Reverse Rollover?

When you sponsor a retirement plan, like a 401k, questions come with the turf. Common questions from employees include: “When am I eligible?” “What about the match?” “How can I change my contribution amount?” and “How do I rollover the funds from the 401k at my last job?”. Here’s another: what about reverse rollover? Read on for guidance from experts—and don’t forget to check what your plan document actually says before answering anything. 

Only Pre-Tax Amounts Can Be Rolled In

Say an employee has had a traditional IRA (Individual Retirement Account) through a bank or mutual fund company. Now, the employee wants to transfer the funds from that account into the 401k. According to attorney Jenny Kiffmeyer and the 

the ERISA consultants at the Retirement Learning Center (RLC) Resource Desk, this would be considered a “reverse rollover”, and the short answer is: “A traditional IRA can be rolled into a current employer’s eligible plan, but only the taxable portion and only if the plan accepts it. Reverse rollovers can be a powerful tool in retirement planning to facilitate tax-efficient Roth IRA conversions, retirement account consolidation, RMD deferral, and access to a new early distribution penalty exception, in some cases.”

Under the Internal Revenue Code [IRC §402(c) and IRC §408(d)(3)], “in many cases,” eligible retirement plans, including a 401(k) plan, can accommodate reverse rollovers, but there are exceptions, and, as Kiffmeyer explains at the National Association of Plan Advisors, restrictions include these two:

1.The qualified plan must have language indicating it allows incoming IRA rollovers (not all plans do), and

2.Only pre-tax amounts may be rolled in. Further, a plan may limit what amounts are acceptable, for example, only those dollars held in a conduit IRA that originated from an eligible plan, and that have not been commingled with other rollovers or contributions. Pre-tax amounts include (meaning taxable when distributed):

• Deductible traditional IRA contributions,
• Pre-tax dollars previously rolled into the IRA (from another retirement plan or IRA), and
• Earnings on the account.

Don’t Forget: Consult The Plan Document

For ERISA retirement plans, the plan document is the playbook—and sponsors should always consult it when questions come up. It’s essential for ERISA retirement plan sponsors to reference the plan document. Doing so ensures clarity and compliance related to the management of the retirement plan. Failing to use and understand the plan document leads to dangerous errors and oversights for plan sponsors. 

Most plan sponsors, upon reflection, will probably realize that the plan document does in fact provide answers to the kinds of questions that frequently pop up, and may seem more perplexing than they actually are. At Plan Sponsor, for example, in response to an inquiry about matching catch-up contributions, a team of ERISA experts underscored: “As with many plan-provision questions, the answer depends on what your plan document says! Matching catch-up contributions is not required, so there should be a section of your plan document or adoption agreement that specifically addresses whether or not catch-up contributions are matched under the plan…”.

As both the questions about reverse rollovers and matching contributions make clear, it’s crucial for plan sponsors, and others with responsibilities to the retirement plan, to frequently check their actions against the protocols spelled out in the plan document. Watkins Ross encourages special attention to alignment with the plan document related to:

• Eligibility requirements
• Contributions
• Definition of compensation
• Distribution options

Should Plan Sponsors Have Fiduciary Liability Insurance?

Yes, given their ERISA fiduciary role, obtaining fiduciary liability insurance is the only way plan sponsors can safeguard their personal assets in the event errors and oversights result in costly regulatory action and litigation. Remember, although required for the protection of the retirement plan, ERISA Bonds do not protect plan sponsors. 

If you face even an allegation of a fiduciary breach, defense is an out of pocket expense that averages $600—per hour.

Only Colonial Surety Company solves the complex puzzle of ERISA compliance and protection by putting three essential coverages into one seamless, affordable bundle:

1. ERISA Fidelity Bond: Fulfills your federal mandate to protect plan funds from dishonesty. 
2. Fiduciary Liability Insurance (FLI): Shields your personal assets, covering up to $1,000,000 in legal defense costs and penalties for administrative errors or oversight omissions.
3. Complimentary $50,000 of Cyber Liability Insurance: Provides vital protection for the plan and company against regulatory actions following a data breach, directly addressing the DOL’s response plan recommendations.

Protect your retirement plan, your business, and your personal assets in one smart move: upgrade to Colonial Surety Company’s affordable bundle for retirement plan sponsors:

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What Fiduciary and Cyber Liability Insurance Covers:

• Administrative Errors: Mishaps such as improper enrollment, failing to process participant changes, or incorrect termination protocols.
• Investment Mismanagement: Claims regarding negligent investment selections or poor financial advice offered to participants.
• Excessive Fees: Lawsuits stemming from a failure to monitor and negotiate third-party service provider fees.
• Cybersecurity Breaches: Failure to adequately mitigate cybersecurity threats or monitor vendor data security protocols.

Why Choose Colonial Surety Company?

• Trusted & Reliable: U.S. Treasury Listed, Rated “A” (Excellent) by A.M. Best Company, and in business since 1930.
• Direct & Digital: Skip the middle players. Quote, purchase, and download your full protection package entirely online in minutes.
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