Premature penalty waiver for employer plan distributions
Can a firefighter who retires at age 56 in Jan ’08 and rolls almost all of his 457 plan assets to his IRA, transfer those funds back to his old employer plan (which is still active w/ $1500 remaining) and take distributions penalty free?
Permalink Submitted by Alan Spross on Wed, 2008-07-16 21:10
No. The decision tree on this one is rather complex.
1) A 457 has no penalty to begin with.
2) An IRA is considered a qualified plan for purposes of this provision in Sec 72t:
(9) Special rule for rollovers to section 457 plans
For purposes of this subsection, a distribution from an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A) shall be treated as a distribution from a qualified retirement plan described in 4974(c)(1) to the extent that such distribution is attributable to an amount transferred to an eligible deferred compensation plan from a qualified retirement plan (as defined in section 4974(c)).
3) So after the rollback (would the 457 even accept a rollover after employee retires?) to the 457, the IRA funds are treated as those of a QRP, NOT a 457.
4) But even under a QRP there is no penalty for distributions due to separation from service at age 55. Since he separated at 56 then, does this mean no penalty?
I don’t think so, because the distribution would not be due to separation from service, but rather due to the later roll in of IRA funds. If the IRA was rolled into the 457 prior to separation at 55 or later, then those funds could be distributed without penalty under QRP rules.
If the firefighter was re employed now, then the IRA rolled over, and then the firefighter separated again after 55, then the former IRA funds could be distributed without penalty.
Just out of curiosity, has his 457 plan indicated they would accept an IRA rollover post retirement?
Permalink Submitted by Derek Seo on Wed, 2008-07-16 21:34
They will accept the funds back, with the following conditions:
1) the exact rollover amount must be sent back
2) a letter stating the rollover was done in error
Basically, they will allow the participant to unwind the rollover. This apparenly can be done since the 457 plan account was never closed after the initial rollover. I’m not sure what the policy would be if the account had been closed out. The challenge is if the market value of the IRA is less than the original rollover amount. Assuming the rollover IRA account has additional contributions to cover the market downturn or the participant has other qualified accounts at the investment firm, I would think the participant is ok as long as the exact original transfer amount is sent back in one check from the IRA custodian.
Thanks for your input! I’ll pass this along to the firefighter.