OUR THOUGHTS ON:

New Safe Harbors for Validating Rollover Contributions

Benefits

By Susan Paulauskas

On April 21, 2014, the Internal Revenue Service (IRS) issued Revenue Ruling 2014-9, which considers two simplified safe harbor processes to help a retirement plan administrator evaluate whether it is reasonable to accept a participant’s rollover contribution.  The ruling expands upon, and does not replace, the previously issued regulatory guidance.  The existing process has the plan administrator from the distributing plan provide a favorable determination letter, or simply a “certification letter,” indicating that the plan satisfies the Internal Revenue Code Section 401(a) requirements to the receiving plan administrator.  In all cases, a distribution must be made from an eligible plan or traditional IRA and must not be either a required minimum distribution (RMD), payment from a series of substantially equal periodic payments or a hardship distribution, as none of these distribution types are eligible for rollover. 

In the first newly outlined situation, the rollover is coming from another employer retirement plan.  The plan administrator receives a check payable to the trustee of the plan for the benefit of the employee.  The attached check stub identifies the distributing plan as the source of the funds.  The employee also certifies that the plan accepts all of the sources being rolled over.  The receiving plan administrator accesses the Department of Labor’s electronic EFAST2 database and searches for the most recently filed Form 5500 for the distributing plan.  The plan administrator then confirms that the Form 5500 does not show code 3C in line 8a (which means that the plan is not intended to be qualified under Code section 401, 403 or 408).  For this situation, the IRS concluded that, absent any evidence to the contrary, the plan administrator may reasonably conclude that the potential rollover contribution is valid. 

In the second new situation that involves a transfer from an IRA, the plan administrator also receives a check payable to the trustee for the benefit of the employee.  The attached check stub identifies the participant’s IRA as the source of the funds.  Similar to the rollover from the qualified plan, outlined above, the plan administrator may reasonably conclude that the distribution from the IRA is from a valid source.  For both rollover sources, the plan administrator may treat the distribution as a valid rollover even without the check stub, as long as the source of the funds is identifiable from the check itself or other information provided with a wire transfer or other electronic means.

These new safe harbors provide a streamlined process for validating rollover contributions while helping to eliminate the administrative burden of determining the validity of rollover contributions to qualified retirement plans, and the associated risk of jeopardizing the plan’s tax-qualified status.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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