Question: I recently changed jobs. I was contributing to the 401(k) plan at my old job, and now I want to take my money and put it in an IRA. But, I'm being told that I cannot roll the 401(k) into an IRA because of a company stipulation that if my balance is over a $16,500, I have to leave it as is until I retire. Have you ever heard of such a restriction?

TB: An employer may include a provision in the plan document requiring that all contributions must be left in the plan until retirement age. It is unusual for an employer to include such a provision in a 401(k), but it is legal. Some employers are concerned that employees will leave just so they can get their hands on the 401(k) money. This does, in fact, happen in some instances. One of the reasons employers offer a 401(k) is to help retain good employees. Your employer has apparently included this provision to keep employees from leaving for this reason.

Some employers include a dollar threshold, which is apparently what yours did. Terminated employees who are entitled to benefits that are below this level can withdraw their money but those with benefits in excess of this limit must wait until retirement age or for a specific number of years to receive their money.

The restrictions and limits your employer selected must be applied in a uniform and nondiscriminatory manner, which means that all employees in a similar situation must be treated equally.

Question: After I left my job, my previous employer forced me out of my 401(k) account without any notice and sent me a check after taking out a 10 percent early penalty tax. What I wanted to do was transfer the money directly to my new employer's 401(k). Is there any way to reverse this so the full amount can be transferred to my new 401(k)?

TB: Your employer can force you to take a distribution if your benefit is less than $5,000. Your employer should have permitted you to select a direct rollover to either an IRA or your new employer's plan. Apparently, it didn't give you this opportunity, though it was required to. I am puzzled by the fact they withheld 10 percent for taxes because the mandatory withholding requirement is 20 percent.

In any event, you need to act immediately if you don't want to have to pay tax on the entire amount. A qualifying rollover must be completed within 60 days after you get the money. You need to deposit the amount you have received into a rollover IRA or your new employer's plan before the 60-day period expires. The IRS is very tough in enforcing this deadline so don't delay.

You must add the taxes that were deducted to the amount you received in order to avoid having this amount taxable. For example, assume you received $2,700 after $300 was deducted for taxes. You can roll over just the $2,700 but then you will have to pay tax on the $300. If you add $300 from another source to the $2,700, you can roll over the entire $3,000 and avoid paying taxes on the $300. Then, you can file for a refund of the $300 that was withheld.

If the deadline has already passed, you should ask the plan provider to take the money back and issue a new check payable to the organization where you have established your IRA. Tell them you were never given the opportunity to select an IRA rollover prior to the forced cash-out.

Question: I retired five years ago. I received notice from my former employer that the balance I elected to leave in my 401(k) plan had to be paid in the form of a lump-sum distribution or rolled over by a specified date. I made my election in a timely manner to roll it over to my IRA. Instead, my employer sent me a check, payable to me.

I prefer that the payout be re-characterized as a direct rollover, as I requested from the beginning. However, after contacting my former employer several times, I feel as if I'm getting the runaround. How should I proceed?

TB: It is unfortunate that your former employer did not follow your instructions; however, the ultimate burden to properly complete the rollover falls on you. You have 60 days to roll the money over into your IRA. Failure to do so will result in the money being counted as a taxable distribution. If the 60 days hasn't expired, you should roll over the money you received immediately. You need to make up from other sources any taxes that were withheld, however, and you'll get this money back when you file your tax return.

If the 60-day deadline has already passed, you should send the check back to your former employer and insist that it issue a new check payable to the IRA custodian that is to receive the rollover. Tell your employer that you will ask the Department of Labor for help if it doesn't cooperate.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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