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Employer changed 403B institutions

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My employer changed 403B institutions. They previously sent my deductions to Lincoln Life but they ended their relationship with them.  Now they are sending my deductions to Fidelity.  My employer stated that my balance at Lincoln Life will remain there.

Question:

May I rollover my balance at Lincoln Life to a traditional IRA without penalty or taxes since my employer no longer has a relationship with them?

Edited by Reg
Misspelling

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15 hours ago, Reg said:

May I rollover my balance at Lincoln Life to a traditional IRA without penalty or taxes since my employer no longer has a relationship with them?

the quick answer is No.

Congratulations  . You may now be the proud owner of a frozen account if Lincoln is no longer on your employer's provider list as transfers are allowed only between institutions within the provider list while employed.Actually that happened to me. We got Vanguard, then Vanguard got taken away so If I wanted to I could not transfer those assets to something else. But my situation was positive because I had no interest in transferring Vanguard over to anything else.In your case it's just the opposite. You would be well served to be able to transfer your money into Fidelity. So that's a bummer.

I think your employer owed it to you to notify you in advance of this happening, with the possibility of doing a transfer before eliminating Lincoln life. But Lincoln wouldn't want that to happen for obvious reasons. They can keep sucking your account of fees  now for years to come.

You only have one choice on your 403b List?   That is rather unusual as most systems have too many choices.

Once you retire you can move that money to an IRA. In the meantime stay the heck away from insurance companies and start investing in Fidelity index funds with all new money as we advise here. Read through the forums .

Also if you leave your current job that too would open the door for you transferring your money over to a new  403b, a iRA, or I believe even a 401k plan.

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I don't have a definitive answer for this, I'd have to read the rules/regulations. However, I can say two things for sure:

  • If they aren't allowing you to move the money out of Lincoln and into an approved 403b vendor, it violates the spirit of the rules if not the letter.
  • If you terminate employment, you can move the money out of Lincoln, no need to wait for retirement.

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I'm pretty sure you can't move the assets outside of the 403b plan (such as to an IRA) until you either reach age 59 1/2 or separate from that employer.

But it is usually possible to move among active vendors within a plan.  It would be in your interest to see whether you can consolidate your 403b assets at Fidelity.

I'm no expert on this, but I've never heard of a 403b vendor being "frozen," where assets cannot be moved out.  Vendors drop off approved provider lists such that one can no longer contribute to them pretty commonly, though.  This has happened to me a couple of times.  You can ask your payroll/benefits office about this, but if I were you I'd call Fidelity to ask them about consolidating there.  They should be able point you in the right direction to get questions answered, at least.

Fidelity is a fine place for the money to grow, I hope you can do that.  My worry is that there may be strings attached to to the insurance investment, e.g., big "surrender" fees for pulling money out before years have elapsed.  If that's the case, your decision will be more complicated.

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1 hour ago, EdLaFave said:

f they aren't allowing you to move the money out of Lincoln, it violates the spirit of the rules if not the letter.

 

1 minute ago, whyme said:

But it is usually possible to move among active vendors within a plan.  It would be in your interest to see whether you can consolidate your 403b assets at Fidelity.

 

4 minutes ago, whyme said:

I'm no expert on this, but I've never heard of a 403b vendor being "frozen," where assets cannot be moved out. 

It happened to me just like it happened to Reg . I could not move it even if I wanted to  move it once Vanguard was dropped. 

I think the issue is Lincoln no longer  part of their plan document which freezes the account until retirement or separation of service.`It happens all the time. I agree it stinks to do that to an employee but we don't know the circumstances behind the move. What I see as  weird to me is that they seem to have only one provider now ?  It's great that it's Fidelity, not so great that employees don't have at least a few more options. Fidelity is certainly better choice  than an insurance company like LincolnLife but, outside of their Index Funds, Fidelity is a managed fund higher fee entity.  I think there must be some other choices but the fact is if Lincoln was dropped than the money stays with Lincoln. Now maybe the rules have changed  but that's the way it was when I was working. 

The OP should investigate this further. I hope we will hear back from him.

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Thanks, Tony.  So you were stuck at Vanguard?  I once had to stop contributing to Vanguard because it was dropped from the list.  My memory is fuzzy on this point, but I think I was able to roll those funds into whatever the replacement 403b account was.  This happened to me two or three times: there was a period when the laws around 403b's were changing and vendors were dropping like flies.

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5 hours ago, whyme said:

So you were stuck at Vanguard? 

Yea so i had no interest to moving to something else but some teachers  who had small amounts in Vanguard wanted to move it to something else  in our 403 and couldn't. I remember that clearly.   They told us it was a frozen account. That's the wordage they used.I'm hoping to hear from Reg and I hope he has researched this further. 

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Thanks for all the input. Here is an update

So far:

Lincoln Life customer rep is not 100% sure but she said it can’t be moved without penalty while I still work for the company. 

Fidelity customer rep is also not 100% sure but he thinks I can move it into the new 403b with them but not the traditional IRA. He is doing research to confirm that and will get back to me. 

My tax lady said that there would be no penalty for me to move it. Somehow, I just don’t trust her quick answer since the other two companies weren’t sure either.

It would suck if I couldn’t move it at all. I will update y'all when I get a definitive answer. 

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23 minutes ago, tony said:

Reg

When we talk penalty are you referring  to surrender fee  or IRS withdrawal fee?  or both?

Tony,

Yes to both. 

I have, in the past,  transferred old 403b plans from previous employers to my traditional IRA without incurring any fees whatsoever. That was great because I was not limited to the funds that my previous 403b plans offered. However, now, with a large portion of my nest egg stuck in Lincoln Life, I don’t have the flexibility that I have with my traditional IRA. 

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Well

Than  if you have a surrender fee involved in all this and its significant than waiting  out any move  until your money is free and clear  of surrender fees might make sense depending on the size of your portfolio and the amount of the surrender fee.

I hope you can move it but from the responses you're getting it seems most of your "Experts" aren't sure either.  

If you can't move it considering where it is, it is very unfortunate and very unfair to you. Let's hope there is a way out for you.

Please keep us informed because this situation may very well  arise again for others and we want to make sure we can guide them correctly.

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Yes, please do give us an update, Reg.  I'm pretty sure that you cannot rollover to an IRA until you are 59 1/2 or have left your job, whichever comes first.  

I'd be surprised to learn that the IRS charges a fee for any 403b-to-403b rollover, though.  Surrender charges on the insurance product are, sadly, all too common.

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DO NOT do any rollover if you don't meet the distribution requirements. If you do, you will have really bad tax consequences.

What you need to do is either a "contract exchange" or "plan to plan transfers".

A contract exchange is when you move money within the plan from one vendor to another vendor in the plan. There is no tax consequences for this as long as you follow the rules. All that happens is that the money is moved from one vendor into another vendor and no tax form is generated.

A "plan-to-plan transfers" is usually when you move your 403b money from one employer into another's employer's 403b plan.

If you are with the same employer, you are most like doing a "contract exchange." Make sure that the transfer is coded correctly. Lots of vendors are not knowledgeable about it. My friend did a contract exchange from one vendor into another vendor in the same plan with the same employer. I told him to make sure that they know it's a contract exchange and NOT a rollover. The vendor that he transfer his money out of said that it will be a contract exchange. Guess what, months later and when 1099 forms went out, he got one. It was coded as a rollover. Contract exchange does NOT produce any 1099 form. Now, because of what happened, he would be on the hook for paying taxes on all that because he was not eligible for any rollover. I helped him and we talked to the vendor he moved the money out of. We talked to the supervisor and we told him that he did a contract exchange but they have it as a rollover distribution. They said that we were wrong and they were correct and that they did a contract exchange which is consider a rollover. We told them that if it was a contract exchange, that why was a 1099 form created? He said it gets created because we did a contract exchange and that's the just name for moving money from one account to another. We fought with him and told him that we will make sure that they are liable for any tax consequences. We repeatedly told this supervisor that he was wrong and he better go check with someone who has knowledge of contract exchange.

Anyways, he got back to us in a couple of days and left a voicemail all apologetic. He said he consulted their tax attorney and that we were right and he was wrong. He said their attorney said that because the 1099 form was already generated, they will send a correction 1099 with all $0 so that rollover was $0. Then they went and corrected the coding so that it's consider a "contract exchange."

This all happened before he did his taxes and they knew once he did his taxes, the IRS would come after him for the taxes on the distribution.

Another thing, the form he filled out to do the "contract exchange" was a "contract exchange" form too. I don't think lots of people know about "contract exchange" since it doesn't get done as often as rollover.

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Excellent advice, DK!  

I once had a similar issue with a rollover between IRA accounts.  As I learned later, that should not have triggered a 1099, though I got one.  The outgoing custodian mis-coded it such that the IRS interpreted it as a taxable withdrawal, and in a year or two I got a surprise tax bill.  I was able to resolve it without cost by sending various records, but it was quite a scare.

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5 hours ago, DK said:

What you need to do is either a "contract exchange" or "plan to plan transfers".

A contract exchange is when you move money within the plan from one vendor to another vendor in the plan. There is no tax consequences for this as long as you follow the rules. All that happens is that the money is moved from one vendor into another vendor and no tax form is generated.

A "plan-to-plan transfers" is usually when you move your 403b money from one employer into another's employer's 403b plan.

Pardon me DK if I'm missing something from your excellent explanation  .  Seems like your explanation is about improper coding .

You say a contract exchange is when you move money from WITHIN the plan from one vendor to another. So Reg can't do this because Lincoln Life is NO LONGER IN THE PLAN, it's been eliminated. This sounds like a basic "Transfer " that most school systems allow. But Reg says Lincoln is no longer in the plan.

Now a plan to plan transfer would only apply to Reg if he was moving his money from a previous employer so that doesn't apply to him either.?

So it seems to me this won't solve his problem. Somebody mail me an aspirin:)  I'm confused.  KROW?????

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