In 1992 the Unemployment Compensation Act created a standard for direct rollover accounts. A rollover account is created when a participant moves their money from one qualified plan to another.

When such a transaction occurs,the distribution is subject to a mandatory withholding of 20% unless the money is reinvested within 60 days. The exciting news is that traditional and Roth* IRA’s are now accepted as qualified plans eligible for rollover.

Here is a condensed list of transactions that are not eligible for rollovers:

• Required minimum distributions under 401(a) (9),  even if a beneficiary is named
• Hardship Distributions
• Any cash distributions which have an annual total amount less then $200
• Distributions of premiums for accident or health insurance under Regulation 1,402 (a)-1(e).
• Prohibited allocation of securities in an S corporation that are treated as distributions
• Code Section 414(w) Permissible withdrawal
• QDRO payment to an alternate payee who is not the employee,spouse of former spouse (i.e. a child)
• Cost of current life insurance protection
• Deemed Distribution of a participant loan
• Corrective Distributions plus earnings
• Distribution of only employer securities or only a participant loan distributed to the participant in kind is eligible for rollover,but no subject to withholding
• Funds from a participant who has already retired and is receiving an annuity distribution

This list covers the basics;  however,  a few other transactions also fail to qualify for rollover eligibility under Code Section 401(a)(31).

Unlike hardship withdrawals,  all qualified plans must make provisions to allow participants to rollover their eligible distributions.   The only choice the employer really has is to decide whether or not they would like to accept a rollover contribution from another qualified plan.

*The word ‘Roth’ simply refers to after tax money.