When taking a distribution from a retirement plan (including a pension, 401(k), 403(b) or 457(b) plan) or IRA, certain provisions of the Internal Revenue Code provide that any amount distributed will be excluded from the distributee’s gross income if it is transferred to an eligible retirement plan no later than 60 days following receipt. This means that if a plan participant elects to have a check issued to him or her to pass along to an eligible retirement plan, including a new employer’s retirement plan or an IRA provider, the amount will not be included in the individual’s taxable income if he or she deposits the check in the eligible plan within 60 days. This is an alternative to the direct rollover option, which involves having the funds transferred directly to the new plan in a trust-to-trust transfer.
When a rollover is not facilitated in a direct rollover, the question often arises what should happen if circumstances occur during the 60 day period which preclude timely deposit, including a simple misplacement of the check.
While the regulations provide examples of situations in which a plan administrator may reasonably rely on certain certifications and documentation that a rollover contribution is valid, they do not address untimely contributions. Revenue Procedures 2003-16 and 2016-4, however, set forth a couple of ways to obtain a waiver of the 60-day rollover requirement:
- Qualifying for an automatic waiver; or
- Requesting and receiving a private letter ruling (PLR) granting a waiver.
An automatic waiver is of limited application as it only applies in a direct rollover scenario where the new plan or financial institution receives the funds before the end of the 60-day rollover period but fails to deposit them into a plan or IRA within the 60-day period due to no error of the participant. In this situation, the funds must actually be deposited into the plan or IRA within one year from the beginning of the 60-day rollover period.
Requesting a PLR waiving the 60-day rollover requirement can be cumbersome and expensive (the current fee is $10,000). A waiver is only available in cases where the failure to waive the requirement would “be against equity or good conscience.” On request, the IRS considers all facts and circumstances, including casualty, disaster, or other events beyond the reasonable control of the taxpayer.
Apparently appreciating the commonplace issues that arise with rollovers and seeking to avoid unintended “leakage” of retirement plan assets from retirement vehicles for those that do not have the time or financial resources to pursue a PLR, the IRS recently adopted Revenue Procedure 2016-47. This Revenue Procedure provides taxpayers with a new mechanism to facilitate a rollover, even if a technical failure to comply with the 60-day rule has occurred. More specifically, a taxpayer can self-certify satisfaction of the requirements of a waiver and thereafter claim a valid rollover unless/until the IRS provides otherwise. This self-certification may be presented to the plan or financial institution to which a rollover contribution is intended, and the plan or financial institution may (but is not required to) accept and rely on the self-certification as indication that the rollover is valid unless it has actual knowledge that the self-certification is false/incorrect. This process will likely be much more streamlined than the PLR method.
Under the expanded guidance, a taxpayer who missed the 60-day time limit will now likely qualify for a waiver if (i) they weren’t previously denied a waiver by the IRS (e.g., under the PLR process); (ii) the contribution is/was made as soon as possible following the elimination of the circumstances that prevented the timely deposit of the funds; and (iii) the circumstances preventing the timely deposit fall into one or more of 11 enumerated circumstances, of which the most notable include:
- the distribution check was misplaced and never cashed
- the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan
- a death in the taxpayer’s family
- a serious illness of the taxpayer or a member of the taxpayer’s family
- incarceration of the taxpayer
- a postal error
Logistically, taxpayers may make the certification by completing the model letter set forth in the appendix of the Revenue Procedure. It may, but need not be, adopted on a “word-for-word” basis. A copy of the self-certification that is presented to the applicable plan or financial institution should be kept in the taxpayer’s files and be available if requested on audit.
If the taxpayer who availed him or herself of a self-certification undergoes an IRS audit, the IRS will opine whether the taxpayer qualifies for a waiver of the 60-day rollover period. Of course, if the IRS finds that the self-certification was inappropriate, the taxpayer will be subject to additional taxes and penalties.
This new guidance went into effect on August 24, 2016. Accordingly, plan administrators and trustees should consider if, how, and when it will honor a taxpayer’s self-certification that they qualify for a waiver of the 60-day rollover rule.