6.4 Rollover Contributions Into the Plan: Eligible Sources, Direct vs. 60-Day Rollovers & Invalid Rollovers
Key Takeaways
- Rollover contributions are always 100% vested, are excluded from the IRC §415(c) annual additions limit and the IRC §402(g) deferral limit, and are excluded from ADP, ACP, coverage and top-heavy testing.
- A plan may accept rollovers from another qualified plan, a 403(b) plan, a governmental 457(b) plan, and a traditional IRA, but designated Roth amounts may be rolled in only from another designated Roth account and only by direct rollover.
- In a 60-day (indirect) rollover from a plan, the payor must withhold 20% under IRC §3405(c); the participant must replace that 20% from other funds to roll over the full amount.
- Treas. Reg. §1.401(a)(31)-1, Q&A-14 gives the plan administrator a good-faith reliance safe harbor: if an invalid rollover is discovered later, distributing the amount plus earnings within a reasonable time preserves the plan's qualification.
Money Coming In, Not Going Out
Most distribution teaching runs one direction: assets leaving the plan. The rollover contribution runs the other way, and it has its own rulebook. Accepting rollovers is always optional — no plan is required to accept them — but nearly every 401(k) document does, because consolidating a new hire's prior-employer balance is a retention and participation win for the sponsor.
Which Sources May Be Rolled In
IRC §402(c)(8)(B) defines an eligible retirement plan. A qualified 401(k) plan that has elected to accept rollovers may take amounts from:
| Source | Accepted? | Notes |
|---|---|---|
| Another qualified plan — 401(a), 401(k), profit sharing, money purchase | Yes | The most common source. |
| 403(b) tax-sheltered annuity | Yes | Portability was made general by EGTRRA 2001. |
| Governmental 457(b) plan | Yes | Tax-exempt (non-governmental) 457(b) plans are not eligible sources. |
| Traditional IRA | Yes, but only the taxable portion | After-tax IRA basis may not be rolled into a qualified plan. |
| SIMPLE IRA | Yes, after the participant's 2-year participation period | Before two years, a rollover triggers the 25% early distribution penalty. |
| Designated Roth account (another plan's Roth 401(k)/403(b)) | Yes, direct rollover only | A 60-day rollover of designated Roth amounts between plans is not permitted. |
| Roth IRA | No | A Roth IRA may never be rolled into a qualified plan. |
| Non-governmental 457(b) | No | Only transferable to another non-governmental 457(b). |
| Required minimum distributions | No | An RMD is not an eligible rollover distribution. |
| Hardship distributions | No | Not eligible rollover distributions. |
| Substantially equal periodic payments over life expectancy or 10+ years | No | Excluded from the definition of eligible rollover distribution. |
Direct Rollover vs. 60-Day Rollover — and the 20% Trap
Direct Rollover (IRC §401(a)(31))
The distributing plan sends the money directly to the receiving plan or IRA. There is no withholding and no 60-day clock. Every plan distributing an eligible rollover distribution must offer the direct rollover option and provide the IRC §402(f) special tax notice between 30 and 180 days before the distribution.
60-Day (Indirect) Rollover
The participant receives the check and has 60 days to deposit it into an eligible retirement plan. This is where the exam sets its trap:
A distribution from a plan that is an eligible rollover distribution is subject to mandatory 20% federal income tax withholding under IRC §3405(c). The participant receives only 80%. To roll over the entire pre-distribution amount, the participant must contribute the missing 20% from other funds, then recover the withholding as a credit when filing.
Worked example. Priya has a $100,000 vested balance and elects a cash distribution intending to roll it to her new employer's plan.
| Step | Amount |
|---|---|
| Gross eligible rollover distribution | $100,000 |
| Mandatory 20% withholding | ($20,000) |
| Check Priya receives | $80,000 |
| To roll over 100%, she must deposit within 60 days | $100,000 |
| Additional cash Priya must supply from savings | $20,000 |
| If she deposits only the $80,000 | $20,000 is taxable income, plus a 10% §72(t) penalty if she is under 59½ |
The same distribution taken as a direct rollover moves $100,000 with zero withholding. This comparison is one of the most reliably tested items in QKA-1 Distributions and Employee Contributions.
The IRS may waive the 60-day deadline for hardship, and Rev. Proc. 2020-46 provides a self-certification procedure for eleven enumerated reasons, including financial institution error, a misplaced and never-cashed check, and serious illness.
How Rollover Accounts Are Treated — the Exclusion Checklist
A rollover contribution is administratively unlike every other money type in the plan:
| Rule | Treatment of rollover contributions |
|---|---|
| Vesting | Always 100% immediately vested — they are the participant's own already-earned money. |
| IRC §415(c) annual additions | Excluded. A rollover is not an annual addition. |
| IRC §402(g) deferral limit | Excluded. |
| ADP / ACP testing | Excluded from both the numerator and the compensation denominator. |
| IRC §410(b) coverage | Excluded. Rolling money in does not make someone a "benefiting" participant. |
| IRC §416 top-heavy ratio | Excluded if the rollover is unrelated (from an unaffiliated employer's plan) and participant-initiated. A related rollover — from another plan of the same employer or controlled group — is counted in the top-heavy ratio. |
| Deduction limit under §404 | Excluded — it is not an employer contribution. |
| In-service withdrawal | A plan may permit withdrawal of the rollover account at any time, even before age 59½, because rollover amounts are not subject to the §401(k) distribution restrictions. |
| Participant counting for Form 5500 / audit | Someone with only a rollover account is a participant with an account balance. |
| $7,000 mandatory cash-out | The plan may disregard the rollover account when applying the cash-out threshold, if the document so provides. |
The related versus unrelated rollover distinction in the top-heavy line is a favorite QKA-2 item. A participant who rolls $400,000 from a genuinely unrelated former employer into a small top-heavy plan does not inflate the top-heavy ratio.
Invalid Rollovers and the Administrator's Safe Harbor
An invalid rollover is an amount accepted that was never eligible — for instance, a hardship distribution, an RMD, or money from a Roth IRA. Because a qualified plan may only hold permissible contributions, an invalid rollover technically threatens qualification.
Treas. Reg. §1.401(a)(31)-1, Q&A-14 provides relief. If the plan administrator reasonably concluded in good faith that the contribution was a valid rollover when accepted, and, upon later learning it was invalid, distributes the amount plus attributable earnings within a reasonable time, the plan is treated as having satisfied §401(a) with respect to that amount.
Reasonable good faith is typically established by obtaining a check from the prior plan's trustee, a distribution statement or Form 1099-R, or a participant certification that the amount is an eligible rollover distribution. The corrective distribution is not subject to the §72(t) penalty.
Common ASPPA QKA Exam Traps
- Trap 1 — Roth IRA rollovers. A Roth IRA can never be rolled into a qualified plan. Designated Roth 401(k) accounts can, but direct-only.
- Trap 2 — Counting rollovers as annual additions. They are excluded from §415(c) entirely.
- Trap 3 — Related vs. unrelated rollovers in top-heavy. Unrelated participant-initiated rollovers are excluded; same-employer rollovers are included.
- Trap 4 — The 20% withholding math. The participant must supply the withheld 20% from other funds to complete a full 60-day rollover.
- Trap 5 — Rolling in an RMD. An RMD is not an eligible rollover distribution; accepting one creates an invalid rollover.
- Trap 6 — Assuming the plan must accept rollovers. Acceptance is always a document election.
Priya has a $100,000 vested account balance and takes a cash distribution intending to complete a 60-day rollover to her new employer's plan. What must she do to roll over the entire $100,000?
A participant rolls $400,000 into a small top-heavy 401(k) plan from a plan sponsored by a completely unaffiliated former employer. How is the rollover account treated in the IRC §416 top-heavy ratio?
A plan administrator accepts a rollover after obtaining the prior plan's distribution statement, then learns two years later that the amount was actually a required minimum distribution and never eligible for rollover. What preserves the plan's qualified status?