Rollovers

[ERISAWiz]

I have a 401(k) plan that merged with a DC plan. Within the new merged plan, participants have two accounts: one for elective deferrals (401k) and one for nonelective deferrals (DC). A participant wants to roll over some of his balance.

The plan allows for rollovers, but it doesn't address what happens if the participant doesn't want to roll over his entire balance. More specifically, it doesn't say whether the portion that isn't rolled over must be (a) distributed at the time of the rollover or (b) left in the plan. Is either one required or prohibited by the IRS? Or can we amend the plan to pick either option?

Not sure if it makes a difference, but the distribution options are annuities or a lump sum.

Thanks to anyone who can help.

[ESOP Guy]

Sorry but you need to make your question clearer. I don't understand it.

Has the merger taken place already?

If so, this person now is terminated and only wants to take some of his balance and leave some of the balance in the plan?

If not, is it he only wants to send some of his money to the new plan when the merger happens?

I just don't understand what you are saying is the fact pattern is here.

[ERISAWiz]

ESOP,

Thanks for responding. Yes, the DC plan and the 401k plan have already merged. The guy is retired, and he wants to roll over a portion of his money into an IRA. The merged plan document does not address what happens to the remainder that isn't rolled over. We are trying to figure out if the IRS requires that the remainder be distributed or if he can leave it behind in the merged plan. We can certainly amend the plan document to do what is required, but I don't know what is required.

I hope this clears up the confusion.

[Jim Chad]

Many plans are written to say that the only form of distribution is lumpsum. If your doc says that, he is not allowed to do a partial. He must take it all out. Or at least that is my understanding.

[ESOP Guy]

Yup you say the plan only allows annuities and lump sums. That is his two choices. He can't take a partial.

I wouldn't recommend changing the plan to allow a partial either. Sounds like a lot of work an expense for the plan administrator and sponsor.

I would urge this person to roll 100% of their money into an IRA. They will allow them to control the fate of their money. Partial withdrawals from IRAs are easy to do. I have even seen some IRA companies make it too easy to make partial withdrawals. I once saw an IRA company that gave you a debit card linked to your IRA. So every purchase was a taxable event! Not to mention the idea of every impulse purchase drains your retirement savings. But I am off topic now so I will stop.

[ERISAWiz]

Jim, a lump sum is not the only form of distribution. Annuities are the normal form of benefit, lump sum is the optional form.

[ERISAWiz]

ESOP, when you say he can't take a partial, do you mean he can't take a partial distribution, i.e. he can't leave part of his account behind in the plan?

And changing the plan to allow a partial is not a problem. I'm just trying to figure out if we are prohibited by the IRS from changing the plan to allow him to leave some of his money in the plan after rolling over part of it.

Thanks for your help.

[Lou S.]

Nothing from the IRS would prohibit him taking a partial distribution, only the Plan Terms.

[ESOP Guy]

Nothing from the IRS would prohibit him taking a partial distribution, only the Plan Terms.

I agree if the plan sponsor really wants to cater to this wish I don't think there is anything stopping the plan from making such an amendment.

I think it is a bad idea as a practical matter.