The rule of thumb is that if you are eligible to receive a distribution from your employer’s plan (current or former employer), then you can generally roll those assets from an employer sponsor plan to a solo 401k plan. Types of eligible employer plans are profit sharing and 401k plans, 403b and 457b government plans. Also, TSPs plans can be transferred to a solo 401k plan. The process of completing rollovers from these types of plans vary on how you choose to move them.
Interesting enough, the IRS does not provide forms for moving retirement plans to a solo 401k plan. However, the financial organization administering the employer plan that you want to move to a solo 401k plan will generally provide the rollover forms since they are the ones holding the assets.
Moving Assets
As outlined in IRC Sec. 402(f) notice, assets can be transferred from an employer plan either by a direct rollover or an indirect rollover. This notice covers the rules for distributions from plans.
Direct Rollover
If a participant in an employer-sponsored plan is entitled to an eligible rollover distribution from that plan, the participant may choose to have those assets directly rolled over to a solo 401k plan. Even though the assets move directly from plan to plan (i.e., solo 401k plan), this will result in reporting to the IRS. The check, mailed or hand-carried, is typically made payable to the receiving solo 401k plan (e.g., if the solo 401k plan name is The Verve Solo 401k Plan, the check is mad payable in this name), although the rollover also may be completed through a wire transfer. The participant does not have constructive receipt of the assets (i.e., the check is not made payable to the individual); therefore, the 60-day rule will not apply to this transaction.
While it is standard procedure in the industry, but not an IRS requirement that a direct rollover be processed using a written request, either the releasing plan or the solo 401k provider will provide the written transfer request.
Indirect Rollover
When the rollover distribution is made payable in the name of the participant he only receives 80% of those assets and only has a certain amount of time to move those assets to a solo 401k plan. Consequently, a participant who takes a distribution and later realizes the tax implications of retaining the assets may still have time to complete a rollover transaction and avoid taxation. Because the plan participant actually takes possession of the assets (e.g., the check), the 60-day rule will apply.
If a participant chooses to take payment of the assets, any of the assets that are eligible to be rolled over will be subject to 20 percent mandatory withholding. Unfortunately the participant has no choice to opt out of this 20% withholding requirement. The withheld amount, however, can be made up out-of-pocket at the time the participant chooses to complete a rollover to a solo 401k plan.
Lastly, not all distributions from employer-sponsored plans are eligible to be transferred to a solo 401k plan. These include required minimum distributions (RMDs), part of a series of periodic payments, and hard-ship distributions.
