IRS Eases Procedure for Late Qualified Plan and IRA Rollovers

Taxpayers who wish to transfer balances between IRAs and/or qualified retirement plan accounts can accomplish this on a tax-free basis either by making a direct trustee-to-trustee transfer between accounts or by making a qualifying rollover within 60 days. The Internal Revenue Service (IRS) has recently issued guidance that will make it easier, in many circumstances, for account holders to avoid a taxable distribution if they miss the 60 day deadline.

Background

The Internal Revenue Code contains liberal rules that allow tax-free rollovers of funds between IRAs, qualified retirement plans, Section 403(b) plans, and governmental Section 457(b) plans. A very helpful table specifying what types of rollovers are allowed can be found here. The rollover can take the form of a direct transfer of funds between the trustees of the plans or IRAs. Alternatively, the account holder can take a distribution of the funds and, within 60 days, deposit them into another plan or IRA.

The 60 day deadline is specified in the Internal Revenue Code, which also provides that the IRS can waive the deadline “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” However, until very recently, it was generally necessary for taxpayers to obtain a private letter ruling in order to get this deadline waived. This is a long and expensive process, which meant that, in most cases, a waiver was practically unavailable.

Revenue Procedure 2016-47

On Wednesday, August 24, the IRS issued Revenue Procedure 2016-47, which greatly streamlines the process for taking the position that the deadline should be waived. Essentially, a distributee of an IRA or plan who wants to take advantage of this procedure self-certifies in writing that he or she intended to make the rollover within 60 days but was unable to do so for one or more of 11 specific reasons. The institution that receives the rollover can rely on this self-certification and accept the funds, unless the institution has actual knowledge that the self-certification is incorrect. The Procedure contains a model letter that can be used for this self-certification process.

The 11 reasons are as follows:

  1. An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
  2. The distribution, having been made in the form of a check, was misplaced and never cashed;
  3. The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
  4. The taxpayer’s principal residence was severely damaged;
  5. A member of the taxpayer’s family died;
  6. The taxpayer or a member of the taxpayer’s family was seriously ill;
  7. The taxpayer was incarcerated;
  8. Restrictions were imposed by a foreign country;
  9. A postal error occurred;
  10. The distribution was made on account of an IRS levy under Code Section 6331 and the proceeds of the levy have been returned to the taxpayer; or
  11. The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

The distributee is required to complete the rollover as soon as practicable after the reason(s) listed above no longer apply. This condition is deemed to be satisfied if the contribution is made within 30 days after the reason(s) no longer apply.

The waiver will not be granted if the IRS previously denied a waiver with respect to all or part of the rollover.

IRA trustees are currently obligated to issue a Form 5498 annually to IRA owners to report contributions, required minimum distributions, and the fair market value of the account. The Procedure indicates that this form will be modified to require IRA trustees to report that a contribution was accepted after the 60 day deadline.

The IRS has also recently issued a set of frequently asked questions that discuss the principles of Revenue Procedure 2016-47.

Some Practical Thoughts

This Revenue Procedure provides welcome relief for people who take IRA and plan distributions with the intent to roll them over within 60 days, but are unable to do so for reasons beyond their control. Previously, the need (in most cases) to obtain a private letter ruling meant that it was not generally practical to obtain a waiver of the 60 day requirement.

However, it should be noted that the potential to miss the deadline can be easily and entirely avoided by making a direct trustee-to-trustee transfer of the funds. Direct transfers are helpful for another reason: as discussed in IRS Announcement 2014-32, taxpayers are allowed to make only one nontaxable 60-day rollover within each one-year period even if the rollovers involve different IRAs. This once-a-year limitation does not apply to direct trustee-to-trustee transfers. Unless there is a compelling reason to the contrary, taxpayers should structure all of their transfers between IRAs as direct transfers between IRA trustees.


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E. Drew Cheney Posted By
E. Drew Cheney