Diane D. Capone
First, let’s discuss the “vice versa”: rolling from a governmental 457 to a 403(b).
The difference between these two plans does not seem significant at first glance. They are usually held in individual accounts or annuity contracts that require the employer’s approval in order to accept the assets from a governmental 457 of a previous employer into the current employer’s 403(b) plan. Of course, in order to be eligible to roll over, the participant must have separated from service with the previous employer. Most employer plans through their TPAs have been providing approval for this type of rollover. Looking at the IRS Rollover Chart
it is clear that this is a permitted type of rollover.
In the details of this type of transaction we could find that it may not be a good idea for the participant. Governmental 457 plan does not have the 10% penalty for early distributions while the 403(b) plan does have a requirement that any distribution before 59½ is subject to the 10% penalty tax (unless an exception applies). Therefore if the participant rolls over an account from a 457 plan of a previous employer into the 403(b) plan of the new employer, the result is the loss of the ability to take a distribution without penalty. It is important to understand this and communicate to the participant this difference.
If the participant is 59½ or older the penalty is not an issue. So the rollover may make sense if the participant wants to have all of his/her retirement assets in one place. It is also possible that the participant may want to have access to a larger loan amount by combining these plans. If the participant is comfortable with the possible downside and the employer (or the employer’s TPA) approves the rollover, it may not be a problem.
What about the opposite: rolling from a 403(b) to a governmental 457?
Now the transaction gets more complicated. As you can see from the IRS Rollover Chart the governmental 457 plan will need to provide “separate accounts” which accounts will be required to treat this rollover under the rules of 403(b). For example, if the participant is 50 years old, rolls into the governmental 457 of the new employer, takes a distribution from the rollover account (if permitted by the employer’s plan), the distribution will result in the 10% premature distribution penalty even though it is coming from a plan that does not have this penalty!
Bottom line — it is important to know the difference set forth above and to be able to discuss this with the participant. It is also important to know what the employer’s plan says regarding rollovers in general and the above types in particular. Finally, since these are mainly held in individual custodial accounts or individual annuity contracts, you will need to know the requirements of the particular custodial account or annuity contracts and whether or not they will accept and monitor these rollovers.
Diane D. Capone, CEBS CPE-Compliant, TGPC is a Sr. Retirement Compliance Consultant for Lincoln Investment, Registered Investment Advisor, Broker/Dealer, Member FINRA/SIPC.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.
Please note that this article is for general informational purposes only and is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.