Carol V. Calhoun, Shareholder Calhoun Law Group, P.C. 9112 Lindale Drive Bethesda, MD 20817-3441 Office Phone: (202) 441-5592 Telefax: (301) 564-1941 E-mail: Click here to send e-mail.

1. The Problem
   
   
1. Current Law
   
   
1. Currently, the Internal Revenue Code ("Code") permits a participant who receives or is entitled to an otherwise taxable distribution from a plan to roll the money over to the same kind of plan--e.g., from one qualified plan to another, or one tax-deferred annuity to another.  A participant can also roll a distribution from a qualified plan or a tax-sheltered annuity (but not from a section 457 plan) to an individual retirement account ("IRA").  However, it does not permit rollovers among different types of plans.  A participant cannot,  for example, roll a distribution from a tax-deferred annuity to a qualified plan.
   
   
   1. Code section 402(c) permits a distribution from a qualified retirement plan to be  rolled over to an "eligible retirement plan." Code section 402(c)(8)(B) defines an eligible retirement plan to include an IRA or another qualified plan, but not a 403(b) or 457 plan.
      
      
   2. Code section 408(d)(3)(A)(ii) permits money in an IRA to be rolled into a qualified plan only if the entire amount in the IRA is derived from a prior rollover from a qualified plan to the IRA, plus earnings.  Thus, an amount rolled into an IRA from a qualified plan cannot later be rolled out of the IRA to a 403(b) plan or a 457 plan.
      
      
   3. Code section 403(b)(8) permits a distribution from a 403(b) plan to be rolled over to an IRA or another 403(b) plan, but not to a qualified plan or a 457 plan.
      
      
   4. Code section 408(d)(3)(A)(ii) permits money in an IRA to be rolled into a 403(b) plan only if the entire  amount in the IRA is derived from a prior rollover from a 403(b) plan to the IRA, plus earnings.  Thus, an amount rolled into an IRA from a 403(b) plan cannot be rolled out of the IRA to a qualified plan or a 457 plan.
      
      
   5. Code section 457(e)(10) permits a transfer from one 457 plan to another.  However, it does not permit amounts to be transferred from a 457 plan to a qualified plan or 403(b) plan.  And unlike the provisions described above applicable to qualified plans and 403(b) plans, Code section 457 does not permit transfers from a  457 plan to an IRA.
      
      
2. As an administrative matter, the Internal Revenue Service ("IRS") has treated direct transfers of money from one plan to another plan of the same type as nontaxable, even if the participant was not entitled to a distribution from the first plan.    These rulings have permitted an employee to move money from one plan to another (e.g.,  to purchase service credit under the second plan, or to take advantage of the second plan's more favorable investment experience), even at a time when the employee was not entitled to a distribution from the first plan.  However, these rulings do not permit transfers from one type of retirement plan (e.g., a qualified plan) to another (e.g.,  a 403(b) or 457 plan).
   
   
1. In the case of qualified plans, this policy is set forth in Rev. Rul. 67-213, 1967-2 C.B. 149.
   
   
2. Direct transfers of money from one 403(b) plan to another are nontaxable, provided that the new plan does not contain more liberal withdrawal rules than the old one.  Rev. Rul. 90-24, 1990-1 C.B. 9.
   
   
3. Direct transfers of money from one section 457 plan to another are nontaxable under Code section 457(e)(10).
   
   
3. Code section 401(a)(31) requires that a qualified plan or 403(b) plan permit a participant to have any distribution from the plan transferred directly to another plan or IRA.  However, it does not permit transfer of money from one type of plan to another.
   
   
4. Contributions which were taxable to the employee when they were made cannot be rolled over into another plan or IRA when they are distributed.
   
   
2. Examples of Effect of Current Law on Participants
   
   
1. An individual who moves from one type of employer to another, or from an employer which maintains one type of plan to an employer which maintains a different type of plan, often cannot move the money into the new employer's retirement plan.  For example, if an employee had previously participated in a private employer's 401(k) plan, any distribution from that plan could not be rolled into a new employer's tax-sheltered annuity.
   
   
2. An individual entitled to purchase service credit under a defined benefit plan cannot use money from a prior employer's tax-sheltered annuity or section 457 plan to purchase the credit without paying taxes on the entire amount used.
   
   
3. An individual who cannot afford to pay all the money to purchase service credit up front cannot accumulate the money in a tax-sheltered annuity or section 457 plan until the necessary amount is available.
   
   
4. If an employee uses a refund of after-tax contributions from one plan to purchase service credit in another, the purchase may violate certain limits in the Code on after-tax contributions, unless an exception to those rules applies.
   
   
5. Employees who participate in section 457 plans are forced, upon separation from service, to make hurried decisions with respect to the distribution of their 457 plans.  Unless the employee goes directly to another governmental employer that has a 457 plans which allows direct transfers, the employee has only 60 days during which he or she must irrevocably decide how to take the distribution.  Many employees elect a cash-out instead of locking into a distribution date in the future that they have little flexibility to change.
   
   
6. If a teacher or other public employee receives a distribution from a defined benefit plan upon termination of employment, and then goes to work for another employer which maintains a 403(b) plan or a 457 plan,  the individual cannot consolidate plan assets by rolling the money over to a 403(b) or 457 plan.
   
   
2. The Pomeroy Legislation
   
   
1. Rollovers allowed among different types of plans.
   
   
2. Rollovers of after-tax contributions permitted.
   
   
3. Direct in-service transfers among different types of plans permitted to purchase service credit.
   
   

Originally presented at the National Association of Public Pension Attorneys' 1998 Legal Education Conference, Newport, RI, June 1998

Copyright © by Calhoun Law Group, P.C. All rights reserved.

Published on: Tuesday, June 30 @ 19:04:06 EDT (4576 reads)