New Revenue Ruling Provides Safe Harbor Procedures for Rollover Contributions
On April 3, 2014, the Internal Revenue Service (IRS) issued Revenue Ruling 2014-9 (Rev. Rul.)
. If a plan administrator uses one of the "safe harbor" due diligence procedures described in the Rev. Rul., absent evidence to the contrary, the administrator of the receiving plan may reasonably conclude that the rollover was valid. In the Rev. Rul., the IRS examines two situations where an employee elects to make a direct rollover to an employer's qualified 401(a) plan. The Rev. Rul. then explains how, under each situation, the plan administrator can reasonably conclude that the rollover is a valid rollover contribution under Treasury Regulation § 1.401(a)(31)-1, Q&A-14(b)(2).
Under Situation 1, an employer maintains a profit sharing plan that: (i) is a qualified Internal Revenue Code (Code) Section 401(a) plan and covers a class of its employees; (ii) allows an employee in the covered class to make a rollover contribution to the plan; and (iii) does not accept rollover contributions of after-tax amounts or amounts attributable to designated Roth contributions.
An employee of the employer who is eligible to make rollover contributions to the plan has a vested account balance in a retirement plan maintained by the employee's former employer. The account is eligible for a distribution under the terms of the prior plan.
In 2014, the employee requests a distribution of her vested account balance from the prior plan and elects that it be paid to the new employer's plan in the form of a direct rollover. A check is issued and made payable to the trustee of the new employer's plan and is delivered to the plan administrator of the new plan, along with a check stub that identifies the former plan as the source of the funds. The employee also certifies that the distribution from the former employer's plan does not include after-tax contributions or amounts attributable to designated Roth contributions.
The plan administrator for the new plan locates the most recently filed Form 5500 on the DOL website for the prior plan and confirms that the 5500 filing does not include code "3C" in line 8a of the form (code "3C" is the code used to indicate the plan is not intended to be qualified under Code Section 401, 403, or 408).
Note: The IRS did acknowledge that a number of qualified plans are not required to file any 5500 filing, such as government plans. Consequently, this safe harbor of checking the DOL website for the 5500 filing may not be as helpful, since a number of rollovers will involve governmental plans.
Under Situation 2, the facts are the same as in Situation 1, except that the employee has an account balance in a traditional IRA (not a Roth IRA or SIMPLE IRA) that is not an inherited IRA. The employee requests a distribution of her account balance in the form of a direct payment from the IRA to the new plan. A check is issued and made payable to the trustee of the new employer's plan and is delivered by the employee to the plan administrator of the new plan, along with a check stub that identifies the IRA as the source of the funds. The employee certifies that her distribution from the IRA does not include after-tax amounts and that she will not have attained age 70½ by the end of the year in which the check is issued.
The IRS indicates in the Rev. Rul. that, in Situation 1, the plan administrator for the former employer's plan effectively made a representation that the plan is intended to be a plan qualified under Code Section 401, 403, or 408 (because the plan administrator did not enter code 3C on line 8a of the plan's Form 5500). As a result, the IRS creates a "safe harbor" – concluding it is reasonable for the plan administrator of the new employer's plan to accept that the former employer's plan is a qualified plan. In addition, since the plan administrator for the prior plan treated the distribution of the employee's vested account balance as an eligible rollover distribution to be directly rolled over to the new plan, it is reasonable for the plan administrator of the new plan to conclude that the potential rollover contribution is an eligible rollover distribution from the prior plan.
Under Situation 2, the Rev. Rul. explains that: (i) the trustee for the IRA treated the distribution as a rollover contribution being paid directly to the new employer's plan; (ii) the plan administrator for the new plan can reasonably conclude that the source of the funds is a traditional, non-inherited IRA; and (iii) the employee certified that the distribution included no after-tax amounts and that she will not attain age 70½ by the end of the year of the transfer. Therefore, it is reasonable for the plan administrator for the new plan to conclude that the distribution from the IRA can be rolled over.
The Rev. Rul. notes in Situation 2 that if the employee had attained age 70½ or older by the end of the year in which the check was issued, the plan administrator for the new plan could not reasonably conclude that the potential rollover contribution was a valid rollover contribution without additional information indicating that the rules of Code Section 408(a)(6) or 408(b)(3) had been satisfied (generally regarding required minimum distributions) with respect to the IRA in the year in which the check was issued.
Based on the facts under Situation 1, and without any contrary evidence, the IRS determined that the plan administrator of the new plan may reasonably conclude that the potential rollover contribution from the prior plan to the new plan is a valid rollover contribution.
Based on the facts under Situation 2, and without any contrary evidence, the plan administrator may reasonably conclude that the potential rollover contribution by the employee from the IRA to the new plan is a valid rollover contribution.
In either situation, the Rev. Rul. notes that, if it is later determined the amount rolled over is an invalid rollover contribution, the invalid amount, plus earnings, must be distributed to the employee.
You may want to review your rollover procedures to see if either new "safe harbor" matches your existing process, or could be helpful as you consider your rollover procedures and on-going compliance procedures.
Revenue Ruling 2014-9 will be posted in Internal Revenue Bulletin 2014-17, dated April 21, 2014.
If you have any questions or would like additional information about valid rollover contributions and these safe harbor procedures, please contact Mary Beth Braitman
, Robert Gauss
, Lisa Erb Harrison
, Tiffany Sharpley
, Malaika Caldwell
or any member of Ice Miller's Employee Benefits Group
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.