I was a Rockwell employee who was transferred to Boeing. ... I would like to roll the 401(k) funds into an IRA. ... We've been told that we can't do that because of the "same desk rule."
The IRS recently changed the rules. In response, Rockwell International Corp. of Milwaukee gave you and many other former Rockwell workers more options effective Sept. 1. For example, you can stick with the Rockwell 401(k) plan, move your 401(k) account to an IRA or roll it over to the 401(k) plan at your new employer.
Richard Koski, principal with Buck Consultants, the international benefits and compensation consulting firm, said that, because the IRS has liberalized the rules, "many companies are going to go back and allow distributions [from 401(k) plans] to employees."
The money in these accounts is supposed to stay in your account until you retire. In general, it can be withdrawn only under certain circumstances, such as your death; your disability; if you turn 59 1/2 ; or if you quit, retire or otherwise lose your job, said James A. Seidel, a tax lawyer for RIA in New York.
There's at least one other situation in which you can withdraw money from your 401(k) account - if your company is sold, and certain other conditions are met (for example, if at least 85 percent of the assets of your company or division are involved in the sale, and the purchaser doesn't take over the old plan).
What if less than 85 percent of the assets are sold? Under the old rules, withdrawals weren't allowed. In effect, the IRS formerly said that such a situation wasn't a "separation from service" for the worker.
Why? You continued to do essentially the same work in essentially the same job, although for a different employer. In other words, you continued to work at the "same desk." Under this "same desk" rule, when workers were transferred to the new company, their 401(k) accounts stayed with their former employer, and the former employer wasn't allowed to distribute the funds, Seidel said.
Of course, the old employers didn't like the rule, because they faced the burdens associated with overseeing accounts for people who no longer worked for them, Seidel said. Workers didn't like being stuck with their money at their old company.
The IRS, however, now says that when a company transfers part of its business to another unrelated employer, and the new employer doesn't take over the 401(k) plan, people who wind up transferring to the new employer are considered "separated from service."
As a result, the employee who now works for the new employer doesn't have to keep his or her 401(k) account in the old employer's plan; he or she can move the money (or other assets) to an IRA or the new employer's 401(k) plan.