Can a Cash Balance Plan be Rolled Over Into an IRA or 401(k)?

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Cash balance plans are becoming more and more popular. But questions still persist over the distribution rules. Specifically, can a cash balance plan be rolled over into an IRA or 401(k)?

In this post, we take a close look at the cash balance plan rollover. We’ll show you how to do it and discuss a few critical steps must be followed.

A little background

You probably are aware that a cash balance plan is technically a defined benefit plan. The company allocates funds, typically a percentage of salary, into an investment account for the benefit of the employee.

Many people are concerned that when they set up a cash balance plan they cannot change or terminate the plan. The IRS contends that these plans are permanent and cannot be terminated at will. There must be a valid reason.

Even though the IRS assumes the plans will carry on indefinitely, it is typically OK to terminate a plan as long as the plan is active for at least a “few years.”

But the regulations are a little vague. They don’t clearly identify what a “few years” truly means. As long as there is a business necessity, the plan can be terminated. Just desiring to get the money to the participant so they can manage their own investments does not qualify as a valid reason.

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A business necessity typically is when the company has lower profits, there is an ownership change, or there is an issue that inhibits the ability to fund the plan on a continual basis. The IRS may also allow the adoption of an alternative plan as a valid reason for termination.

From a practical standpoint, the IRS has typically not questioned a termination that happens more than 10 years after the initial inception. In addition, companies that are terminating a plan that was initiated at least 5 years prior to termination do not generally receive problems from the IRS.

Can a plan be rolled over into an IRA?

So assuming you can terminate the plan, can the cash balance plan be rolled over into an IRA? The law allows you to take money out of the plan in a full lump sum payment or, alternatively, to take that lump sum and roll it into an IRA.

Because the funds in the cash balance plan have not been taxed, you may rollover the funds upon termination into a traditional IRA or a Roth IRA. A traditional IRA is similar to a cash balance plan because the taxes are deferred until retirement. If you roll the funds into a Roth IRA you will be taxed on the entire amount.

Can I do a Roth IRA rollover?

A Roth IRA functions opposite to a traditional IRA, or, the funds deposited into a Roth IRA must have been taxed already, and no taxes will be required at retirement.

Should you choose to rollover your cash balance plan to a Roth IRA, keep in mind you will need to pay taxes on the amount rolled over, which will be taxed as ordinary income.

What about a rollover to a 401k plan?

Many people don’t realize that a cash balance plan can be rolled over into a 401k. In fact, you can rollover a cash balance plan into almost any qualified retirement plan. Even though an IRA is the most popular choice, the 401k rollover is a close second.

One of the biggest disadvantages of rolling over a cash balance plan to a 401k plan is that fact that you will have to continue to file form 5500 when the balance exceeds $250,000. This is not the case with an IRA.

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But the 401k plan rollover might still be your best option. This is because you can borrow against the plan an amount up to $50,000 or 50% of the account balance.

Rollover fromAcceptable Account
Cash balance planIRA
Defined benefit plan401k
Cash balance planRoth (but taxable)

What is the cash balance plan rollover process?

How do you roll over a cash balance plan into an IRA?

  1. Determine why the rollover is required

    Is it because the employee is leaving and has a vested account balance? Or possibly the plan itself is terminating.

  2. Locate a custodian who will receive the funds from the rollover

    Since the amount will be rolled into an IRA then make sure to open up an account at a provider Vanguard, Schwab or Fidelity to accept the rollover.

  3. Have the current custodian verify the rollover amount

    The current custodian with help from the TPA will determine the final vested balance.

  4. Process rollover paperwork

    The company will have distribution forms that will need to be signed that will instruct the custodian to release the funds. Normally the administrator will facilitate the distribution.

  5. Verify funds receipt

    Unfortunately, this can sometimes take a week or so depending on processing time. Verify that amount equals the vested account balance, net of fees.

Final Thoughts

Before terminating your plan and rolling it over into an IRA or 401(k), make sure you discuss the issue with a cash balance pension plan administrator.

So can a cash balance plan be rolled over into an IRA? Absolutely. Just make sure that you do your diligence up front so that the plan is properly terminated. Only then can you keep your distance from the IRS.

Paul Sundin

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