Rollover from Defined Benefit Plan to Defined Contribution Plan

[Guest SCUDDESLER]

Company Alpha sponsors a defined benefit plan and a defined contribution plan. A participant in both plans terminates his/her employment with Company Alpha. Assume his/her accrued benefit and

account balance exceed their respective cash out limits. The participant would like to take a distribution from the defined benefit plan, in the form of a lump sum distribution, and roll that

amount into the profit sharing plan. The profit sharing plan is an eligible retirement plan. Since, at the time of the rollover, the individual is not an employee, can he/she make a rollover contribution to the profit sharing plan?

[david rigby]

From facts given, looks like a simple NO.

1. If the DB lump sum value exceeds the cashout limit, then the plan appears not to permit a lump sum distribution to this participant. Absent any other information, that should be enough to answer the question.

2. Also, the provisions of the DC plan will say whether it accepts rollovers. However, most plans that do so also include a requirement that the individual be an active employee of the sponsor.

[Guest Gravely48]

This situation is similar to one I've been asked several times. Say P is a participant in Plan X. P also maintains a conduit IRA. P no longer works for the Plan X sponsor, but would like to roll his/her conduit IRA into Plan X. The question I get is, "Can P do it, assuming there are no restrictions in Plan X?" The real question boils down to whether the law (ERISA or some section of the IRC) prohibit a nonemployee from rolling money into a former employers plan. My response has been that since qualified plans are established for the exclusive benefit of the sponsor's employees, it seems a nonemployee cannot make a contribition to a plan sponsored by an entity that he no longer works for (despite the fact that he is a participant in a plan sponsored by an entity that he used to work for). Any thoughts.

[david rigby]

Maybe. See IRC 401(a)(1). Includes the phrase "...for the exclusive benefit of his employees or their beneficiaries..."

IRS Reg. 1.401-1 http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html might include some flexibility. Subsection (a)(3)(ii) restates this "exclusive benefit characteristic". Subsection (B)(4) seems to acknowledge that former employees have a legitimate place in qualified plan.

My hunch is to question the motivation of the employer for permitting this.