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.
