Benefit Plan Distributions Part 4

Making sure participants know how to roll over their accounts can help limit your administrative work and, for small organizations, keep audits at bay.

Employer strategies

Employers Should Help Employees Roll Over Retirement Accounts

  • 12/6/2017

When employees leave your organization, their retirement account should move with them. As plan sponsor, one option for transitioning these accounts is having your employees initiate a rollover distribution, which moves investments from one qualified plan or IRA to another qualified plan or IRA account following an eligible event such as termination or retirement.

As you can imagine, these distributions are common when participants start a new job with a company that has its own plan, given that they meet the new plan’s eligibility requirements. By rolling funds, participants avoid paying taxes or penalties, and the money can continue to grow for their future retirements. Or, if a participant wants to withdraw from the account, he or she pays taxes on the amount.

Providing rollover instructions to employees who leave the organization can help keep your organization from maintaining accounts that belong to former employees, which can generate fees and create additional administrative work for your team. And, for small organizations, closing out plans can help you maintain fewer than 100 accounts, possibly eliminating the need for an audit.

Explain the rollover process to employees

Mentioning the rollover process in an employee’s exit interview isn’t enough, especially during what can be a stressful transitional phase in one’s career. Employers should consider providing a handout with rollover instructions both in person and via email prior to an employee’s departure. It can also be helpful to mail these instructions to the participant following his or her last day with your organization. This helps make sure that participants are aware of their responsibilities and can reference them later.

Because some employees may not wish to consolidate their retirement accounts when switching organizations, consider listing the benefits of having retirement funds in one place, such as:

  • It’s easier to manage investments.
  • It saves time if the participant needs to update contact information.
  • Beneficiaries will have an easier time managing one account, should something happen to the participant.
  • Participants can easily track how much they’ve invested.
  • It prevents the possibility of losing track of an old account.

Employees have 60 days to complete the rollover

It’s also important to let exiting employees know that they have 60 days from the date they receive an IRA or qualified retirement plan distribution to roll it over to another plan or IRA. If the funds are not rolled over within 60 days, the participant is subject to federal and state withholding taxes, plus additional early distribution penalties.

You can only make one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. The one-per-year limit does not apply to rollovers from traditional IRAs to Roth IRAs (conversions) or trustee-to-trustee transfers to another IRA.

Current employees can initiate rollovers

Plans may also allow for in-service rollover distributions. These distributions allow employees to withdraw from their accounts and roll the funds into a IRAs while continuing to work for their current employers. Typical plan guidelines require a minimum age (typically 59.5 years old) and length of service (varying by plan) to be eligible. It’s important to check your plan’s provisions, as this type of distribution is not always included.

How we can help

CliftonLarsonAllen (CLA) knows that you have a lot to consider when transitioning employees out of your organization. Our employee benefit plan professionals can work with you to review your plan and help you prepare participants for the rollover process.

Read more about plan distribution options and responsibilities.