Purchase of service credits from 403(b) transfer

[Guest ERISA_kid]

I have a 403(b)(7) custodial account in which the account owner would like to make a tax-free transfer to the state teacher's pension fund for purposes of purchasing service credits. I know that the transfer itself is permissible, but I'm unsure whether this transfer should be reported as a direct rollover on IRS Form 1099-R or should be treated like a non-reportable "90-24 transfer" (i.e. non IRS Form 1099-R tax reporting). Any insight would be greatly appreciated.

[Appleby]

Until you posted the question, I always assumed it would be a non-reportable trustee-to-trustee transfer---but your question made me take a closer look at the rules and now I am thinking it should be reported as a direct rollover, here’s why….

We know that the IRS often use the term trustee-to-trustee transfer to mean transactions where the assets are delivered directly from one trustee/custodian to the other- this could include non-reportable transfers and reportable transfers/direct rollovers. Most Custodians assume it is always used to refer to a non-reportable transaction- however, we know that is not always the case…case in point, Roth conversions and recharacterizations.

Also, the instructions for filing Form 1099-R make a point of noting when a trustee-to-trustee transfer must not be reported on a Form 1099-R. One example is when a trustee-to-trustee transfer occurs between two traditional IRAs…another is “ from one tax-sheltered (section 403(b)) arrangement to another”…no exception is made for a transfer from a 403(b) to a defined benefit plan…

The instructions also state that we should not “report transfers between trustees or issuers (unless they are direct rollovers from qualified plans)…”. ...….the instructions define a direct rollover as “ the direct payment of the

distribution from a qualified plan (including a governmental section 457(b) plan) or tax-sheltered annuity to a traditional IRA or other eligible retirement plan”.

Therefore, IMO, a trustee-to-trustee transfer between a 403(b) and a defined benefit plan is a direct rollover and must be reported on form 1099-R…

[Guest ERISA_kid]

Thank you for your insight.