Rollovers by Terminated Participants

[lalaland]

Is anyone aware of guidance that either blesses or prohibits a plan from accepting rollovers by participants who have terminated employment with the plan sponsor? I have a particular plan sponsor that is interested in doing so.

[Lou S.]

I am not aware of any official guidence but I have heard some argue that accepting rollovers from terminated participant could be a potential violation of the exclusive benefit rule.

Assuming the participant has some balance in the plan, I doubt the IRS would challenge a rollover in. No if the participant has a $0 account balance before the rollover in, I think you are in a little grayer teritory.

[MWeddell]

I had thought that there was guidance allowing a plan to accept rollovers from former employees.

I didn't have much luck locating any authority for that just now though. Private letter ruling 200027058 permits incoming rollover contributions from former employees, but that's not very relevant: what we really want is something from the DOL indicating that it is not an exclusive benefit rule violation.

[MWeddell]

Rev. Ruling 2012-4 is another example where the IRS approved accepting rollovers from former employees. PLR 8816050 is another example. Still didn't find anything from the DOL though.

[lalaland]

Thank you, this was very helpful.

[Guest A_Dude]

Not aware of any guidance, but our Corbel document I am pretty sure has a box to check for allowing this.

[masteff]

1) As to the concerns above about the exclusive benefit rule, Reg 1.401-1(b)(4) says "(4) A plan is for the exclusive benefit of employees or their beneficiaries even though it may cover former employees..."

2) The discussion in this thread: http://benefitslink.com/boards/index.php?/topic/19665-terminated-employee-rollovers/

Includes the analysis by mbozek that "Also since former employees are participants they should be permited to make tax free rollovers under the BRF provisions."

The discussion references Rev Rul 96-48: http://www.unclefed.com/Tax-Bulls/1996/RR96-48.PDF

3) I think Lou S hits on a key factor: whether the former employee still qualifies as a participant, which generally would mean they still have a balance in the plan. You should review the plan document w/ that question in mind.

[BG5150]

Why would the ER do this? Is there an asset breakpoint that will be hit?

[lalaland]

I can think of a few examples, but here is one: Employer is terminating a DB plan and has a 401(k) Plan in place. Employer wants to give terminated participants the opportunity to rollover their lump sum payment into the 401(k), particularly if they already have a balance in the 401(k) anyway. It's no skin off the employer's back to accept the rollovers (if it's legally allowed) and if the participant doesn't have an IRA it is much easier to just rollover into the 401(k) than open an IRA. Employer certainly doesn't want to allow transfers or merge the two plans, however.

[masteff]

I'd forgotten until reading that example that we made rollover to the 401(k) an option on the de minimis cashout forms for our pension plans some years ago when I was in a corporate benefits department. As lalaland said, it is a way to make it easier for the participant. And retention of assets can be beneficial depending on circumstances.