funds in the plan of the other employer (if permitted) rather than incurring a charge to roll the funds over.

In addition, you’ll want to thoroughly document the circumstances of her termination of employment and rehire so that, in the event that your plan is ever subject to an IRS audit, the IRS is assured that the termination and rehire was legitimate and not a “sham” termination/rehire designed to provide a participant with access to retirement funds (since the rollover funds in your plan will generally be available for withdrawal for any reason, subject to the specific terms of your plan).

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.