In-Service Transfers

[Guest BruceC]

If I understand the regulations correctly, a Qualified Retirement Plan may allow for transfers to other QRPs, TIRAs or Roth IRAs as a conversion, while the employee is still working for the employer and otherwise eligible to participate in the QRP. And further, the criteria for in-service transfers may be for any non-discriminatory reasons, such as length of service, age or nature of the position. For example, in-serivce transfers could be limited to those who have been with the company for at least 10 years or who have attained age 60.....correct?

Conversely, could the QRP limit transfers once the person has separated from service up until RMD's? That is, is there anything in the code that makes it mandatory that former employee's be allowed to do direct or indirect rollovers of their vested plan holdings? Pub 575 is laced with "may" or "can" for plan distributions, but the only "must" I see is for plan RMD's. So in theory could a QRP not allow plan distributions until the employee's or beneficiary's (on death) first RMD?

I ask this becuase I'm getting an increased number of employees who are finding out that the annual expenses of their employer sponsored retirement plans are considerably greater than the expense rations reported by the plan's mutual fund investment options, and they'd like to be able to move their vested account balances to their own IRA as quickly as possible.

Thanks

BruceM

[J Simmons]

If I understand the regulations correctly, a Qualified Retirement Plan may allow for transfers to other QRPs, TIRAs or Roth IRAs as a conversion, while the employee is still working for the employer and otherwise eligible to participate in the QRP.

If I understand the regulations correctly, a Qualified Retirement Plan may allow for transfers to other QRPs, TIRAs or Roth IRAs as a conversion, while the employee is still working for the employer and otherwise eligible to participate in the QRP. And further, the criteria for in-service transfers may be for any non-discriminatory reasons, such as length of service, age or nature of the position. For example, in-serivce transfers could be limited to those who have been with the company for at least 10 years or who have attained age 60.....correct?

A qualified retirement plan (i.e. 401a) to qualified retirement plan transfer as decided by the employer and plan officials, not the employee, is permitted. Certain profit sharing plans are designed to permit in-service distributions of profit sharing contributions made by the employer after the dollars in questions have been in the plan for as little as two years. If so, the individual employee would have the option to take a distribution and have it rolled over into another qualified retirement plan, a traditional IRA or Roth IRA (if the employee is eligible that year for Roth conversion).

Conversely, could the QRP limit transfers once the person has separated from service up until RMD's? That is, is there anything in the code that makes it mandatory that former employee's be allowed to do direct or indirect rollovers of their vested plan holdings? Pub 575 is laced with "may" or "can" for plan distributions, but the only "must" I see is for plan RMD's. So in theory could a QRP not allow plan distributions until the employee's or beneficiary's (on death) first RMD?

A QRP may limit distributions for the time specified after separation from service; typically this is not after the plan's normal retirement age. However, as to benefits accrued under a QRP that did not have the delay in the plan documents at the time of accrual cannot later impose such a limitation later on those accrued benefits.

[Guest Sieve]

To clarify, only PSP & 401(k) contributions are permitted to be distributed earlier than attainment of normal/early retirement age or termination of employment (if the plan so permits). Pension benefits (either DC or DB) can only be distributed at termination of employment or attainment of NRA/ERA.

By law, a plan must allow distributions to a terminated employee no later than the later of (i) attainment of normal retirement age (or age 65, if earlier), or (ii) the 10th anniversary of commencement of participation (IRC Section 401(a)(14)--until then, no distributions are required (by law), even if termination of employment has occurred. (Of course, you need to check the plan document to determine if the plan requires such a wait for distributions or whether it permits distributions earlier.)

But, once distributions are permitted under the terms of the plan, then rollovers directly into another qualified plan or IRA must be allowed (at the request of the employee). (IRC Section 401(a)(31)(A).)

[K2retire]

To answer your final paragraph, in most cases current employees cannot withdraw money from an employer sponsored plan just because they think they can get a better deal elsewhere. If it is a 401(k) plan, they can certain choose not to invest any of their own money in the plan. But that will mean forgoing any employer matching funds.

[J Simmons]

To clarify, only PSP & 401(k) contributions are permitted to be distributed earlier than attainment of normal/early retirement age or termination of employment (if the plan so permits).

And at that, benefits from 401k contributions may not be distributed to an employee that is in-service and under age 59 1/2. IRC § 401(k)(2)(b); Treas Reg § 1.401(k)-1(d)

[GBurns]

It might help if you tell us what sort of Plan it is and whether public or private sector.

[Guest BruceC]

It might help if you tell us what sort of Plan it is and whether public or private sector.

As I mentioned, I ask this because I receive querries from employees with all forms of QRP's, not just 401(k)s

So in summary....

1. QRP's are not required to allow for in-service transfers, but may allow it, except pension plans ,which may not offer in-service transfers. If so, could an ER QRP be set up to allow EEs to transfer the 401(k) or PSP contributions the day after they are made to the EE's account?

2. Once separated from service, a QRP MUST allow former EE's to transfer vested plan assets not later than the earlier of the plan's FRA (or 65 if earlier) or by the 10th anniversary of the former EE's plan participation date. And I assume that later refers to the date the employee began working for the employer and would otherwise be eligible for plan participation if there were no 1 year waiting period and they worked >1,000 hrs/yr. In other words, the same starting year for determination of maximum vesting period..yes?

One other question: could the EE at the plan's FRA transfer his vested plan assets if is still working for the ER but just not able to participate in the plan, due to reduced working hours or ineligibility due to participation in another ER related plan (such as through collective bargaining)....or must the EE actually be physicially separated from service?

Thanks for your responses

BruceM

[J Simmons]

1. QRP's are not required to allow for in-service transfers, but may allow it, except pension plans ,which may not offer in-service transfers. If so, could an ER QRP be set up to allow EEs to transfer the 401(k) or PSP contributions the day after they are made to the EE's account?

DB and Money Purchase Pension Plans may not allow in-service distributions prior to reaching the plan's normal retirement age. A profit sharing plan may permit EEs to withdraw benefits from employer profit sharing contributions that have been in the plan at least 2 years, and 401k benefits once the employee reaches age 59 1/2 years.

2. Once separated from service, a QRP MUST allow former EE's to transfer vested plan assets not later than the earlier of the plan's FRA (or 65 if earlier) or by the 10th anniversary of the former EE's plan participation date. And I assume that later refers to the date the employee began working for the employer and would otherwise be eligible for plan participation if there were no 1 year waiting period and they worked >1,000 hrs/yr. In other words, the same starting year for determination of maximum vesting period..yes?

The term 'transfer' is a term of art in the realm of qualified retirement plans. What you seem to be referring to is known as 'rollover' because it involves each employee having an individual decision in the matter. That being said, it is the later of the plan's normal retirement age or 10th anniversary of participation. Participation date is the entry date after satisfying any minimum age and service conditions, while vesting counts from date of hire. They do not equate unless plan eligibility and entry is immediately upon hire (i.e., no minimum age, minimum service or delayed entry date required).

One other question: could the EE at the plan's FRA transfer his vested plan assets if is still working for the ER but just not able to participate in the plan, due to reduced working hours or ineligibility due to participation in another ER related plan (such as through collective bargaining)....or must the EE actually be physicially separated from service?

If the plan does not impose the 'later of normal retirement age or 10th anniversary of participation', then the employee that is yet in-service upon reaching the plan's stated normal retirement age may withdraw benefits (and if he chooses, roll them over into an IRA or other qualified retirement plan that allows). He may do so regardless of the hours he works.

[Guest BruceC]

Thank you! Your description is very helpful.

BruceM