We recently processed a rollover from our 401(k) plan for a former employee who wants to roll her balance into her new employer’s plan. Shortly after the payment was processed, the former employee emailed us requesting either a copy of our plan’s IRS favorable determination letter or a signed acknowledgment that we have such a letter.
We have never received a request like this before. Are we required to provide that information?
Since 401(k) and other types of qualified plans receive special protections and tax treatment, there are rules in place to ensure that only qualified money can be rolled in. There are four elements to this determination, as follows:
- Does the receiving plan allow rollovers? All plans must permit participants to roll money out, but it is optional whether they accept rollovers in. So, the first step is to make sure the receiving plan has a provision to accept rollovers. In our experience, the vast majority of plans do allow them.
- Is the person in question eligible to make the rollover? Some plans require an employee to be a participant before the rollover can occur, but many allow new hires to roll over previous accounts even if they haven’t yet become eligible for the new plan.
- Is the incoming rollover from an allowable source? The rules are designed to make retirement accounts easily portable across types. The IRS website has a handy reference chart that shows this. However, each plan is able to limit the types of plans it will accept. In other words, a 401(k) plan could accept rollovers from other 401(k) plans but not from IRAs, for example. The plan document must specify which account types are accepted.
- Is the distributing plan truly qualified? This gets to your specific question. If a plan accepts a rollover from another plan that is severely out of compliance, it could jeopardize the receiving plan’s compliance. For that reason, some plan sponsors ask for documentation of qualification before accepting a rollover. To make this easier, the IRS has indicated that the receiving plan can look up the distributing plan’s most recent Form 5500 in the Department or Labor database. As long as code “3C” does not appear on page two of the form, the receiving plan can rely on that as documentation of the qualified status. This rule is found in IRS Revenue Ruling 2014-9.
That’s all a long way of saying you don’t have to provide exactly what they requested, since they could simply look up your 5500 on the DOL database, but it also doesn’t hurt anything if you want to provide it anyway.
For more information on the Form 5500, please visit our Knowledge Center here.