Governmental plan transfer qualifies as direct rollover

Plain-English summary

A county proposed allowing former employees to make a one-time election to move their account balances from its governmental defined contribution plan to its governmental defined benefit plan. The receiving plan would immediately convert each transferred balance into a life annuity or a joint and survivor annuity. The IRS ruled that the transfer would be a permissible direct rollover and would not trigger current income tax, the early-distribution tax, constructive receipt, or a cash-or-deferred arrangement. The resulting annuity generally would be excluded from the employee's annual benefit for purposes of the section 415(b) limit, but only to the extent it was calculated under the actuarial rules in section 411(c). Any excess benefit produced by more favorable actuarial assumptions would count toward the section 415(b) limit.

Ruling snapshot

• Question: Can former county employees directly roll their governmental defined contribution plan balances into a governmental defined benefit plan for immediate annuitization without current tax or a section 415(b) violation?
• Outcome: Approved, subject to the section 411(c) actuarial limits on the annuity attributable to the rollover.
• Key authorities: IRC §§ 72(t), 401(a)(31), 401(k), 402, 411(c), 415(b), and 417(e); Treas. Reg. §§ 1.401(a)(31)-1, 1.401(k)-1, and 1.415(b)-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201527041 Third Party Communication: None
Release Date: 7/2/2015 Date of Communication: Not Applicable
Index Number: 402.06-00, 72.20-00, 401.29-
00, 415.01-00 Person To Contact:
, ID No.

Telephone Number:

Refer Reply To:
CC:TEGE:EB:QP1

PLR-T-103087-15

Date:
March 30, 2015

State A
County B
Plan C
Plan D

Dear

This letter is in response to correspondence, dated May 14, 2014, submitted on behalf
of County B by its authorized representatives, requesting a ruling with respect to the
federal income tax consequences of an elective plan-to-plan transfer of assets from
Plan C to Plan D by employees who have severed employment with County B.

The following facts and representations are submitted under penalties of perjury in
support of your request:

County B is a county in State A. County B established and maintains Plan D, a defined
benefit plan that is a governmental plan within the meaning of section 414(d) of the
Internal Revenue Code (“Code”), and a qualified plan within the meaning of section
401(a) of the Code. Plan D covers employees who: (1) were hired before October 1,
1994 and work in a permanent position for County B; (2) work in a union represented,
permanent position for County B as a sworn deputy sheriff and any County B
correctional staff or officer if designated by the Chief Administrative Officer to participate
in Plan D; (3) work in a union represented, permanent position for County B as a sworn
police officer; or (4) work in a union represented, permanent position for County B as a
paid firefighter, paid fire officer, or paid rescue service personnel. Those employees
hired after September 30, 1994, as union represented employees in categories (2), (3),
or (4) who transfer to non-union positions, continue to participate in Plan D.

PLR-T-103087-15 2

County B also established and maintains Plan C, a defined contribution plan that is a
governmental plan within the meaning of section 414(d) of the Code, and a qualified
plan within the meaning of section 401(a) of the Code. Plan C covers regular, full-time
or part-time employees who: (1) were hired after October 1, 1994 and are (a)
unrepresented employees, or (b) non-public safety employees that are members of a
specified collective bargaining unit; (2) are sworn police officers who have reached the
maximum credited service under Plan D; or (3) were hired before October 1, 1994, are
otherwise eligible for coverage under Plan C and wish to irrevocably elect to transfer to
Plan C.

County B intends to amend the County B Code to permit participants of Plan C who
have severed employment with County B to make a one-time, irrevocable election to
make a plan-to-plan transfer of their account balance under Plan C to Plan D in order to
receive an annuity benefit under Plan D. The transfer would occur prior to a
participant's commencement of benefits under Plan C.

After the transfer from Plan C to Plan D, the amount transferred would be immediately
annuitized and paid to the participant under Plan D as a single life annuity or a joint and
survivor annuity with a spouse, domestic partner, or child as a contingent annuitant.
Subsequent to the transfer from Plan C, no other contributions will be made to Plan D
by the participant or County B.

Based on the above facts and representations, you request a ruling that the transfer of
assets from Plan C to Plan D after a participant's severance from employment,
regardless of whether the participant has an existing Plan D benefit -

1. Is a permissible plan transfer that will not result in taxation to the participant
   under sections 72(t), 401(k), or 402 of the Code;

2. Will not result in constructive receipt of such amounts by an affected
   participant under section 72(t) or 401(k) of the Code; and

3. Will not be subject to the limitations on benefits under section 415(b) of the
   Code.

Section 72(t) of the Code provides for an additional tax on any amount received from a
“qualified retirement plan” (as defined in section 4974(c) of the Code, which includes
plans described in section 401(a) of the Code). The additional tax for the taxable year
in which such amount is received is equal to 10 percent of the portion of such amount
which is includible in gross income, unless one or more of the exceptions enumerated in
section 72(t)(2) of the Code applies.

Section 401(a) of the Code provides that a trust created or organized in the United
States and forming a part of a qualified stock bonus, pension, or profit sharing plan of

PLR-T-103087-15 3

an employer constitutes a qualified trust only if the various requirements set out in
section 401(a) of the Code are met.

Section 401(a)(16) of the Code requires that a qualified plan not provide for benefits or
contributions that exceed the limitations of section 415 of the Code.

Section 401(a)(31) of the Code requires that a participant in a qualified plan be
permitted to elect to have a distribution made in the form of a direct rollover to another
eligible retirement plan if the distribution qualifies as an eligible rollover distribution.
Section 1.401(a)(31)-1, A-15, of the Income Tax Regulations (the “Regulations”)
provides that, for purposes of applying the plan qualification requirements of section
401(a), a direct rollover is a distribution and rollover of the eligible rollover distribution
(rather than a transfer of assets and liabilities).

Section 401(a)(31)((D) of the Code defines the term “eligible rollover distribution,” for
purposes of section 401(a)(31), as having the meaning set forth in section 402(f)(2)(A)
of the Code. Section 402(f)(2)(A) of the Code, referring to section 402(c)(4) of the
Code, defines the term “eligible rollover distribution,” for purposes of a section 401(a)
qualified plan, as any distribution to an employee of all or any portion of the balance to
the credit of the employee in a qualified trust, except that such term shall not include:
(A) any distribution which is one of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of the employee
or the joint lives (or joint life expectancies) of the employee and the employee’s
designated beneficiary, or for a specified period of 10 years or more; (B) any distribution
to the extent such distribution is required under section 401(a)(9) of the Code; or (C)
any distribution which is made upon hardship of the employee.

Section 401(a)(31)(E) of the Code defines the term “eligible retirement plan,” for
purposes of section 401(a)(31) of the Code, as having the same meaning given such
term by section 402(c)(8)(B), except that a qualified trust shall be considered an eligible
retirement plan only if it is a defined contribution plan, the terms of which permit
acceptance of rollover distributions. Section 402(c)(8)(B) of the Code otherwise defines
the term “eligible retirement plan” to include a qualified trust.

Section 1.401(a)(31)-1, A-2, of the Regulations explains that while section 401(a)(31)(D)
of the Code limits the types of qualified trusts that are treated as eligible retirement
plans to defined contribution plans that accept eligible rollover distributions, a plan is
permitted, at a participant’s election, to make a direct rollover to any type of eligible
retirement plan, as defined in section 402(c)(8)(B) of the Code, including a defined
benefit plan. Accordingly, a direct rollover from a qualified defined contribution plan to a
qualified defined benefit plan is permitted under section 401(a)(31) of the Code, but not
required.

PLR-T-103087-15 4

Section 401(k) of the Code provides the rules relating to cash or deferred
arrangements. Section 1.401(k)-1(a)(2) of the Regulations provides that, subject to
certain exceptions, which are inapplicable in this case, a cash or deferred arrangement
is an arrangement under which an eligible employee may make a cash or deferred
election with respect to contributions to, or accruals or other benefits under, a plan that
is intended to satisfy the requirements of section 401(a) of the Code.

Section 1.401(k)-1(a)(3)(i) of the Regulations generally defines a cash or deferred
election as any direct or indirect election (or modification of an earlier election) by an
employee to have the employer either: (A) provide an amount to the employee in the
form of cash (or some other taxable benefit) that is not currently available, or (B)
contribute an amount to a trust, or provide an accrual or other benefit, under a plan
deferring the receipt of compensation.

Section 402(a) of the Code generally provides that any amount actually distributed to
any recipient by any employees’ trust described in section 401(a) of the Code, which is
exempt from tax under section 501(a) of the Code, shall be taxable to the recipient in
the taxable year of the distribution under section 72 of the Code (relating to annuities).

Section 402(c)(1) of the Code provides that if any portion of the balance to the credit of
an employee in a qualified trust is paid to the employee in an eligible rollover
distribution, and the employee transfers any portion of the property received in such
distribution to an eligible retirement plan, then such distribution (to the extent so
transferred) shall not be includible in gross income for the taxable year in which paid.

Under section 411(c)(2)(B) of the Code, in the case of a defined benefit plan, the
accrued benefit derived from contributions made by an employee as of any applicable
date is the amount equal to the employee’s accumulated contributions expressed as an
annual benefit commencing at normal retirement age, using an interest rate which
would be used under the plan under section 417(e)(3) of the Code (as of the
determination date).

Section 411(c)(2)(C) of the Code defines the term “accumulated contributions” as the
mandatory contributions made by the employee, increased by interest. With respect to
periods during plan years beginning on or after January 1, 1988, section 411(c)(2)(C)(iii)
specifies that the interest is determined using the rate of 120 percent of the Federal
mid-term rate (as in effect under section 1274 of the Code for the first month of each
plan year) for the period beginning with the first plan year to which section 411(a)(2) of
the Code applies (by reason of the applicable effective date) and ending on the date the
determination is being made, and using the interest rate under section 417(e)(3) of the
Code for the period between the determination date and the date on which the
employee attains normal retirement age.

PLR-T-103087-15 5

Section 411(c)(3) of the Code requires that, if the accrued benefit derived from
employee contributions is to be determined with respect to a benefit other than an
annual benefit in the form of a single life annuity (without ancillary benefits) commencing
at normal retirement age, the accrued benefit derived from contributions made by the
employee shall be the actuarial equivalent of the amount determined under section
411(c)(2) of the Code.

Section 411(e) of the Code provides that a governmental plan (within the meaning of
section 414(d) of the Code) is treated as meeting the requirements of section 411,
provided the governmental plan meets the vesting requirements resulting from the
application of sections 401(a)(4) and 401(a)(7) of the Code as in effect on September 1,
1974.

Section 415(a)(1)(A) of the Code provides that a defined benefit plan is not a qualified
plan if the plan provides for the payment of benefits with respect to a participant which
exceed the limitation of section 415(b) of the Code. Section 415(b)(1) of the Code
prescribes limitations that are based on the annual benefit determined under section
415(b)(2) of the Code. Section 415(b)(2)(B) of the Code provides for adjustments, in
accordance with regulations, to the benefit determined under the plan if employees
contribute or make rollover contributions to the plan.

Section 1.415(b)-1(b)(1) of the Regulations prescribes rules for the determination of the
annual benefit for purposes of section 415(b) of the Code. Under section 1.415(b)-
1(b)(1)(ii) of the Regulations, the annual benefit, for purposes of determining the section
415(b) limitation, does not include the annual benefit attributable to either employee
contributions or rollover contributions (as described in section 401(a)(31) and section
402(c)(1) of the Code). Furthermore, pursuant to section 1.415(b)-1(b)(1)(ii), the
treatment of transferred benefits is determined under the rules of section 1.415(b)-
1(b)(3) of the Regulations.

Under section 1.415(b)-1(b)(2)(v) of the Regulations, the annual benefit attributable to
rollover contributions is determined by using the factors applicable to mandatory
employee contributions as described in sections 411(c)(2)(B) and (C) of the Code and
regulations promulgated under section 411 of the Code, regardless of whether the
requirements of sections 411 and 417 of the Code apply to the plan. Thus, in the case
of rollover contributions from a defined contribution plan to a defined benefit plan to
provide an annuity distribution, the annual benefit attributable to those rollover
contributions, for purposes of section 415(b), is determined by applying the rules of
section 411(c) as described in section 1.415(b)-1(b)(2)(iii), regardless of the
assumptions used to compute the annuity distribution under the plan and regardless of
whether the plan is subject to the requirements of sections 411 and 417 of the Code.
Accordingly, in such a case, if the plan uses more favorable factors than those specified
in section 411(c) to determine the amount of annuity payments arising from rollover
contributions, the annual benefit under the plan would reflect the excess of those

PLR-T-103087-15 6

annuity payments over the amounts that would be payable using the factors specified in
section 411(c).

Section 1.415(b)-1(b)(3)(ii) of the Regulations provides that where, as described in
section 1.411(d)-4, Q&A-3 (c) of the Regulations (permitting certain elective transfers of
distributable benefits), a distributable benefit is transferred to a defined benefit plan from
either a defined contribution plan or a defined benefit plan, the amount transferred is
treated as a benefit paid from the transferor plan and the annual benefit provided by the
transferee defined benefit plan does not include the annual benefit attributable to the
amount transferred (determined as if the transferred amount were a rollover contribution
subject to the rules of section 1.415-1(b)(2)(v)). Section 1.415(b)(3)(ii) further states
that the rule in the preceding sentence applies regardless of whether the requirements
of section 411 of the Code apply to the plan and, in the case of a transfer from a defined
contribution plan that is not subject to the requirements of section 411 (such as a
governmental plan) to a defined benefit plan, the rule applies even if the participant's
benefits are not distributable from the defined contribution plan at the time of the
transfer.

Revenue Ruling 2012-4, 2012-8 I.R.B. 386, involves the direct rollover of an eligible
rollover distribution from a qualified defined contribution plan to a qualified defined
benefit plan maintained by the same employer. The revenue ruling provides that a
qualified defined benefit plan that accepts a direct rollover of an employee's or former
employee’s benefit from a qualified defined contribution plan maintained by the same
employer does not violate section 411 or 415 of the Code if the defined benefit plan
provides an annuity resulting from the direct rollover that is determined by converting
the amount directly rolled over into an actuarially equivalent immediate annuity using
the applicable interest rate and applicable mortality table under section 417(e) of the
Code.

Revenue Ruling 2012-4 further provides that if the qualified defined benefit plan
receiving a direct rollover were to use a more favorable actuarial basis (such as a higher
interest rate than the section 417(e)(3)(C) applicable interest rate or a mortality table
with shorter life expectancies than the applicable section 417(e)(3)(B) mortality table) for
purposes of calculating the annuity resulting from the rollover amount, or otherwise
provided for a larger annuity than the annuity derived from employee contributions as
determined under section 411(c), then the portion of the benefit under the qualified
defined benefit plan resulting from the amount directly rolled over that exceeds the
benefit derived from that rolled over amount under the rules of section 411(c)(2)(B) is
not treated as the benefit derived from the employee’s own contributions, and the
excess portion would be included in the annual benefit for purposes of section 415(b) of
the Code.

In this case, participants in Plan C are permitted to elect to have amounts otherwise
distributable to them under Plan C transferred directly to Plan D. Plan C and Plan D are

PLR-T-103087-15 7

each eligible retirement plans, within the meaning of section 401(a)(31)(E) of the Code.
The amounts transferred constitute eligible rollover distributions, as defined in section
401(a)(31)(D) of the Code. Therefore, each employee's elective plan-to-plan transfer of
assets from Plan C to Plan D constitutes a direct rollover within the meaning of section
401(a)(31) of the Code.

In addition, an employee’s election to direct a plan-to-plan transfer of an eligible rollover
distribution from one eligible retirement plan to another is not a direct or indirect election
(or modification of an earlier election) by the employee to have the employer either
provide an amount to the employee in the form of cash (or some other taxable benefit)
that is not currently available, or to contribute an amount to a trust, or provide an accrual
or other benefit, under a plan deferring the receipt of compensation. Thus, the election
to direct a plan-to-plan transfer of an eligible rollover distribution from Plan C to Plan D
does not constitute a cash or deferred election, within the meaning of section 1.401(k)-
1(a)(3)(i) of the Regulations. Rather, as provided in section 1.401(a)(31), A-15, of the
Regulations, the plan-to-plan transfer (i.e., direct rollover) from Plan C to Plan D is
treated as a distribution and rollover of the eligible rollover distribution (rather than a
transfer of assets and liabilities). Accordingly, the employees’ ability to elect a direct
plan-to-plan transfer of assets from Plan C to Plan D does not constitute a cash or
deferred arrangement, within the meaning of section 1.401(k)-1(a)(2) of the
Regulations.

Under section 402(c)(1) of the Code, the amount transferred from Plan C to Plan D on
behalf of an employee in a direct rollover is not includible in the gross income of the
employee for the taxable year in which the plan-to-plan transfer occurs. In accordance
with section 402(a) of the Code, such amount is taxable to the employee in the taxable
year in which the amount is distributed from Plan D under section 72 of the Code
(relating to annuities). Therefore, the direct rollover of an employee’s account balance
under Plan C to Plan D Is a permissible plan transfer that will not result in taxation to the
employee under sections 72(t), 401(k), or 402 of the Code at the time of the rollover,
and similarly will not result in constructive receipt of such amounts by an affected
employee under section 72(t) or 401(k) of the Code at the time of the rollover.

Pursuant to section 1.415(b)-1(b)(1)(ii) of the Regulations, an employee’s Plan D benefit
resulting from the amount directly rolled over from Plan C on the employee’s behalf is
generally excluded from the employee’s annual benefit for purposes of section 415(b) of
the Code. However, as provided in sections 1.415(b)-1(b)(1)(ii) and 1.415(b)-1(b)(2)(v)
of the Regulations, the amount that is directly rolled over from Plan C to Plan D is
excluded from the employee’s annual benefit for purposes of section 415(b) only to the
extent the Plan D benefit is determined using the rules of sections 411(c)(2)(B) and (C)
of the Code, In addition, in accordance with Revenue Ruling 2014-4, a direct rollover
from Plan C to Plan D will not be subject to the limitations on benefits under section
415(b) of the Code, provided the resulting Plan D benefit is an annuity that is
determined by converting such amount directly rolled over into an actuarially equivalent

PLR-T-103087-15 8

immediate annuity using the applicable interest rate and applicable mortality table under
Code section 417(e).

If the Plan D benefit attributable to the amount directly rolled over from Plan C is
determined using a more favorable actuarial basis than as provided under sections
411(c)(2)(B) and (C) of the Code, then the portion of the Plan D benefit resulting from
the amount directly rolled over that exceeds the benefit derived from the rolled over
amount under the rules of section 411(c)(2)(B) is not treated as the benefit derived from
the employee’s own contributions, and the excess portion must be included in the
annual benefit for purposes of section 415(b) of the Code. For example, as described in
Revenue Ruling 2012-4, an amount might be included in the annual benefit, for
purposes of section 415(b), if a higher interest rate than the section 417(e)(3)(c)
applicable interest rate, or a mortality table with shorter life expectancies than the
applicable section 417(e)(3)(B) mortality table, is utilized. Similarly, an amount would
be included in the annual benefit for purposes of section 415(b) if the Plan D annuity
benefit resulting from the rollover from Plan C is otherwise larger than that determined
under section 411(c) of the Code.

Based on the foregoing, we conclude that the transfer of assets from Plan C to Plan D
after a participant’s severance from employment, regardless of whether the participant
has an existing Plan D benefit -

1. Is a permissible plan transfer that will not result in taxation to the participant
   under sections 72(t), 401(k), or 402 of the Code at the time of such transfer;

2. Will not result in constructive receipt of such amounts by an affected
   participant under section 72(t) or 401(k) of the Code; and

3. Will not be subject to the limitations on benefits under section 415(b) of the
   Code to the extent the annual benefit under Plan D derived from the transfer
   of assets from Plan C is determined using the rules set forth in section 411(c)
   of the Code;

This ruling is based on the assumption that Plan C and Plan D satisfy the qualification
requirements set forth in section 401(a) of the Code, and constitute governmental plans
within the meaning of section 414(d) of the Code, at all relevant times.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

PLR-T-103087-15 9

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed

by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Sincerely,

Laura B. Warshawsky

Senior Tax Law Specialist

Qualified Plans Branch 2

(Tax Exempt and Government Entities)

cc: