In Employee Plans News, Issue 2014-8, May 16, 2014, the Internal Revenue Service (the “IRS”) provides guidance on verifying rollover contributions. Here is what the IRS said:
A retirement plan isn’t required to accept rollover contributions from other plans or IRAs, but if it does, the incoming funds must:
• be permissible rollovers allowed by the plan document,
• come from a qualified plan or IRA,
• be the type of funds eligible to be rolled over, and
• be paid into the new plan no later than 60 days after the employee receives the funds from the old plan or IRA.
The plan administrator should take reasonable steps to evaluate whether these conditions are met. If the funds are coming directly from the old plan or IRA – for example, via a check made out to the new plan – then there is no 60-day requirement.
Safe harbor procedures. Revenue Ruling 2014-9 describes simplified due diligence procedures for a plan administrator to confirm the sending plan or IRA’s tax-qualified status and conclude that a rollover contribution is valid. These procedures are generally sufficient:
• employee certification of the source of the funds
• verification of the payment source (on the incoming rollover check or wire transfer) as the participant’s IRA or former plan
• if the funds are from a plan, looking up that plan’s Form 5500 filing, if any, in the Department of Labor’s EFAST2 database for assurance that the plan is intended to be a qualified plan.
It’s not necessary to obtain a letter from the distributing plan when its qualified status can be checked using the online Department of Labor filing search.
Example (1): Alice makes a direct rollover contribution to Plan A with a check from Plan B payable to the trustee of Plan A, for the benefit of Alice. Plan A accepts all rollover contributions except after-tax or designated Roth contributions. Plan A’s administrator may reasonably conclude that Alice’s rollover contribution is valid based on these factors:
1. Alice, aged 50, certifies that her Plan B distribution doesn’t include after-tax contributions or amounts attributable to designated Roth contributions.
2. Plan A’s administrator verifies that the rollover check was issued by Plan B payable to the trustee of Plan A. The plan administrator may reasonably conclude that the trustee of the distributing plan treated the amount as an eligible rollover distribution.
3. Plan A’s administrator checks the EFAST2 database for Plan B’s most recent Form 5500 filing and sees that the entry on line 8a (identifying plan characteristics) indicates the plan is intended to be a qualified plan.
Example (2): Brian, aged 60, gives Plan A’s administrator a check from the trustee of his traditional IRA, payable to Plan A for the benefit of Brian. The check stub identifies the source of the funds as “IRA of Brian.” Brian also certifies that the distribution includes no after-tax amounts. Based on the information on the checkstub and Brian’s certification, the plan administrator may conclude that Brian’s rollover contribution is valid.
Will an invalid rollover contribution jeopardize my plan’s qualification? In general, a plan can accept a direct rollover contribution without jeopardizing its qualified status if the plan administrator:
1. reasonably concludes that the rollover contribution is valid, and
2. distributes any ineligible rollover contribution, with earnings, within a reasonable time of discovering the error (Treasury Regulation Section 1.401(a)(31)-1, Q&A 14).
Form 5500 filings database.
A plan administrator can access the EFAST2 database maintained by the Department of Labor, and:
• Search for the most recently filed Form 5500 or 5500-SF for the plan making the rollover distribution.
• On the latest Form 5500 or 5500-SF for the plan, check the entry on the line for plan characteristics (line 8a on Form 5500 and line 9a for Form 5500-SF).
• Code 3C entered on this line indicates that the plan is not intended to be a qualified plan. If any other code is entered on this line, the plan administrator may reasonably conclude that the plan is qualified.
Not all plans are required to file a Form 5500 or Form 5500-SF, so sometimes this information will not be available.
It’s not necessary for the distributing plan to have a determination letter from the IRS on its qualified status for a plan administrator to conclude that a rollover contribution is valid.
Eligible rollover distributions. IRAs: You can roll over all or part of any distribution from your IRA except:
• A required minimum distribution or
• A distribution of excess contributions and related earnings.
Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:
• Required minimum distributions,
• Loans treated as a distribution,
• Hardship distributions,
• Distributions of excess contributions and related earnings,
• A distribution that is one of a series of substantially equal payments,
• Withdrawals electing out of automatic contribution arrangements,
• Distributions to pay for accident, health or life insurance,
• Dividends on employer securities, or
• S corporation allocations treated as deemed distributions.
Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you have to meet the plan’s conditions for a distribution, such as termination of employment.