Administration October 29, 2019

Rollover Rules Between Different Plan Types

Retirement plan sponsors need to understand IRS rules for rollovers and what they should consider before accepting one.
Reported by
Art by Marcellus Hall

In general, retirement plan sponsors can accept rollovers from individual retirement accounts (IRAs) and other qualified retirement accounts, according to Larry Steinberg, chief investment officer at Financial Architects, Inc and an investment adviser at Claraphi Advisory Network, LLC. Likewise, sponsors of qualified retirement plans generally can permit participants to move money from their plan into an IRA or another qualified plan.

However, there are special considerations for rolling over Roth IRAs or Roth accounts in 401(k), 403(b) and 457(b) plans. And, there are special rules for rolling funds out of or into SIMPLE IRAs.

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Details about rollover rules can be seen in the IRS’ rollover chart. Also, certain types of distributions are not eligible for a rollover.

“However, what a specific plan can accept or roll over to will be determined by what is in that specific plan’s plan document,” Steinberg says. Retirement plans are not required to accept rollovers.

Before accepting a rollover from another qualified plan, plan sponsors need to ensure that the money is, indeed, coming from another qualified plan, says Diana Jordan, senior retirement plan consultant at Unified Trust. “Each rollover request situation could be different and may require different steps to determine the validity of the rollover contribution,” she says.

“An easy way to do this is to go to the Department of Labor’s website where all Form 5500s are filed, www.efast@dol.gov,” according to Jordan. “The rollover check could also include a stub or statement with the plan name and source of the funds.”

As well, sponsors need to ensure, according to the plan document, that the participant is eligible to participant in the plan before accepting rollover money. “Many plans have a 30-, 60- or 90-day waiting period,” Jordan notes.

The possible issue with this is that IRS rules require participants to invest money that is being rolled over to a qualified plan or an IRA within 60 days, says Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Services. If the participant fails to invest the money within that time frame, “the IRS deems that to be a nonqualified distribution, which it will tax at ordinary income rates and subject a participant younger than the age of 59-1/2 to the 10% early excise penalty,” says Brett Tharp, CFP senior financial planning analyst at eMoney Advisor.

Edelman says that instead of issuing a rollover check directly to participants, a best practice is for sponsors to advise participants to conduct a transfer, whereby the money is sent directly from the old recordkeeper to the new recordkeeper. This elimates the danger that the participant won’t meet the rollover deadline.

Plan sponsors also need to be aware that if a participant is rolling money over from a regular IRA or qualified plan account to a Roth IRA or Roth retirement plan account, he will need to have the money to pay the state and federal taxes. This is something that sponsors should educate participants about, Steinberg says.

Edelman says his firm is not a proponent of converting money to a Roth account for this very reason. “When you convert to a Roth account, you are going to have to pay taxes immediately on the full value of the account, and that seldom serves participants’ best interests,” he says.

The IRS chart does not include 401(a) plans. Rollovers are permitted from 401(a) plans to a qualified plan.

And, rollovers are permitted to and from 403(b) plans not subject to the Employee Retirement Income Security Act (ERISA)—as long as the plan document allows it.

Administration October 25, 2019

Undocumented Workers Become a Missing Participant Problem

Nothing in ERISA says an undocumented worker cannot participate in a retirement plan, but making a distribution to one could be a problem.
Reported by
Art by Brian Stauffer

It can happen and has happened—a retirement plan sponsor discovers an undocumented worker is participating in the retirement plan.

Eric W. Gregory, an attorney with Dickinson Wright in Troy, Michigan, tells PLANSPONSOR he has found that the Affordable Care Act (ACA) has diminished the instances of illegal immigrants obtaining a Social Security number and using it to get employment. “That mismatch between name and Social Security number could go undetected, but, with the ACA, employers send Social Security numbers to the IRS to show an employee has health care coverage, and the IRS is cross checking numbers against names. That has caused a lot of employers to get mismatched information from the IRS and has led to a rising level of employers finding out about false Social Security numbers,” he says.

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According to Gregory, the undocumented worker can’t be kicked out of the retirement plan just because it was discovered he was undocumented. There hasn’t been a lawsuit that has come out to say this, and the Employee Retirement Income Security Act (ERISA) doesn’t have any exceptions for workers who are not legally authorized to work in the United States.

In a blog post, Gregory noted that the Department of Labor (DOL) has taken the position that undocumented or under-documented workers are “employees” under the Fair Labor Standards Act (FLSA) and the Migrant Seasonal Agricultural Worker Protection Act (MSPA), but it has not done so explicitly in the context of ERISA.

“Most retirement plans include a ‘common law’ definition of ‘employee,’ which does not take into consideration whether a worker is authorized to work in the United States,” Gregory wrote.  “Therefore, unless a retirement plan has a specific exclusion for unauthorized workers or workers whose participation arose as a result of fraud, it appears to be inconsistent with both ERISA and plan terms to exclude those workers from participation, or cause them to forfeit their benefits.”

There still are ramifications for plan sponsors, though.

If a current employee is determined to be an undocumented worker, his employment will be terminated.

If an undocumented worker is vested in any retirement benefits, the time for a distribution will come. It may be that the retirement plan requires a cash out of small balances, or a former employee who was an undocumented worker will reach age 70 1/2—the current age at which minimum distributions are required.

In a best-case scenario, described by Gregory in Part II of his blog post, unauthorized workers may qualify as U.S. Persons merely based on the amount of time (legally or illegally) they have spent in the U.S. He said a plan sponsor may consider confirming that tax status by providing the participant with Forms W-8BEN, W-9 and W-7. The Form W-8BEN permits the participant to attest whether he is a U.S. Person and determine whether he will claim benefits under an applicable tax treaty. A Form W-9 gives the plan sponsor a record of the participant’s name, address, individual tax identification number (ITIN) or Social Security number (SSN), which may allow him to be treated as a U.S. Person, pursuant to rules for U.S. Persons. In case the participant is eligible to take advantage of treaty benefits, he will need to complete a Form W-7.

Often, though, an employee who is discovered to be undocumented, doesn’t want to be found, Gregory tells PLANSPONSOR. Or, an undocumented worker has moved, or been deported, to a place outside of the U.S.

According to Gregory, the IRS in audits has recently said plan sponsors can forfeit the retirement benefit of a missing participant and reinstate it if the participant shows back up, but the DOL says that’s a prohibited transaction. He says some employers just wait for the situation to resolve itself, following guidance on trying to locate missing participants.

Gregory points out that if the retirement plan sponsor and recordkeeper do not have a valid Social Security number of ITIN for a plan participant, a distribution cannot be made because one or the other is required for issuing a 1099R to the IRS and the participant. Gregory says it is unlikely for a worker to show back up at his employer saying he applied for an ITIN.

He explains: “When employers are required to make distributions to employees who have provided invalid Social Security Numbers, they are faced with a quandary because Internal Revenue Code Section 6109 generally requires that any person required to file a return, statement, or other document with the IRS must include an identifying number. That identifying number is generally a Social Security Number.”

In order to make distributions that are otherwise required to be made to individuals who have provided a false or incorrect Social Security Number who will not provide an ITIN, some employers have relied on previous guidance from the IRS that relates to W-2s. “That guidance suggests that employers should enter all zeroes in the Social Security Number field of a Form W-2 for reporting earnings for someone who was hired or worked in error when an accurate Social Security Number was not obtained. However, recordkeepers typically do not want to prepare 1099-Rs with missing Social Security Numbers,” Gregory says.

If a plan sponsor has issued a required distribution to an undocumented worker and the check is never cashed, the IRS has recently issued a Revenue Ruling saying plan sponsor’s still have an obligation to withhold and pay taxes on required distributions and report it on a 1099R.

Gregory says, “If a plan sponsor came to me, I would first want to know if it is dealing with a large or small group of employees. I would first suggest the plan sponsor ensure it is following immigration rules and determine whether it knows if the employee has an invalid Social Security number.”

He would first suggest the plan sponsor tell the employee or employees to fill out a Form W-7 to get an ITIN so a distribution can be made. But, he concedes they may not be eligible to get one. Plan sponsors should follow plan provisions with respect to when it is appropriate to make a distribution.

“If the employee doesn’t have a W-7 or if the employee has a balance larger than the automatic cash out limit, the plan sponsor is at the mercy of it recordkeeper about whether it can issue a 1099R,” Gregory says.

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