What's the Difference Between 401(k) Transfers and Rollovers?

DWC | 10/31/17

Facts

Our company sponsors two separate 401(k) plans. One covers salaried employees, and the other one covers hourly-paid employees. From time to time, employees change from hourly to salaried and vice versa. When they change job classifications, they also change plans so that they are always in the plan that aligns with their job class.

Question

Is it possible to move an employee’s existing account balance back and forth between the two plans when he or she changes job class?

Answer

The short answer is yes, but there are a few details to consider.

Although it probably sounds like simple semantics, it is important to note that the type of transaction described in the question is referred to as a transfer and not a rollover. The reason for the distinction is that there are different rules that apply.

Generally, rollovers are initiated by participants. In order to do so, the participant must have incurred a distributable event, typically a termination of employment, and has a choice of taking a cash distribution, rolling over to an IRA or rolling over to another company-sponsored plan.

Transfers, on the other hand, are usually initiated by the plan sponsor pursuant to some sort of uniform policy, meaning that all similarly situated participants are treated the same way. Since the participant isn’t able to choose between cash or rolling over the balance, no distributable event is necessary in order for a transfer to take place. We should note that it is technically possible for a plan to permit participant-initiated transfers, but our experience is that many plan documents do not include this type of transfer as an option.

For plan sponsors that wish to make transfers, we highly recommend that a formal written procedure be established to identify the particulars.

Here are a few items the procedure might cover.

  • Timing. When does the transfer occur? Immediately on a change in classification or after a set amount of time has passed, e.g. 30 days after the change? Are the transfers processed on an ad hoc basis or at a set time, e.g. at the end of each quarter?
  • Type. Are accounts liquidated and transferred in cash or are they transferred in-kind?
  • Blackout. During the transfer, will participants lose access to their accounts for more than three business days? If so, then blackout notices must be provided 30 days in advance.
  • Participants. Do the transfers go in both directions or just from hourly to salaried or vice versa?

Documenting these details ahead of time helps ensure that everyone is on the same page and that all participants are treated consistently.

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Topics: DWC, Rollovers, Transfers

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.