Empower Retirement says cannot do Direct Rollover – Want to do Indirect with Checks made to Participant

Submitted by Julie Brangenberg on Fri, 2020-08-28 17:54

Hello.
A client went to rollover her 401k and Profit Sharing accounts at Empower Retirement. She has a roth bucket in her 401k. I instructed the client to rollover the pre-tax $ into her Traditional IRA with us and the Roth $ into a Roth IRA with us. When they called Empower Ret., equipped with our instructions like who to make the check out to (IRA Custodian) and account #’s, they were told that Empower can’t do that, and made the checks payable to the client, telling her she can use the 60 day rollover rule. She will be doing 2 60 day rollovers in one year, from which I understand, is not allowed. I’ve asked to be on the call with them, but haven’t talked to Empower. I made the client aware of the 60 day rollover rule, and they are calling Empower back. Any suggestions or help is appreciated.



Submitted by Alan - IRA critic on Fri, 2020-08-28 18:12

There is no limit to 60 day rollovers unless they are IRA to like kind IRA rollovers. These distributions are coming form qualified employer plans so there is no limit on the number of rollovers. However, the real problem here with Empower is that distributions like this are subject to mandatory 20% withholding if not done as direct rollovers.  That would force client to come up with other funds to replace the withheld amounts or end up with only partial rollovers. Therefore, you should press them to do the twin direct rollovers. Ideally, they make out separate checks, one to the Roth IRA custodian and the other to the TIRA custodian.



Submitted by David Mertz on Fri, 2020-08-28 18:34

Section 401(a)(31)(A) of the tax code requires the plan to offer to perform a direct rollover.  See IRS Notice 2008-30 Q&A-4 (https://www.irs.gov/pub/irs-drop/n-08-30.pdf) and CFR 1.401(a)(31)-1 (https://www.law.cornell.edu/cfr/text/26/1.401(a)(31)-1).



Submitted by William Tuttle on Sat, 2020-08-29 05:27

  • As pointed out by DMx, Empower is required to perform one direct rollover by CFR 1.401(a)(31)-1.
  • They are not required to do more than one direct rollover, but it is uncommon for large 401k record keepers not to do so.
  • If they will only do one direct rollover, use that for the pre-tax account. This will prevent the mandatory 20% withholding that Alan referred to.
  • You can then do an indirect 60-day rollover of the Roth account. This will neither be subject to the 20% mandatory withholding nor the once per 12 month IRA rollover rule as pointed out by Alan.
  • However, the client should contact Empower again and inform them they are in violation of IRS regulations by not honoring a participant’s election to do a direct rollover. They should escalate if necessary getting the plan sponsor (employer) involved. They are the ones ultimately at risk for violating IRS regulations.
  • I think it is quite likely the CSR was misinformed and both direct rollovers are actually allowed by the plan. Unfortunately, CSR misinformation is not uncommon.


Submitted by David Mertz on Sat, 2020-08-29 12:46

Note that as long as a check is made out to the receiving IRA for your benefit, even though they give the check to you to forward to the IRA custodian the transaction still constitutes a direct rollover that must be reported with code G on Form 1099-R and avoids mandatory tax withholding.  As a direct rollover, there is no 60-day deadline for completing the rollover, but there is generally no good reason not to immediately forward the check to the IRA custodian.



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