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Rollover Only In-Service Distribution Option


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Can a plan allow for in-service distributions, but limit the distribution to a rollover to an IRA?  I realize this doesn't make sense, because once the money is in the IRA the participant can just take a distribution.  Also, they are not looking to avoid the 20% withholding.  The client wants to allow in-service distributions, but does not want to allow participants take their cash and go on vacation or whatever.   

My question then is whether there are any rules that would prohibit a plan provisions that would allow participants who are employed to request and receive a rollover distribution, but the employed participant cannot take that distribution as a taxable, cash distribution.  

They also do not want to have any in-plan IRAs.  

 

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In 2010, I wrote a provision that entitled a participant to an in-service distribution only if, among other conditions, “the Participant’s claim includes his or her instruction to pay the distribution as a direct rollover into an eligible retirement plan (including an IRA).”

 

A Form 5307 application disclosed this provision as a variation from the preapproved document.  With no question from the IRS, the applicant received its requested determination letter.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I think requiring a complete rollover of an eligible rollover distribution would violate 1.401(a)(31)-1 Q&A 9.
 

Quote

 

Q-. 9. Must the plan administrator permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder of that distribution paid to the distributee?

A-9Yes, the plan administrator must permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder paid to the distributee. However, the plan administrator is permitted to require that, if the distributee elects to have only a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover, that portion be equal to at least a specified minimum amount, provided the specified minimum amount is less than or equal to $500 or any greater amount as prescribed by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter. If the entire amount of the eligible rollover distribution is less than or equal to the specified minimum amount, the plan administrator need not allow the distributee to divide the distribution.

 

 

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This is interesting.  The EOB suggests that if the distribution does not meet the rules for a rollover, the IRS would treat the entire payment as a taxable distribution and then the amount that goes into the IRA would be an IRA contribution, not a rollover.  That makes sense.  Also, 1.401(a)(31)-1 Q&A 9 makes it clear that participants have to be allowed to take cash.  I think the IRS was saying a plan cannot force participants to take all cash, but the regs can clearly be read also to say the plan cannot force participants to take it all as a rollover.  

Can clients still submit their plans with a Form 5307?  I have lost track of the determination letter process.  I am using the FTW volume submittor.  

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14 minutes ago, ERISAAPPLE said:

This is interesting.  The EOB suggests that if the distribution does not meet the rules for a rollover, the IRS would treat the entire payment as a taxable distribution and then the amount that goes into the IRA would be an IRA contribution, not a rollover.  That makes sense.  Also, 1.401(a)(31)-1 Q&A 9 makes it clear that participants have to be allowed to take cash.  I think the IRS was saying a plan cannot force participants to take all cash, but the regs can clearly be read also to say the plan cannot force participants to take it all as a rollover.  

Can clients still submit their plans with a Form 5307?  I have lost track of the determination letter process.  I am using the FTW volume submittor.  

Peter's post was a bit of an eye opener to me. I wouldn't have thought it possible. If you use FTW, I would reach out to Brian Furgala, their new ERISA director, and ask for guidance.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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I don't see anything in the definition of eligible rollover distribution in 1.402(c)-2 Q&A 3 that would make a distribution ineligible for rollover if the plan tried to require all of the distribution to be rolled over.  (That doesn't surprise me since I read 1.401(a)(31)-1 Q&A 9 as saying you can't do that.)  I think the plan would have the problem, not the participant.  The distribution should still be an eligible rollover distribution.

Peter, what did that document say about rollovers? Our VS document has this language in the Rollover section:

"Direct Rollovers. Notwithstanding any provision in the Plan to the contrary, a Participant may elect, at the time and the manner prescribed by the Plan Administrator, to have all or any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan in a Direct Rollover.  ..."

Even if you changed the in-service distribution to require a rollover, it seems this language would still allow the participant to do a partial rollover.

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Kevin C, I likely never knew whether the recordkeeper’s preapproved document had a provision of the kind you describe.  (My client limited my scope.  And although I sometimes volunteer work beyond what my client will pay for, I remember that project having such a harsh time pressure that I wouldn’t have taken time to read the document, or to think about any potential inconsistency with the tax-law rules mentioned above.  My scope did not include considering whether the plan was tax-qualified, even in form, and did not include representation before the Internal Revenue Service.)

 

But one imagines a preapproved document likely included such a direct-rollover provision.  Perhaps the IRS’s reviewer didn’t see the inconsistency some BenefitsLink mavens see.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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15 hours ago, ERISAAPPLE said:

Can a plan allow for in-service distributions, but limit the distribution to a rollover to an IRA?  I realize this doesn't make sense, because once the money is in the IRA the participant can just take a distribution.  Also, they are not looking to avoid the 20% withholding.  The client wants to allow in-service distributions, but does not want to allow participants take their cash and go on vacation or whatever.   

My question then is whether there are any rules that would prohibit a plan provisions that would allow participants who are employed to request and receive a rollover distribution, but the employed participant cannot take that distribution as a taxable, cash distribution.  

They also do not want to have any in-plan IRAs.  

 

It is an "interesting" question, but clearly a stupid request.  It will take five minutes for any employee to figure out they could set up an IRA at their bank, move the money and take it the next day.  It's just an enormous waste of time and effort (even if it is permissible, which I do not believe is the case but I am also not going to do the research on this one to prove it is ok).  The client needs to be counseled on the stupidity of such a move, even if it were permissible (and I would explain it is not).  

Modifying a plan document does not guarantee that the language would pass a challenge by the employee.  The reviewer of the language might not have caught it, and if it is wrong, then it just means their approval will prevent disqualification.

Just tell the client NO.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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3 hours ago, Larry Starr said:

The reviewer of the language might not have caught it, and if it is wrong, then it just means their approval will prevent disqualification.

Larry is dead-on here, just because a d-letter was received does not mean the IRS didn't make a mistake in not catching it, and they can subsequently reverse that oversight and make the plan sponsor correct.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Someone asked whether you can submit a Form 5307 at this time.   Form 5307s can be submitted only during an applicable 2-year restatement window:  Section 13.03 of Rev Proc 2017-4.   I did not check to see if the RP 2018-4 also has that provision, but that requirement has been in that series of annual determination-letter Procedures for a few years, and I suspect it is in the current Procedure.  Presumably you can ask for retroactive reliance on a modification when you submit your modified preapproved plan, in which case, you probably only want to do so for provisions where you are reasonably sure retroactive reliance will be granted.   I have also heard of the IRS rejecting applications because the change was not significant enough, which is understandable on some facts, but I have no clear understanding of where they draw the line (assuming that they have a clear understanding of where to draw the line).

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