QUESTION: Our company sponsors a 401(k) plan. As we review the plan’s rollover procedures, we want to confirm our understanding of what constitutes an eligible rollover distribution. Can you summarize the definition and key rules?
ANSWER: Generally, an “eligible rollover distribution” from a 401(k) plan is a lump-sum payment or series of installments (over a period of less than ten years) to a participant, spouse beneficiary, spouse (or former spouse) alternate payee, or designated non-spouse beneficiary. Eligible rollover distributions can be moved tax-free into another tax-advantaged retirement plan or individual retirement account (IRA).
Plans must offer recipients of eligible rollover distributions the opportunity to have the distribution paid directly by the plan to another plan or IRA—this is a direct rollover. For designated non-spouse beneficiaries, a direct rollover can be made only to an IRA, not to another plan. If a recipient chooses not to use a direct rollover, the eligible rollover distribution is subject to 20% federal income tax withholding.
A plan must make a direct rollover to any eligible retirement plan designated by a participant, spouse beneficiary, or spouse (or former spouse) alternate payee, even if the receiving plan is not a qualified plan. An eligible retirement plan for this purpose includes a qualified defined contribution plan, an IRA, a 403(b) plan, a 403(a) annuity plan, or an eligible 457 plan. Plans are permitted, but not required, to make direct rollovers to defined benefit plans.
While most 401(k) plan distributions are eligible rollover distributions, some distributions that a plan might offer are specifically excluded from the definition and thus cannot be directly rolled over to another plan or IRA. Excluded distributions are—
- required minimum distributions (RMDs);
- hardship distributions;
- any distribution in a series of substantially equal periodic payments made at least annually over the participant’s life or life expectancy, the joint lives or joint life expectancies of the participant and designated beneficiary, or a specified period of ten years or more;
- corrective distributions of excess annual additions, excess deferrals, excess contributions, or excess aggregate contributions; and
- any loan treated as a deemed distribution.
Special rules apply to distributions that include Roth contributions or other contributions made on an after-tax basis.
For more information, see EBIA’s 401(k) Plans manual at Sections XIV.B (“Defining an Eligible Rollover Distribution”), XIV.C (“Direct Rollover Distributions”), XIV.E (“Roth Rollovers to Roth Accounts in Other Plans or Roth IRAs”), and XIV.J.1 (“Income Tax and Withholding Rules on Eligible Rollover Distributions Not Rolled Over”).
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