Rollover of Tax-Exempt Combat Pay from TSP to 401(k)

A participant is seeking to transfer or rollover funds from the Thrift Savings Plan. Part of those funds consist of tax-exempt combat pay. I am not seeing any guidance indicating whether an employer-sponsored 401(k) plan can accept transfers or rollovers of tax-exempt funds.

If permissible, I think it would need to be separately accounted for as tax-exempt and properly reported as such upon distribution for 1099-R reporting and withholding purposes.

Am I missing guidance on this? Any ideas on permissibility and whether it's an eligible rollover distribution? Thanks.

That which is not specifically prohibited is generally allowed. That is why it may be difficult to find explicit guidance. This is entirely subject to the plan document and plan rules. Even some plans that do not allow employee after-tax contributions will accept and separately account for rollovers of employee after-tax contributions and associated pretax earnings.

A bigger question is why would the participant wish to take such an unwise action. The earnings on employee after-tax contributions and current pre-tax earnings would continue to be pre-tax. It would make far more sense to do a direct split rollover of the employee-after-tax contributions to a Roth IRA (stopping any further pre-tax earnings) and the pre-tax earnings to a traditional (pre-tax) 401k account or traditional IRA (may not be advisable). If the pre-tax earnings on the employee after-tax contributions are minimal, alternatively the participant could do a single direct rollover to a Roth IRA with the earnings taxable.

The IRS did provide direct guidance on the above in IRS Notice 2014-54. Clearly it is permissible.

Thanks. Not sure that's completely comparable. These are tax-exempt funds and not after-tax funds. It appears that a participant in the TSP can choose to designate tax-exempt contributions as either traditional 401k contributions or Roth contributions which governs the tax treatment of the earnings only - the contributions themselves continue to be tax-exempt regardless of designation. As of now, I believe the tax treatment as it stands in the TSP would follow when the funds are transferred to the 401k.