(b)lines Ask the Experts – Rollovers Versus Transfers

October 16, 2012 (PLANSPONSOR (b)lines) – “A lot of our 403(b) plan participants have been confusing rollovers with transfers of late, and vice versa. Can the experts provide some simple guidance that we can provide to employees in this regard?”

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

Certainly! But first, the Experts should clarify that, in addition to rollovers, there exist two different types of transfers under the 403(b) final regulations: contract exchanges and plan-to-plan transfers. Thus, we will be describing the differences between these three types of transactions, as follows:  

Rollovers: the easiest way to understand the difference between rollovers and the other two transaction types is that a rollover ALWAYS involves a DISTRIBUTION FROM THE PLAN that is eligible for rollover. Thus, if the participant is not yet eligible to receive a distribution from the plan (e.g., termination of employment, age 59 and 1/2, etc.), a rollover is not possible. It should be noted that hardship distributions, by definition, are not eligible for rollover.  

Also, rollovers are the only type of these three transactions where funds may be moved to something other than a 403(b) plan (if we ignore the limited exception for transfers to purchase service credits under a governmental defined benefit plan). One can roll over funds from a 403(b) to another tax-favored retirement plan (401(k), 401(a), 403(b), governmental 457(b)) or an IRA, or vice versa.  

Finally, like plan-to-plan transfers, rollovers involve the movement of funds OUT of a retirement plan. Simply moving funds between 403(b) contracts or custodial accounts within a 403(b) plan are not rollovers.

Contract Exchanges: as the name implies, these transactions involve exchanging one contract for another within the same 403(b) plan.  Thus, contract exchanges would ONLY apply when there are multiple approved providers within the same 403(b) plan. Unlike rollovers, there is no distribution involved; it is really just a change in investment under the plan.  Thus, a participant need not be eligible to receive a distribution from the 403(b) plan in order to complete a contract exchange, although plan terms would need to address the ability to make an exchange.  

Plan-to-Plan Transfers: the least common of these three transaction types, plan-to-plan transfers involve the movement of assets from one 403(b) plan to another 403(b) plan (except in the limited case of transfers to purchase service credits under a governmental defined benefit plan as described above). Like contract exchanges, there is no distribution involved; thus, a participant need not be eligible to receive a distribution from the 403(b) plan in order to complete a plan-to-plan transfer, although plan terms would need to the ability to make a transfer.  

However, since the receiving plan must impose distribution restrictions on the transferred funds at least as stringent as existed in the prior plan, there are many plans that will not provide for the receipt of such transfers since it creates an additional recordkeeping burden. They tend to be most common in plan mergers or spin-offs.  Moreover, for ERISA plans, such transfers may be further restricted by ERISA.  

Finally, keep in mind that the final regulations did away with Rev. Rul. 90-24 transfers after September 24, 2007.  Thus, you can no longer rollover or transfer your 403(b) monies from your 403(b) plan to another 403(b) investment outside of the plan - it generally must be an eligible rollover distribution, assuming you are eligible for a distribution, to another 403(b) plan of an employer that you have an account or contract under (though it could be rolled over to an IRA or another eligible plan you may be a participant in), or must be a contract exchange with an approved vendor under your 403(b) plan.  

The Experts hope that this explanation clears up some of the confusion your 403(b) plan participants are experiencing!  


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.