Rollover/Transfer of 401K Funds

[Guest John P.]

Okay, I recently got confused...which is not too hard for me.

It may not matter, but client has an individual, trustee-controlled 401K plan. He initially is funding the plan with a rollover/transfer. The account, while trustee-directed, is maintained at a national financial services company (e.g,. Merrill Lynch).

I have always told clients that when they are moving funds into a 401K plan that they MUST report the rollover via thei 1040 tax return for the same year via line 15A/B or 16A/B....the difference between the two line items on the 1040 being whether the rollover funds are coming from an IRA (line 15) or other qualified plan (line 16). Also, the IRS wants one to write rollover in the margin and attach a note of explanation of what they did.

In a recent conversation with the financial services company and their department that deals with rollovers, they stated if the funds from custodian 1 are sent to the new 401K plan at company #2 via ACAT, that a 1099 will not be prepared by company #1 and, as such, it is not a rollover but rather a direct transfer. They stated that the key is that it is an ACAT transfer and, if so, company #1 will not prepare a 1099 coded G (for rollover) and the individual does NOT have to report the event on their 1040 tax form.

IF this is correct, great. Maybe I have been too conversative, but I have always operated that when funds come into a 401K, the event (rollover? direct transfer?) MUST be reported on the 1040 tax form. If the client doesn't have to, great...but I would feel more comfortable getting feedback from others?

Any help out there? Thanks.

[ESOP Guy]

The facts here are unclear. So I am going to ask a few questions to get a little clarity.

What was the relationship of the sending plan to the recieving plan? Was the transfer from one 401(k) plan that your client sponsored to another 401(k) plan they sponsored?

What triggered the moved? Was it he just wanted to use a different investment house?

As far as I know there is nothing special about the move being done via ACAT that makes a difference although.

[Bird]

I don't think being an ACAT has anything to do with it, at least not directly. I'm pretty sure, just about positive, that they won't ACAT unless the registrations are identical - " XYZ Company Profit Sharing Plan, Trustee Joe Johnson" for example. That by definition would mean it is a transfer within the same plan and not reportable. (So the ability to ACAT is more or less proof that it is a transfer within the plan, but the ACAT transfer itself is not the reason for the non-reporting.)

If it's coming from an IRA to a plan, yes, the distributing IRA custodian will issue a 1099-R and it will need to be reported. Likewise if it is going from one plan to another plan. Even within the same plan, from one institution to another, it might be (incorrectly) reported and the easiest thing to do is just report it as a rollover.

As noted the facts are unclear.

[BG5150]

It could be that the investment house people are mixing up "direct rollover" with "direct transfer."

[Bill Presson]

It could be that the investment house people are mixing up "direct rollover" with "direct transfer."

I would be shocked if this were the case.

[ESOP Guy]

I don't think being an ACAT has anything to do with it, at least not directly. I'm pretty sure, just about positive, that they won't ACAT unless the registrations are identical - " XYZ Company Profit Sharing Plan, Trustee Joe Johnson" for example. That by definition would mean it is a transfer within the same plan and not reportable. (So the ability to ACAT is more or less proof that it is a transfer within the plan, but the ACAT transfer itself is not the reason for the non-reporting.)

If it's coming from an IRA to a plan, yes, the distributing IRA custodian will issue a 1099-R and it will need to be reported. Likewise if it is going from one plan to another plan. Even within the same plan, from one institution to another, it might be (incorrectly) reported and the easiest thing to do is just report it as a rollover.

As noted the facts are unclear.

Way back in the day when I worked some rather small 401(k) plans I seem to recall the brokers working out distributions in kind for the clients. They did this to keep people who did alot of business with them happy.

I can't say for sure it was an ACAT but what happened was 100 shares of IBM left the plan (for example) and we had to prepare a 1099-R based on the value of those shares as of close of the markets on that day. It was a clear distribution from a plan that the person (a doctor) who was just an employee to the 401(k) plan for his own practice. Like I said the brokers made it work because there was alot of stock in both the sending plan and going to the recieving plan and that doctor didn't want to have to pay commisssion to sell/buy his stocks.

[masteff]

He initially is funding the plan with a rollover/transfer.

So which is it? A rollover or a transfer.

Toward what BG5150 said, see "Transfers" on page 6 here: http://www.irs.gov/pub/irs-pdf/i1099r.pdf

[Appleby]

Okay, I recently got confused...which is not too hard for me.

It may not matter, but client has an individual, trustee-controlled 401K plan. He initially is funding the plan with a rollover/transfer. The account, while trustee-directed, is maintained at a national financial services company (e.g,. Merrill Lynch).

I have always told clients that when they are moving funds into a 401K plan that they MUST report the rollover via thei 1040 tax return for the same year via line 15A/B or 16A/B....the difference between the two line items on the 1040 being whether the rollover funds are coming from an IRA (line 15) or other qualified plan (line 16). Also, the IRS wants one to write rollover in the margin and attach a note of explanation of what they did.

In a recent conversation with the financial services company and their department that deals with rollovers, they stated if the funds from custodian 1 are sent to the new 401K plan at company #2 via ACAT, that a 1099 will not be prepared by company #1 and, as such, it is not a rollover but rather a direct transfer. They stated that the key is that it is an ACAT transfer and, if so, company #1 will not prepare a 1099 coded G (for rollover) and the individual does NOT have to report the event on their 1040 tax form.

IF this is correct, great. Maybe I have been too conversative, but I have always operated that when funds come into a 401K, the event (rollover? direct transfer?) MUST be reported on the 1040 tax form. If the client doesn't have to, great...but I would feel more comfortable getting feedback from others?

Any help out there? Thanks.

• If the assets are being moved between two accounts under the same plan, it should be moved as a nonreportable transfer (no 1099-R).
• If the assets are being moved between plans of maintained by different employers, a 1099-R should be issued and the transaction should be reported on the participant’s Form 1040. The movement can be done via ACAT or no-ACAT.
• An ACAT or Non-ACAT is always a trustee-to-trustee transfer, but that is just a means of delivery. The plan determines the tax reporting requirements.