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PENSION
ADMINISTRATION and TRUST ACCOUNTINGNew Rollover Rules
Click - > Here is a handy link … A Rollover Chart
The new tax law greatly expands the
rollover opportunities for participants. As a plan sponsor, you should compare
the new rules with the rollover provisions of your plan and decide if you want
to amend your plan to include the new options.
Under the old law, a profit sharing
plan, for instance, could only receive rollovers from another qualified
retirement plan or from a “conduit” IRA. A conduit IRA is a holding tank for
qualified retirement plan rollovers-—it cannot receive any other type of
contributions from its owner. In the past, if a conduit IRA ever received
contributions from its owner other than rollovers from qualified plans, it
became tainted and the “taint” prevented any future roll back into a qualified
plan.
Under the new law, a qualified plan can
receive funds from any IRA—-whether or not there has been a commingling of
qualified plan rollovers and other IRA contributions. This major breakthrough
removes the need for “conduit” IRAs in most cases.
The new law also allows your plan to
accept rollovers from Section 403(b) tax sheltered annuities (TSAs) and Section
457 governmental deferred compensation plans (457 plans). Even after-tax
contributions in employer plans can be directly rolled into another qualified
plan—-if separate accounting is done. Also, according to the new law, a
participant in your plan who is a surviving spouse of a deceased participant in
another plan can roll over distributions into your plan.
Choosing these new options will probably
require a plan amendment. According to IRS Notice 2001-42, a plan sponsor that
chooses to implement any of the optional provisions under the new law will have
to amend its plan to conform plan provisions to plan operation. To assist you,
the IRS has issued model language to cover the additional types of plans from
which rollovers may be accepted. You will also need to inform your employees of
the changes to the plan.
Should your plan take advantage of these
optional provisions? We see no good reason not to (other than for after-tax
amounts, which require additional recordkeeping). For large and small plans
alike, it provides an additional employee benefit, helps you with recruitment,
and, for smaller plans the increase in plan assets may make the plan eligible
for expanded services and investments.
A word of caution. First, you will want to make sure the money coming into your
plan is a valid rollover. Under current law, you must “reasonably conclude”
that the contribution is a valid rollover contribution. The plan sponsor is
generally protected by relying on a determination letter or a representation
from the plan administrator of the distributing plan (see Treasury Regulation
1.401(a)(31) Q&A-14). We anticipate similar criteria will be applied under
the expanded rollover provisions.
Lastly, a note about
funds leaving your plan. While you are not
required to accept rollovers into your plan, you are required to provide
participants leaving your plan with a more comprehensive notice of their
expanded rollover options to other retirement vehicles. The IRS has issued
model language for your plan relating to direct rollovers and will issue a
revised model notice that will aid you in fulfilling this requirement.
The provisions discussed in this article
are effective for distributions made after December 31, 2001