Frequently Asked Questions about the 401(k)/Deferred Compensation (457) Transfer Benefit
1. If an employee retires prior to age 59 ½ and transfers NC 401(k) or NC 457 funds to the Retirement Systems, will the monthly benefit be subject to the 10% federal income tax penalty?
The retiree’s age is not a factor. The Transfer Benefit provides a monthly stream of income for life which meets an IRS requirement for an exception to the penalty.
2. What is the difference between the Transfer Benefit and rolling over NC 401(k)/457 funds into an annuity and receiving lifetime payouts?
The Transfer Benefit is comparable to an immediate fixed annuity (but not to variable annuities, which may carry high fees and are subject to market risk). If the retiree chooses not to
have the benefit increase with inflation (No COLA), then the monthly benefits will remain the same throughout the retiree’s life. If the retiree chooses inflation protection (COLA), then the monthly benefits will
increase with increases in the CPI-U (Consumer Price Index-All Urban Consumers).
3. What is the advantage of rolling over NC 401(k) or 457 funds in to the Retirement System instead of purchasing an immediate fixed annuity from a life insurance company?
The NC Retirement System Plans are among the most well-funded public pension plans in the United States. The Transfer Benefit is also backed by the state of North Carolina, which is AAA
rated. The monthly payments generated by the Transfer Benefit appear to be competitive with annuities provided by insurance companies; however, retirees may wish to shop around before making a final decision.
4. How will the transfer affect my status under the Bailey case?
The transfer will not affect your status under the Bailey case. Please see the review of tax impacts.
5. What is left to my heirs if I die soon after electing a transfer?
If you have elected to provide monthly survivorship benefits to one beneficiary after your death under option 2, 3, 6-2, or 6-3, then that survivor will receive a monthly benefit for the rest of his or her life.
If you have elected to receive your benefits under the Maximum Allowance, no monthly survivorship benefits will be payable after your death.
If you, and/or your survivor, as appropriate, have received payments totaling less than the amount specified under the refund guarantee you selected, then your guaranteed refund beneficiary or your estate will receive the appropriate refund. Otherwise, payments will cease upon your death.
You generally should not elect the Transfer Benefit for any funds you wish to leave to your heirs in a lump sum. The Transfer Benefit is intended to provide monthly income to cover your living expenses while you are alive and, if needed, the living expenses of one survivor after your death. It is not designed to pass assets to your heirs.
6. Is this benefit secure?
Nothing in life is 100% secure, but the NC Retirement Systems are recognized as some of the best funded retirement systems in the country, both public and private. In addition, even if all funds in the retirement systems were exhausted, the benefits are protected under contract law by the State of North Carolina, a AAA-rated state.
7. Is this the only way to obtain monthly income from the NC 401(k) and NC Deferred Compensation (457) Plans?
No. You can establish systematic withdrawals directly from the NC 401(k) or Deferred Compensation (457) Plan, as described on the Length of Payments page.
8. How much will it cost/what fees are associated with electing this benefit?
A one-time fee of $100 is subtracted from the amount you transfer before the monthly benefit is calculated. This fee is used to cover the administrative costs associated with the initial transfer and payment of the benefits. There are no ongoing fees.
9. How is the investment return on this option calculated? Will I earn the same return as the pension fund?
The Transfer Benefit is not an investment product. Once the transfer is completed, you cannot withdraw your money from TSERS or LGERS. The amount of your monthly payments is unaffected by the return earned by the pension fund.
10. If I have an emergency, can I take a loan from the Retirement System based on my Transfer Benefit?
No. In addition, you cannot use the Transfer Benefit as collateral for a loan from any other source because, by law, the benefit cannot be assigned. During retirement we recommend you maintain an emergency fund equal to at least one year of expenses.
11. What can I do if I change my mind after the transfer is complete?
Once the transfer is complete, you will not be able to cancel the transfer. This is a one-time and irrevocable election.
12. How much will I be able to transfer if I currently have loans from my 401(k) or 457 account?
You will only be able to transfer the active balance in your NC 401(k) or NC Deferred Compensation (457) account, which excludes the balance of the loan.
13. What happens if I return to work at a participating employer? Will my Transfer Benefit be suspended?
No. The Transfer Benefit will continue to be paid regardless of your subsequent employment.
14. If I cancel my TSERS or LGERS retirement, what will happen to the transfer?
You must be retired from TSERS or LGERS to complete the transfer and receive the monthly lifetime income. Thus, if you cancel your TSERS or LGERS retirement prior to the effective date of the transfer, your transfer will also be cancelled.
15. Can I take option 4, Social Security Leveling Option, on this benefit?
No. The only available options are the Maximum Allowance, and the optional payment plans, 2, 3, 6-2, and 6-3 which provide monthly survivorship benefits after your death. If you are concerned about covering income needs until you are eligible for Social Security, please read the information on the Length of Payments page.
16. Will the reductions for early retirement apply to the Transfer Benefit?
No. The benefit is already adjusted for your age at the time when you begin receiving monthly payments.
17. If I receive a post-retirement COLA from the TSERS or LGERS, will my Transfer Benefit be increased as well?
No, the two benefits are paid separately. If you chose the No COLA option, then your Transfer Benefit will be a fixed amount for your lifetime. If you chose the COLA option, then your benefit will increase annually when there is an increase in the Consumer Price Index (CPI-U).
18. Can I choose a different payment option than the option elected for my monthly pension?
Yes.
19. Can I name a different survivor under the Transfer Benefit than the person selected as a survivor under the Pension Plan?
Yes.
20. Can I transfer balances from a local 457 account or 403(b) account, or an IRA?
No, only the NC 401(k) and NC 457 plans are eligible. However, if you have a balance in the NC 401(k) or 457 Plan(s), additional funds from the NC 403(b) or other retirement plans may be consolidated into the NC 401(k) or NC 457 plans and then become eligible for the transfer. You should contact Prudential Retirement at 1-866-627-5267 to see if your plan or account is eligible for rollover into the NC 401(k) or NC 457.
21. Can I transfer Roth balances?
No.
22. Will I receive a separate deposit of the Transfer Benefit each month?
Yes.
23. Can I deposit my Transfer Benefit to a different account than my Pension benefit?
Yes
24. Will I receive a separate 1099R for the Transfer Benefit income?
Yes
25. For the guaranteed refund features, can I name a different beneficiary than I have designated with the NC 401(k) or 457 Plan?
Yes
26. I am a disability retiree. Are different factors used for the transfer benefit for me?
No, the factors used for the transfer benefit are the same for all retirees.
27. If I selected the University of North Carolina Optional Retirement Program (ORP) instead of TSERS, can I elect the Transfer benefit?
No, you must be retiring or retired from TSERS/LGERS in order to participate. However, if you would like to annuitize your ORP or 403(b) account, you do have
that option under these plans. For more information, please contact the UNC Human Resources department.
In addition, the NC 457 plan has an annuity payout option. For more information about this benefit, contact Prudential at 1- 866-827-5267.
28. What effect will an outstanding loan balance have on transferring my 401(k)
or 457 accounts?
If you transfer a portion of your 401(k) or 457 balance to the retirement
system, and have an outstanding loan balance at that time, your loan will be subject to repayment within 90 days of the date you separate from service. However, if you choose to transfer the entire balance of your 401(k) or 457 Plan to the retirement system and have an outstanding loan, you should consider paying the loan in full prior to electing the transfer. You may contact Prudential at 1-866-627-5267 to receive a payoff balance for the loan. Any loan balance that remains unpaid after 90 days from the date you separate from service or immediately following a full transfer of the 401(k) or 457 to the retirement system will cause the outstanding loan to be considered "defaulted". That amount will then be reported to the IRS as taxable income for the year in which it defaults. In addition to state and federal taxes, you may also incur an early withdrawal penalty on the outstanding loan balance.
