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.