Friday, May 23, 2014

Thoughts on “Decoration Day”

Given the pace at which we live our life these days, it’s pretty easy to let the distinctions between the different holidays become blurred.  We often find ourselves seeing holidays as just a break from time in the office, an extra-long weekend to spend on our favorite pastimes, an opportunity to focus on things other than work, or – less exciting, perhaps – to make progress on projects. 
If there is one holiday that we should not let that happen to, it is Memorial Day.  It’s a day to remember the sacrifices that others have made for us.  Ultimate sacrifices, to put a finer point on it.  As is often said of those who have served, “all gave some, some gave all”.  In honor of those who have paid that price, this blog will depart from its normal retirement plan focus and look at what this holiday means. 

There are probably few who are younger than the baby boom generation that will recognize the term “decoration day,” and even those of this generation that do recognize it, likely does so only because their parents or grandparents may have called it by that now-archaic name.  Memorial Day was, in fact, first known as Decoration Day when it was recognized as a national holiday following the American Civil War.  It was a day, traditionally the last Monday in May, when family members and others put flowers on the graves of soldiers, both Union and Confederate, who died in what many consider the event that most defined us as a people and a nation.  In other words, they "decorated" the graves in memory and recognition.  Since those early days the title changed and Memorial Day has officially become a day to honor and remember all who have made that ultimate sacrifice while in military service. 
Many Americans have no idea or have forgotten how close our country came to being two countries, rather than one, a century and a half ago.  There is no way to properly envision or comprehend what two divided Americas might not have accomplished in shaping the world as it now exists.  In particular, helping as we did to save our world from dark forces that rejected individual freedoms and sought political and military domination.  We are by no means a perfect nation.  We have made our mistakes and have our flaws.   But in our balance of imperfection and good intentions, our commitment to self-determination and individual liberties stands out and we can be proud of most of what we have come to stand for to the rest of the world.

The sacrifices a century and a half ago that affirmed us as a united people have been demonstrated more than once, in world wars and in other conflicts, but also in peaceful things, made possible by the common purpose that was a byproduct of our unity.  Creating an international forum in which nations can attempt to resolve their differences, striving and working for equal opportunity and personal dignity for our citizens, exploring the universe beyond the confines of our own sphere, and many other accomplishments, are a legacy of sacrifices both before and since the first Decoration Day. 
As a nation and a people we are not inclined to dwell on gloom and loss, the emotions that must have accompanied the first Decoration Day.   We’re inclined to look toward the future through the lenses of optimism and confidence.  Maybe that is why Memorial Day as we celebrate it in our era is a time for smiles and laughter, appreciating our families and friends, as well as for remembering the sacrifice and loss of those who have served and insured our freedom.

And after this welcome holiday is over, a time to get back to working toward a worthy and secure retirement for us all.

Tuesday, May 20, 2014

More Musings on the New Rollover Limitation

One of the truisms of our industry, as it is a truism of life, is that “nothing is as constant as change.”  That certainly applies to the IRA rollover limitation issue, which reared its head in the Bobrow v. Commissioner U.S. Tax Court case, and completely upended thirty-plus years of IRS interpretation on IRA rollovers.   As most will remember, the Court disallowed a taxpayer’s IRA rollover on the grounds that he was limited to one rollover distribution per taxpayer per 12-month period, not one rollover per IRA per 12-month period.  Proposed regulations dating back to 1981, and IRS publications, had formerly granted the more liberal option.
That’s water under the bridge, because the IRS has fallen into marching step with the new drummer – the U.S. Tax Court.  The IRS revealed in Announcement 2014-15 that, going forward, the rule will be one IRA distribution per taxpayer, not per IRA, that will be eligible for an indirect 60-day rollover in any 12 month period.   Released in March, Ann. 2014-15 stated that the IRS would not enforce this new interpretation before January 1, 2015.  Ascensus has since learned from a reliable IRS contact that the “no sooner than” timing for enforcement of this new interpretation will, in fact, be January 1, 2015.  The IRS representative stated that the nine month enforcement reprieve – from March to next January – was granted in response to industry requests for a grace period to allow IRA custodians, trustees and issuers to adjust their procedures.

Some over-eager service providers did not wait until the IRS released Ann. 2014-15, but responded to the January Tax Court decision and immediately informed clients and prospects that they should amend their IRA documents, advising that they do this at the first opportunity.  They also indicated that the new interpretation had to be followed and adhered to immediately.  This was suggested not only before the IRS responded to the Tax Court ruling by issuing Ann. 2014-15, but before it was even known whether the Bobrow case would be appealed, and whether its ruling might be upheld, or reversed. 
The point here is that it is usually best in such situations to let the dust settle, to not over-react, or – as some might do – take an opportunistic tack and recommend actions prematurely.  Yes, IRA documents will certainly have to be revised for new accounts, and it is advisable that existing IRAs be updated to align with the new interpretation that will govern future rollovers.  But, as revealed in Ann. 2014-15, we are still nearly seven months away from the earliest enforcement date for the new rule, and no date has been even hinted at for updating existing IRAs.  For the remainder of 2014, the enforcement of the rule will remain as it has been, one rollover per IRA. 

A little reflection on the new rollover interpretation might also be in order here, given the level of uproar and resistance seen within the industry.  Many were predictably upset that the Tax Court ruled as it did, reversing a long-held tradition and contradicting an oft-stated and oft-published IRS position.   Perhaps more upsetting was the fact the IRS brought this case in the first place and didn't give credence to their own published guidance.  Regardless of this, the statutory reference to rollovers in the Internal Revenue Code has not changed since 1978, and a plain-language reading of it – while somewhat ambiguous – can in all honesty be read as the Tax Court did, limiting rollovers to one per-taxpayer per year.   
The Tax Court took the position that our lawmakers intended to make access to IRA funds possible, but not so easy as to encourage abuses.  “Leakage,” or frittering away retirement assets, has long been a concern of Congress.  Also, there are clear prohibited transaction rules that discourage an IRA owner from dealing “…with the income or assets of a plan in his own interest or for his own account.”  IRA assets are to be preserved for retirement as much as possible.  Some might say that the strategy – permissible under the existing rules – of setting up multiple IRAs and thereby receiving multiple rollable distributions within the same 12-month period, was tantamount to enabling the taking of multiple 60-day “loans” from one’s IRAs.  Put another way, that person could, in some peoples minds,  be accused of using IRA assets “in his own interest.” 

As much as we like flexibility and freedom when it comes to our own property, we can’t ignore the desirability of accumulating sufficient assets to experience a reasonably comfortable, independent retirement.  We also can’t ignore the fact that we typically receive a tax break as an encouragement for us to save.  Sometimes we rely on our own discipline to resist temptation and make the right choices, and sometimes the Tax Code does it on our behalf.  If it serves the ultimate end of helping us accumulate assets for a secure retirement, maybe the change in the rollover limitation won’t be such a bad thing after all.

Friday, May 2, 2014

IRS Inbound Rollover Guidance May Both Help and Hinder

Retirement plan rollovers are a high priority for the IRS these days.  That is not a criticism, because the portability of retirement savings is essential to workers if they are to have the maximum opportunity to retain IRA and employer plan assets for a financially secure retirement. 
Perhaps the rollover issue getting the most attention has been the IRS’s declaration in Announcement 2014-15 that it will change its stance and limit taxpayers to one IRA rollover per 12 months, regardless of how many IRAs an individual has.  Some have suggested that the agency itself “rolled over” by abandoning a position it held for over 40 years, which had allowed one rollover per IRA per 12 months.   But it is pretty hard for the IRS to ignore a U.S. Tax Court decision (Bobrow v. Commissioner), which prompted the reversal.

More recently, the IRS issued guidance intended to give employers some comfort and certainty when their plans accept employee rollovers from IRAs or other retirement plans.  This guidance, Revenue Ruling 2014-9, provides several practices which, if followed, may serve as evidence that the administrator of the recipient retirement plan took the necessary steps to determine whether assets being received into the plan were eligible for rollover.
Under Treasury Regulations, a plan administrator will jeopardize the qualified status of a plan with respect to  a rollover unless two conditions are met.  The administrator must “reasonably conclude that the rollover contribution is valid,” and if it later proves otherwise, “distribute the ineligible rollover contribution, with earnings, within a reasonable time of discovering the error.”

In the past, some plan administrators felt it necessary to go to such lengths as requiring an employee to produce a determination letter from the prior retirement plan where the pending rollover originated.  In those days, prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), only assets that originated in another qualified retirement plan could be rolled over to a new one.  What’s more, when distributed from such prior plan and not immediately rolled over to a new plan, the assets had to reside for the interim period in what was then known as a “conduit IRA.”  It was a lock-box, or quarantine, you might say.  Commingling such assets with other IRA or employer plan assets disqualified them for rollover to another employer plan.
Motivated by concern over workers dissipating their retirement assets prematurely, Congress, through EGTRRA, liberalized the rollover rules to enhance plan-to-plan portability and hopefully limit such “leakage.”  Thereafter, general portability between plan types, and even rollovers to employer plans of IRA-originating assets, was possible. 

The expectations of employers changed, too.  It may be over-simplifying, but instead of absolute certainty that assets received in a rollover had come from a compliant qualified plan or IRA, employers were required to take steps to be “reasonably certain” that a rollover was valid. Under this standard, employers have had a certain amount of flexibility in making such determinations. 
The IRS has now, in endeavoring to add clarity for employers, provided a list of actions an employer can, or should, take in determining whether a rollover is valid.  Steps described in IRS Revenue Ruling 2014-9 include visiting the Department of Labor’s web site and reviewing a prior employer plan’s Form 5500 filing, to see whether it was “intended to be a qualified plan,” in the IRS’s words.  “Certification” of rollover validity is to be obtained from the employee requesting the rollover, whether it’s from another employer plan, or from an IRA.  Reliance on documentation from a custodian or trustee holding the funds prior to rollover is suggested, with check or wire transfer payment source details given as an example. 

Industry reaction has been mixed.  On the one hand there is appreciation; there is value in details versus generalities.  On the other hand there is some concern and uncertainty over the application of the IRS’s suggested due diligence steps.  In the IRS’s own words the agency states that “These procedures are generally sufficient.”  Are they not always sufficient?  Are they a new minimum standard?  How much latitude and judgment do plan administrators now have in determining rollover eligibility?  The unintended consequence may be more uncertainty, rather than less.   
In the eyes of many, there has not been a significant problem in judging the eligibility of rollovers to employer plans.  What has really been lacking is more aggressive participant education efforts to reinforce the importance of retaining assets for retirement, and the options for doing so.  That, many believe, is where the problems really lie.