New Methods Diminish Due Diligence for Rollovers
The IRS has provided two safe harbor methods designed to reduce the burden of due diligence on qualified plan administrators who receive rollover distributions from another qualified plan or IRA. The safe harbors enable administrators in certain situations to conclude that a potential rollover distribution is a valid rollover contribution from a qualified plan.
The IRS described two scenarios. In the first, Alejandro’s employer maintains a qualified profit-sharing plan (Plan M), which provides for rollover contributions to the plan. Plan M does not accept rollover contributions of after-tax amounts or amounts attributable to designated Roth contributions. Alejandro has a vested account balance in Plan O (from a former employer) and is eligible for a distribution.
Alejandro requests a distribution from his Plan O account balance, and elects to have it paid to Plan M in the form of a direct rollover. The trustee for Plan O distributes his account balance in a direct rollover to Plan M by issuing a check payable to the trustee for Plan M for the benefit of Alejandro. Then, Alejandro delivers the check, with an attached check stub that identifies Plan O as the source of the funds, to the Plan M administrator. Alejandro also certifies that the distribution from Plan O does not include after-tax contributions or amounts attributable to designated Roth contributions. The Plan M administrator searches for the most recently filed Form 5500, Annual Return/Report of Employee Benefit Plan, for Plan O and discovers it does not include code 3C on line 8a. (Code 3C indicates that the plan is not intended to be qualified under Code Sections 401, 403, or 408.)
In the second scenario, the facts are the same, except that Alejandro has an account balance in a traditional IRA (not an inherited IRA). Alejandro requests a distribution of his account balance in the form of a direct payment from the IRA to Plan M. The IRA trustee issues a check payable to the trustee for Plan M for the benefit of Alejandro. Then, Alejandro delivers the check, including a check stub that identifies “IRA of Alejandro” as the source of the funds, to the Plan M administrator. Alejandro also certified that the distribution included no after-tax amounts and he will not attain age 70½ by the end of the year of the transfer.
Addressing the first scenario, the IRS explained that by not entering code 3C on line 8a of the Form 5500 filed for Plan O, the Plan O administrator made a representation that Plan O is intended to be a plan qualified under Code Sections 401, 403, or 408. It is reasonable for the Plan M administrator to conclude that Plan O is intended to be a qualified plan, and the potential rollover contribution is an eligible rollover distribution from Plan O, the IRS explained.
In the second scenario, the check stub indicated that the distributing account is “IRA of Alejandro.” The Plan M administrator can reasonably conclude that the source of the funds is a traditional, non-inherited IRA. It is reasonable for the Plan M administrator to conclude that the distribution from the IRA is a distribution that can be rolled over.
The rules relating to rollovers from qualified retirement balances are complex. If you have any questions, please contact your Brown Smith Wallace Tax Advisor, or Ann Holtshouser, at 314.983.1277 or AHoltshouser@bswllc.com.