Is this a 401k transfer or rollover? And reporting requirements.

[Guest Carl C]

I'm below retirement age, currently with employer A, and participating in their 401k plan, all funds 100% vested. I'm considering starting my own company, company B, with just myself as the sole employee (sub-S corp.), and leaving A. Company B will have a Solo 401k plan.

If and when I do this, I'd be moving my 401k funds (all cash) from A to B, through a direct trustee to trustee /FBO transfer.

The question, is this considered a transfer or a rollover? What's the difference?

Are there any IRS reporting requirements (1099-R, Form 5498?) on behalf of the trustee of company A? In the Transfers section of the IRS 1099-R instructions it appears to say that direct trustee to trustee transfers not involving payments or distributions of funds to the participant don't have to be reported. But further down in the instructions, under the Guide to Distribution Codes chart, it appears that employer A would have to report on a 1099-R using code G, Direct Rollover and Rollover Contribution. (I'm hesitant on asking our plan administrator, because it would tip them off that I MIGHT be leaving the company).

Also, are there any reporting requirements of company B once they've received the funds?

I guess what's confusing as a layman are how the terms transfer, rollover, and distribution are used and defined in the eyes of the IRS.

CarlC

[Bird]

It's a "distribution" in which you elect to "roll over" your account by a "transfer."

(It's a rollover for tax/reporting purposes.) It is, truly, a distribution from Plan A that happens to be a rollover. Any payout from a plan to or for the benefit of a participant is a "distribution" from that plan, for purposes of the plan's income statement.

A trustee-to-trustee transfer is generally a transfer from IRA A to IRA B (typically initiated through the back door by IRA B's custodian). You can't do that in a qualified plan because the distributing plan must generally provide certain notices and get the participant's (and maybe spouse's) approval for the transfer. But don't feel bad because financial institutions don't understand and try this (initiating a "transfer") all the time.

[Spencer]

Are there any IRS reporting requirements (1099-R, Form 5498?) on behalf of the trustee of company A?

Employer A (or the financial institution) should prepare a 1099-R, code G, Direct Rollover and Rollover Contribution. Because it is a rollover, the taxable amount will be zero.

Also, are there any reporting requirements of company B once they've received the funds?

NO.

[masteff]

In the Transfers section of the IRS 1099-R instructions it appears to say that direct trustee to trustee transfers not involving payments or distributions of funds to the participant don't have to be reported.

(I'm hesitant on asking our plan administrator, because it would tip them off that I MIGHT be leaving the company).

1) Further in the paragraph on Transfers it says, "However, you must report ... Direct rollovers from qualified plans". This is a direct rollover from a qualified plan.

2) Sorry if I'm stating the obvious but you're not responsible for preparing the 1099-R, Plan A does that and sends you a copy which you use to correctly file your tax return (see instructions for lines 16a & 16b of Form 1040).

[ESOP Guy]

I little off topic, and it might not apply to you. But just in case a little warning. In this economy people are starting their own company and moving 401(k) money into the company's 401(k). After that they are using the money to buy company stock to fund the business start up.

While this can be done and I have some sympathy for people doing it.

The IRS takes a dim view of this and it is very easy to violate the law.

Here is an IRS link on topic.

If you are not using the funds going into the new IRA to fund your new business just ignore this.

By the way good luck on the new business, hope it does for you what you want and need.

http://www.irs.gov/retirement/article/0,,id=231594,00.html

I just had a client that has a Profit Sharing plan with company stock get a large letter asking lots of questions about their plan and the stock. As I spoke the IRS person it was clear they were trying to decide if this was a ROB and if it was they were going to hit them with an audit. I answered their questions and it was not a ROB, and the IRS left them alone. The IRS is looking into this stuff harder.