Can Deferred Compensation Be Rolled Into a 401(k)?

Nonqualified rollovers can end up being taxed twice.

Nonqualified rollovers can end up being taxed twice.

Deferred compensation can come in a number of forms — from salary deferred to a future year to nonqualified retirement plans to money you contribute to a qualified retirement plan. In order to determine whether you can roll it into a 401(k) plan, you have to determine the type of deferred compensation in question.

Qualified Retirement Plans

If you have deferred compensation in a qualified plan — such as a 401(k) plan, simplified employee pension IRA, savings incentive match plan for employees or even another 401(k) plan — you can roll the money into a 401(k) plan. For example, if your new employer offers a 401(k) plan with lower fees or better investment options, the IRS permits you to roll the money into a 401(k). You might also want to roll the money into the 401(k) to consolidate your retirement savings into one account.

Nonqualified Plans

Generally, nonqualified deferred compensation plans are not eligible to be rolled over into a 401(k) plan. Nonqualified plans are those that do not meet the requirements of the Employee Retirement Income Security Act and the Internal Revenue Code. Since these plans aren't subject to the same contribution limits as 401(k)s, permitting you to roll over money from nonqualified deferred compensation plans would allow you to effectively skirt the 401(k) plan contribution limits.

Governmental 457 Plans

If you work for a government agency and have been using a 457(b) plan to save for retirement, you can roll the money in the plan into a 401(k) plan even though the 457(b) plan is a nonqualified retirement plan. Governmental 457 plans are subject to a separate contribution limit that is the same as qualified plans, even though these limits are not cumulative. However, if you roll over money from a 457(b) plan to a 401(k) plan, you can't take out money penalty-free before age 59 1/2 anymore.

Effects of Nonqualified Rollovers

If you try to roll over deferred compensation and the rollover is impermissible, you're treated as a taking a distribution from the deferred compensation and then contributing to the 401(k) plan. For example, if you take out $50,000 from a nonqualified plan and put it in the 401(k) plan, the $50,000 would be treated a $50,000 contribution to the 401(k) plan, which is well in excess of the contribution limits, which is just $17,000 as of 2012. You would have to pay taxes on the distribution and you wouldn't get a basis in your 401(k) plan, so you'll pay taxes on it again when you take distributions from the 401(k) plan.

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