Only former employees can transfer a pension into a 401(k) plan. Common reasons for a rollover include consolidation of retirement assets and desire for more control over investments, according to U.S. News and World Report. Rollovers to a current employer's 401(k) plan have no immediate tax consequences, notes Kiplinger.
A pension rollover to a 401(k) plan is also known as a partial lump-sum distribution because administrators typically do not release full amounts. This means that the rollover amount is not a dollar-for-dollar equivalent to the contribution, indicates U.S. News and World Report. A consideration is whether there is concern about the solvency of the pension. In this case, the partial sum rollover is protected for retirement in a 401(k) plan.
In 2012, new rules allowed pension administrators to calculate lifetime benefits at a higher interest rate than previous rates, resulting in smaller lump-sum payouts, reports Kiplinger. As such, some former employers encourage lump-sum distributions. Under this scenario, former employees have the option of taking the distribution as a one-time payout. However, rolling over to a current employer's 401(k) plan or IRA offers tax benefits.
If the partial payment is not rolled over, employers are required to withhold 20 percent of the payment for federal income taxes, and 10 percent for early-withdrawal penalties if under the age of 55 in the year employment ended.