401K Rollover blocked for casual employee

[sleah]

What is the name of your state (only U.S. law)? Georgia

Question:
Can company block 401K rollover?

I put in for a rollover of my 401K to a rollover IRA (both with Vanguard). Today, I found out that the company will not release the funds to go to the rollover IRA. They said that the policy is to not allow transfer of funds outside of the 401K for anyone employed in any capacity with the company. They said there are no variances, there is no-one to go to request an exception, etc. Regardless of rehire status - they don't allow it because I have been working for them.

I explained the entire situation to Vanguard when I set up the rollover IRA a few weeks ago and they figured the approval of transfer was just a formality.

Overview (sorry for the long explanation): I was hired in 1999. In September 2006, after 7 1/2 years they terminated my position due to reorganization. They gave me a letter stating that for 401K: I could take the cash, rollover to an IRA, or leave it sit in company plan - it would earn money but I would not be able to add to it. I just left it sitting there. This 401K has been sitting there for over 5 years with no contributions allowed into it. (I know it was irresponsible for just letting it sit there but that is the case).

Less than 2 weeks after terminating me, they had me doing side work for them from home (increased hourly rate but no benefits). I did that steady for a few months and then took a contract position with another company, still working for them on the side but with less hours due to my availability. That lasted for about a year.

In Feb. 2008, they asked me to return full-time as a "casual" employee (i.e., I looked like a salaried employee working in the office but had no benefits). In Dec. 2010, my supervisor asked me if I would be interested in returning as a salaried employee. He said HR indicated that there may be labor issues since I had been there so long without benefits, they basically mandated days & times I worked and supplied workspace and equipment. I said it would depend on offer.

1st offer came back a month or so later. Basically, they just calculated what I would have earned had I not left and that was it. I rejected that offer and told them the minimum I would accept. (terminating me was the best thing that they ever did because I learned what the market rate was for what I did). This month (over 10 months after being first asked), they gave a second offer that I agreed to.

The rehire takes affect Dec 1 and is being treated as a new hire (background check, drug test, waiting for benefits, 12 years onging work with no seniority). I have to wait 60 days to contribute to 401K even though the plan documents state that upon rehire, it will kick in as of rehire date. I guess that is one reason they are treating it as a new hire.

My issue is not so much that I want the money (I just plan on leaving in rollover IRA) but I am curious how they can block the transfer and if it is even legal. It is not indicated in the termination letter, in the plan documents or anywhere else that I can find that states the policy is to block rollovers for casual employees. I asked today for a copy of it. It just does not seem right (and should be illegal) that they can block the transfer even though they do not contribute OR allow contributions while a casual employee.

Any information is greatly appreciated.What is the name of your state (only U.S. law)?

 

[cbg]

They not only can block the transfer; they must block the transfer. Once you were rehired, under Federal law they CANNOT allow you to remove the funds.

You could have rolled them over any time while you were NOT employed by them. Once you were rehired, whatever they may have told you (or you understood) about "casual labor" the fact of the matter is that they would be in violation of the law if they DID allow the transfer.

 

[sleah]

Is this a federal law because they state that it is their policy or because of some other reason? I keep finding references to in-service withdrawals being allowed at times.

One example: In Revenue Ruling 68-24, the IRS said employees may be given access to contributions in a qualified retirement plan if the contribution had been in the plan for at least two years or if the employee had been a participant in the plan for at least five years.

I haven't researched it thoroughly so that ruling is probably something a company may offer and not be required to allow.

 

[FlyingRon]

In-service withdrawals are entirely at the discretion of the employer/plan. If they allow them they can be used to rollover into another. They are not required to permit this. You're only guaranteed a rollover when you cease to be an employee or are 59 1/2.

 

[cbg]

There is a difference between an in-service withdrawal, and a rollover to other funds.

SOME funds will allow you to take a loan. SOME funds permit hardship withdrawals (what constitutes a hardship withdrawal is limited by Federal law). But to take all the funds you have in a plan and roll them over to another fund that is not with your employer - that is not permitted by Federal law.

 

[sleah]

I'm not trying to be picky - I just want to understand completely and it seems that rollovers ARE at times allowed by Federal law according to law signed in 2006. Here is reference:

As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½.

Employees have to satisfy the five-year/two-year rule (that is where Revenue Ruling 68-24 comes into play).

Site that is found on is below but many references to it.
Hill's Personal Finance: Rules Change for 401K In-Service Rollovers

Am I reading this wrong?

EDIT: I understand discretion of employer. I just want to clarify cbg's post.

 

[cbg]

Okay. Let's assume that the law does not block all rollovers. I'm not going to swear it's impossible that I've missed an update, and there have been some changes to many benefits laws recently.

The fact remains, and I guarantee you that this has NOT changed, unless your specific plan document specifically and in so many words states that they WILL permit such withdrawals, the employer would STILL be in violation of the law if they did. They are required to follow the plan document TO THE LETTER and they MAY NOT allow any withdrawals that are not SPECIFICALLY spelled out.

And let's not forget, they are not obligated to allow any.

The bottom line is that unless you can show us where the specific plan document covering YOUR plan spells out that it WILL permit the kind of rollover you are looking for, then you are SOL. Even the withdrawals that the Feds do permit, they permit reluctantly. There is not one flippin' hope in heck that the employer can survive an audit in which they've approved a rollover that the plan document does not provide for, whether the rollover is allowed in the abstract or not.

 

[sleah]

At this point I just wanted to clarify that it IS possible for employer to offer the rollover option and does not violate law. I already gave up on even thinking of a rollover for myself - I have no doubt that the plan would not offer it.

I personally think there are some issues in legislation that will hopefully be corrected by some future law. Namely, it should not be allowed that an employer can effectively terminate a person, rehire them as a "casual" employee and then freeze the 401K - Not allowing any deposits and not allowing a transfer to something else where activity can occur. There should be a stipulation that if nothing can be put in, moving it should be allowed. Just my opinion of course.

In my situation, my period during which I was officially not working for them was so short that I never missed a check. After researching, the benefits department told me that I would have been denied taking the money out at any point because of that. They also indicated that this has come up before - that practice of letting people go and bringing back in without benefits seemed to be common for them a few years ago.

Oh well, lesson learned. Thank you for your info.

 

[cbg]

I am by no means convinced that rollovers from an in-house plan to an out-of-house plan ARE permitted. If the plan offers access to funds A, B, C and D but not to E, F, G, and H, you can certainly move the funds from A to D, or from D to B. You cannot move them from A to H as long as you are employed by the company.