EGTRRA portability--are there some types of rollovers a Plan should NO

[Guest Dan Gould]

Because Plans--apparently--have to affirmativly the types of transfers and rollovers they will and/or will not allow under the new EGTRRA portability rules, are there types of rollovers or transfers that a governmental 401(a) DC Plan and a 403(B) Plan should NOT accept? If so why not?

As one example, if an employee's former Plan allows after tax contributions should, should the current employer say no to the transfer or rollover of the after-tax portion of a current employee's rollover from that employee's former Plan?

As a second example, what would be the downside of a Plan Sponsor saying that ANY transfer or rollover of ANY sort from ANY other IRA, TDA or qualified plan is allowed?

[Carol V. Calhoun]

I don't think that there is any universal answer to this; a lot depends on the type of plan, and the circumstances.

For example, many defined benefit plans do not normally allow rollovers, but may permit them for the limited purpose of purchasing prior service credit. Under these circumstances, the plan may for administrative reasons refuse any rollover or transfer which is not in the exact amount necessary to purchase a particular unit (e.g., one year) of service credit.

After-tax contributions may be an issue if the plan does not otherwise allow them, because the plan may not have set up mechanisms to differentiate between pretax and after-tax contributions upon ultimate pay-out.

In other circumstances, however, a plan may want to provide the maximum flexibility to employees, and may have the administrative capabilities to do so.

And of course (I'm sounding like a broken record here!), you would have to look at applicable state and local law to make sure that they did not impose restrictions beyond those imposed by federal law. I am informed, for example, that some state laws limit the rollovers that can be accepted to rollovers from other qualified plans, in accordance with federal tax law prior to EGTRRA. This may prevent rollovers from 403(B) or 457 plans, even if federal law would otherwise allow them.

[Guest Tom Geer]

An additional issue is the premature distributions penalty, which does not apply to 457 money. If a non-457 takes 457 money, it apparently becomes subject to penalty. If a 457 takes non-457, it needs to subaccount to track application of the penalty, with potentially increased costs. Last, unless the plan already has post-tax money/tax basis, accepting rollovers of after-tax amounts could increase costs.