(b)lines Ask the Experts – Transfers vs. Rollovers

“What is the difference, and is this a significant restriction?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

The restriction on plan-to-plan transfers should not be significant, at least in the eyes of the participant. Plan-to-plan transfers are an OPTIONAL provision under the final 403(b) regulations, which means that a plan is not required to permit such transfers, However, plans are REQUIRED to allow an eligible rollover distribution to be rolled over to another retirement plan or IRA.

In fact, many plans do not permit plan-to-plan transfers, for the following reasons:   

1) Plan-to-plan transfers require greater administration when compared to a rollover. Among other issues, it must be verified that the receiving plan can accept a plan-to-plan transfer, and the applicable vendor contract must be reviewed to determine if a plan-to-plan transfer is permitted on the contract level, and whether any charges or restrictions apply.

2) For ERISA plans, certain sections of the Code and ERISA essentially conflict with the plan-to-plan transfer provisions. Though those fiduciary and other provisions are beyond the scope of this article, consider an example of one such conflict. Suppose a plan contains a Qualified Joint and Survivor Annuity (QJSA) provision whereby spousal consent is required for loans and any distributions that are not in the form of a QJSA. Imagine a participant whose assets are currently in an ERISA 403(b).  If there is a non-ERISA 403(b) plan, which is also maintained by her current or prior employer, he/she might circumvent the spousal consent provisions, by simply completing a plan-to-plan transfer of assets to a non-ERISA plan, where spousal consent would not be required for future loans/distributions.

3) Many individuals who would be eligible to complete plan-to-plan transfers are also eligible to complete rollovers as well.

The lack of a plan-to-plan transfer provision in many plans is offset by the requirement that rollovers be offered to move assets out of a 403(b) plan. It should be noted that one may only roll over an eligible rollover distribution, which means that an individual must be eligible for a distribution under a retirement plan in order to compete a rollover. If there is no distributable event (e.g. an in-service employee who is not at least 59 ½ years of age wishes to move assets), there can be no rollover. As a reminder, in-service distributions of elective deferrals prior to age 59 ½ are generally only available in the event of financial hardship, and hardship distributions are not eligible for rollover.    

If the plan is even more restrictive—for example, if all in-service distributions are prohibited—then rollovers for current employees out of the 403(b) plans of their current employer would not be possible. Distributions on certain types of employer contributions (as opposed to elective deferrals) may be less restrictive, but these are often more restrictive than the restrictions on elective deferrals.    

Thus, most active employees are not in a position to use rollovers out of the 403(b) plan of their current employers, and would not be able to move assets out of the plan to another plan at all if plan-to-plan transfers are not permitted. But the reality is that the vast majority of requests to move assets from one plan to another, or to an IRA, are made by former, rather than active, employees. It is for this reason that the lack of a plan-to-plan transfer option may have little impact to most plan participants.    

It should be noted, for participants who have participated in a plan for many years such that their plan assets may consist of per 12/31/86 annuity account balances grandfathered from the minimum distribution requirements and/or 12/31/88 account balances grandfathered from the distribution restrictions on elective deferrals, rolling over such account balances would eliminate such grandfathering. A plan-to-plan transfer, however, would preserve the grandfathering, so long as such balances continue to be segregated and clearly identified under the new contract.