Rollover

What a rollover is

When an employee leaves a job or becomes eligible for a distribution, they can usually move their 401(k) balance to an IRA or a new employer’s plan. Done correctly, a rollover is not taxable.

• Direct rollover: the plan pays the receiving plan or IRA. No tax is withheld.

• Indirect rollover: the plan pays the participant, who has 60 days to deposit the money elsewhere. The plan must withhold 20% for federal income tax, so the participant has to make up that amount from other funds to roll over the full balance.

Some payments cannot be rolled over, including required minimum distributions, hardship withdrawals and corrective distributions.

Why it matters to employers

You touch rollovers at three points. When employees leave, the plan must offer a direct rollover and give a written explanation of their options. When you hire, your plan may accept rollovers in, which is an optional feature. And when former employees leave small balances behind, the plan document may allow you to cash them out: balances of $7,000 or less can be paid out without consent, and amounts over $1,000 must be rolled to an IRA if the person gives no instructions.

A change of provider is not a rollover. Moving the whole plan to a new recordkeeper is a plan-level transfer, and participants do not need to act.

Common mistakes

• Telling employees to roll over their accounts when you change providers.

• Accepting a roll-in without checking that it came from an eligible plan.

• Missing the 20% withholding on a check made payable to the participant.

• Ignoring small balances of former employees for years, which adds to participant counts and plan costs.

• Giving employees advice on whether to roll over. Give them the notice and the facts.