Qualified retirement plans can generally accept rollovers that were distributed from other eligible retirement plans such as another 401(k) plan, 403(b) plan, governmental 457(b) plan, or IRA. However, certain distributions such as required minimum distributions, hardship distributions, and distributions from an inherited or Roth IRA cannot be rolled into a qualified plan. Prior to accepting Rollover contributions, employers must verify that the rollover is a “valid rollover contribution.” In order to simplify the verification process, the IRS recently announced some new “safe harbor” procedures that can be used to determine if a contribution is a valid rollover contribution.
Guidelines for assessing the validity of a rollover from another employer plan:
- Verify that Code 3C is not listed on the transferring plan’s Form 5500. Code 3C is used to indicate that a plan is not intended to be a qualified plan; as long as Code 3C does not appear, it is reasonable to assume that the distribution is from a qualified plan. The Form 5500 for the transferring plan can be found on the DOL’s EFAST2 website (http://www.efast.dol.gov).
- If the distribution check is made payable to the plan for the benefit of the employee, the employer can reasonably conclude the distribution is a valid rollover distribution and that it does not include required minimum distribution or hardship distribution amounts. The rollover check or wire transfer should identify the transferring plan.
Guidelines for assessing the validity of a rollover from an IRA:
If the distribution check is made payable to the plan for the benefit of the employee from the trustee or custodian of an IRA and identifies the IRA as the source of the funds, the employer can reasonably conclude that the distribution is a valid rollover distribution and does not include funds from an inherited IRA. The employee must also certify that the distribution does not include after-tax amounts and that he or she does not have to take a required minimum distribution for the year.
Previous guidelines for assessing validity of a rollover:
The safe harbor procedures mentioned above are in addition to several existing guidelines that permit an employer to conclude that a rollover contribution is a valid rollover contribution. Some of the existing guidelines are as follows:
- If the distribution is from a qualified plan, such as a 401(k) plan (not from a 403(b) or 457), the employer can request a letter from the transferring plan stating that the plan satisfies the qualification requirements or that it has received a favorable determination letter from the IRS.
- When the rollover is an indirect rollover from the employee rolled over within 60 days of a prior distribution, the employer can make a reasonable conclusion that the rollover is valid by obtaining specific certifications from the employee that the rollover is valid.
Taking adequate steps to verify rollovers (including those mentioned in this article) is an important part of maintaining the tax-qualified status of your plan.