IRS Releases Guidance Regarding Acceptance of Rollover Contributions
Introduction
The Internal Revenue Service (IRS) has simplified the “due diligence” that needs to be performed by administrators of qualified plans before accepting rollover contributions from another qualified plan or individual retirement account (IRA). Under the new guidance, a plan administrator no longer needs to request a copy of the other plan’s determination letter or obtain evidence of the IRA’s pre-tax nature. Rather, in reliance on two safe harbor procedures, the plan administrator can safely assume that a potential rollover contribution is valid, absent evidence to the contrary.
Practical and Immediate Implication
Plan administrators should revisit their procedures for accepting eligible rollover contributions. The new guidance will likely streamline and simplify that process.
Background
The rules governing rollovers permit rollovers of only certain types of distributions, e.g., a participant’s balance in a qualified plan, 403(b) plan, or 457(b) plan, subject to certain excluded amounts; and a plan can accept
rollovers only from certain types of plans, e.g., qualified trusts, individual retirement annuities, and traditional IRAs to name a few. Rollovers that do not meet all the requirements of the Code and regulations will be considered
invalid and could jeopardize the tax-qualified status of the transferee plan. However, a transferee plan that accepted a rollover erroneously believed to meet all the requirements for rollover treatment may qualify for relief (i.e.,
the invalid/ineligible rollover will be treated as valid for purposes of tax-qualified status) if two conditions are satisfied. First, the plan administrator must have reasonably concluded at the time the rollover was accepted that
the contribution was valid (i.e., the contribution met all the requirements of the Code and regulations). To be safe, under previous guidance, a plan administrator would generally require a copy of the plan’s favorable determination
letter and other information in order to “reasonably conclude” that the rollover was valid. Second, if the transferee plan later determines that the contribution was an invalid rollover contribution, the invalid amount
plus any earnings must be distributed to the distributee within a reasonable time after making such determination.
New IRS Guidance
The newly-issued guidance provides two safe harbors under which plan administrators can safely presume that rollover contributions are valid.
- In the case of a rollover from another employer’s qualified plan, the plan administrator can rely on a distribution check from the transferor plan made payable to the trustee of the transferee plan and a copy of the plan’s
Form 5500 for evidence that the potential rollover contribution is valid. By making a check payable to the transferee plan, the administrator of the transferor plan has concluded that the distribution is an eligible rollover distribution
and that, if the employee is over 70-1/2, the transferor plan deducted the required minimum distribution from the rollover amount prior to its distribution. The transferee plan can rely on that determination as evidence that the
prior plan administrator treated the rollover contribution as an eligible rollover distribution. In addition, the plan administrator can search the DOL database at
www.efast.dol.gov for the latest Form 5500 for the transferor plan. If Code 3C (which indicates that the plan is not intended to be qualified under Internal Revenue Code Sections 401, 403, or 408) is not marked in line 8a of
the Form 5500, the plan administrator can use the Form 5500 for the transferor plan as conclusive evidence that the transferor plan is qualified under the appropriate sections of the Internal Revenue Code.
Certain plans are not required to file Form 5500, e.g., SIMPLE IRAs, governmental plans and certain church plans. In order to accept rollovers from those types of plans, the prior rollover procedures should be implemented.
- In the case of a rollover from an IRA, the plan administrator can rely on a check stub from the IRA that provided the stub that reflects an account titled “IRA of [Name of Distributee]” and a certification from the
IRA beneficiary that the distribution does not include after-tax amounts and that the IRA beneficiary will not attain age 70 1/2 by the end of the year. If a check stub is unavailable, the plan administrator can rely on the check
itself, as long as the check identifies the source of the funds as the transferor IRA.
Under either of the two safe harbors, the result would be the same if the rollover was accomplished by wire transfer or other electronic means, provided that the transferor plan administrator communicated the source of the funds to the transferee plan administrator.
Call your Troutman Sanders LLP employee benefits attorney for more information concerning eligible rollover distribution requirements and procedures for insuring valid rollover contributions.
If you have any questions about how this guidance could affect your qualified retirement plans, or you want to implement the aforementioned, please contact any of the lawyers in our Employee Benefits and Executive Compensation Practice.
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