Thursday, September 8, 2016

Is It “Buyer Beware” with New Rollover Self-Certification?

Barb Van Zomeren, Vice President, ERISA

Federal agency retirement plan guidance has taken some interesting and surprising turns in recent months. But if there is a prevailing direction to these developments, it is toward minimizing the expenditure of personnel resources, and relying less on Congress to get things done.

We’ve certainly seen this with the Department of Labor (DOL) conflict-of-interest regulations, as well as their guidance for state coordination of retirement plans for private sector workers. The Internal Revenue Service (IRS) has made radical changes in its determination letter program, clearly with the goal of reducing manpower devoted to that process. Most recently, the IRS has taken major steps to liberalize the process of granting waivers for IRA rollovers that fail to be executed within the normal 60-day window allowed for such transactions.

“Once upon a time,” as the fairy tale goes, the IRS maintained that it had no authority to extend the statutory 60-day period for completing an indirect rollover between IRAs, or between an employer-sponsored retirement plan and an IRA. EGTRRA, the Economic Growth and Tax Relief Reconciliation Act of 2001, changed that, giving the IRS the authority to waive the 60-day deadline if failure to do so “would be against equity and good conscience.”

IRS guidance in 2003 set out the conditions for obtaining a waiver, identifying multiple conditions – such as financial organization error, disaster, illness, incarceration, and others – that might justify an extension in order to complete a rollover and avoid unwanted tax consequences. In some cases, such as financial organization error, the waiver could be automatic. In others, the taxpayer had to apply to the IRS for a private letter ruling, or PLR.

PLRs have never been free, but the fee for these rollover waiver PLRs began at less than $100; a real bargain as IRS fees go, and many, many taxpayers took advantage of it. Rollover waiver PLRs became by far the most numerous to be issued. Over several years the fee was increased to a range between $500 and $3,000, depending on the volume of assets involved. Finally, in 2016, the IRS eliminated the special reduced fee, and the cost rose to a daunting $10,000. Clearly, the only taxpayers who would apply for a rollover waiver were likely to be those with a great deal at stake if the 60-day limitation could not be waived.

Little IRS or DOL guidance is issued without either being identified on their priority guidance plans, or via leaks of insider information revealing what these agencies are about to issue. Guidance that does not rise to the level of regulations is not reported as pending with the federal office of Management and Budget (OMB), so for any guidance below regulations-level there is no tip-off from that source.

Against this backdrop, IRS release of Revenue Procedure 2016-47 on August 24 came without hint or advance fanfare, and apparently little, if any, advance industry awareness. The latest update to the IRS priority guidance plan had made no mention of sub-regulatory IRA guidance on rollovers.
The IRS has provided what at first glance seems like a very generous option for taxpayers to claim eligibility for an extension of the 60-day limitation on executing rollovers. Now, many of the justifications that might have earned a waiver in the PLR process are available in what seems an almost automatic fashion. Illness, damage to one’s residence, postal errors, serious injury or death of a family member – even misplacing a check – are among 11 reasons for self-certifying one’s eligibility for a waiver, requiring no blessing from the IRS.

Is there a dark lining to this apparent silver cloud? Obtaining a waiver from a rule that could otherwise yield unpleasant tax consequences is obviously of great benefit to a taxpayer moving assets from one savings arrangement to another, and missing the deadline. But this guidance is not without some “maybes.” The most sure and certain of its positive effects is to grant protection to IRA custodians and trustees, and plan administrators, who receive rollovers under the self-certification process. They may rely on the representations of the taxpayer providing the certification, unless they have actual knowledge that the reason is invalid.

The real ambiguity is faced by the taxpayer himself. For example, what constitutes severe damage to a taxpayer’s principal residence, one of the exemptions cited in the latest guidance? What does “seriously ill” mean? What is “a postal error” that would prevent completion of a rollover? How could a taxpayer substantiate that he believed a non-retirement account was a retirement account when he mistakenly made the deposit? These are but a few examples among the 11 for self-certification.
Missing are details to help a taxpayer be certain that he or she meets some of these less-than-straightforward conditions for self-certification. That could be a bad thing or a good thing, depending on your viewpoint. Certainty will not be easy in some situations. That will bother some taxpayers, and may lead them – if the stakes are high enough – to seek an actual PLR. Others may feel just the opposite. If the door has been opened for them to give themselves “wiggle room” in an ambiguous self-certification situation, they may go for it and take comfort in the low probability of their ever being audited.

That certainly will not make every potentially eligible taxpayer comfortable. Nor should it.