Plan-to-plan rollover guidance issued by IRS

The IRS has released a revenue ruling (Rev. Rul. 2014-9) clarifying the process by which a qualified plan determines that an incoming rollover may be accepted. Generally, under the process described in the revenue ruling, a qualified plan may accept a check or wire transfer payable to it (the receiving plan) and issued by a plan whose Form 5500 filing (accessible on the Department of Labor’s EFAST2 database) indicates that it (the issuing plan) is a qualified plan. The ruling also clarifies requirements for direct IRA-to-qualified plan rollovers.

In this article we begin with a brief discussion of the controversy over current rollover practice and then discuss the revenue ruling.

Background

In our article Recent studies on rollovers identify emerging issues, we discussed a Government Accountability Office (GAO) report titled “401(k) Plans – Labor and IRS Could Improve the Rollover Process for Participants.” In that report, the GAO criticized current rollover rules and practice as “favor[ing] distributions to individual retirement accounts” and current plan-to-plan rollover practice as “inefficient” and “complex.” Generally, GAO found that while IRA providers make rolling over to an IRA relatively easy, the IRS and plan sponsors make plan-to-plan rollovers relatively hard.

One focus of the GAO report was the issue of “complex verification processes.” Rev. Rul. 2014-9 addresses that issue.

Rev. Rul. 2014-9

The revenue ruling describes a common direct (plan-to-plan) rollover process:

Employee A requests a distribution of her vested account balance in Plan O [her former employer’s plan] and elects that it be paid to Plan M in the form of a direct rollover. The trustee for Plan O distributes Employee A’s vested account balance in a direct rollover to Plan M [her new employer] by issuing a check payable to the trustee for Plan M for the benefit of Employee A, and provides the check to Employee A. Employee A provides the plan administrator for Plan M with the name of Employee A’s prior employer and delivers the check, with an attached check stub that identifies Plan O as the source of the funds, to the plan administrator. Employee A also certifies that the distribution from Plan O does not include after-tax contributions or amounts attributable to designated Roth contributions.

Problem: complex verification of qualified status of distributing plan

The next step in this process is the one that GAO identified as overly complex – verification that the former employer’s plan (Plan O in this case) is a qualified plan. This step is necessary because, generally, a qualified plan may not accept a rollover contribution from a plan that is not a qualified plan.

Here’s the verification problem as GAO describes it:

Plans can require complex and lengthy verification processes for rollover funds to ensure they are tax-qualified. For example, they can request a participant’s previous plan complete verification forms, but that plan has little incentive to handle the verification in a timely way. Participants may be responsible for ensuring that their former employers’ plans complete and return the verification forms.

Simpler verification process

In the revenue ruling, Plan M (the new employer’s plan) finds a simpler solution to this problem:

The plan administrator for Plan M accesses the EFAST2 database maintained by the Department of Labor at www.efast.dol.gov and searches for the most recently filed Form 5500 for Plan O. The latest Form 5500 for Plan O that the plan administrator for Plan M locates in the database is the Form 5500 filed for the plan year beginning January 1, 2012, and ending December 31, 2012. On that filing, line 8a does not include code 3C (for a plan not intended to be qualified under Code section 401, 403, or 408).

In the revenue ruling, IRS found that “it is reasonable for the plan administrator for Plan M to conclude that the potential rollover contribution to Plan M of the distribution from Plan O is a valid rollover contribution.”

To be clear about the key elements of this rollover that make it reasonable, here is how IRS breaks it down:

1. “[T]he plan administrator for Plan O did not enter code 3C on line 8a of the Form 5500 filed for Plan O. By completing the form in this manner, the plan administrator made a representation that Plan O is intended to be a plan qualified under section 401, 403, or 408. As a result of this filing, it is reasonable for the plan administrator for Plan M to conclude that Plan O is intended to be a qualified plan.”

2. “The trustee for Plan O issued a check payable to the trustee for Plan M for the benefit of Employee A, which indicates that the plan administrator for Plan O treated the distribution as an eligible rollover distribution to be directly rolled over. … Thus, for example, if the distribution had occurred during or after the year in which Employee A had attained age 70 1/2, it would be reasonable for the plan administrator for Plan M to conclude that … Plan O distributed the required minimum amount under section 401(a)(9) for the year, prior to making the direct rollover.”

Thus, according to the revenue ruling, the key elements in the process are (1) how the Form 5500 was filled out and (2) how the check was filled out. In this case, one key piece of information about the check (that Plan O was the source of funds) was on the stub, but IRS states that “the results would be the same if there had been no check stub identifying the source of the funds, as long as the check itself identified the source of the funds as Plan O.”

IRA rollovers

The Revenue Ruling also addresses the procedure for direct transfers from ‘traditional’ IRAs (that is, IRAs other than Roth or SIMPLE IRAs). In this case:

The trustee for IRA N issues a check payable to the trustee for Plan M for the benefit of Employee A and provides the check to Employee A. Employee A delivers the check, including a check stub that identifies “IRA of Employee A” as the source of the funds, to the plan administrator for Plan M. Employee A certifies that her distribution from IRA N includes no after-tax amounts. Employee A also certifies that she will not have attained age 70 1/2 by the end of the year in which the check is issued.

Again, to be clear about the key elements of this rollover that make it reasonable, here is how IRS breaks it down:

1. “[T]he trustee for IRA N issued a check payable to the trustee for Plan M for the benefit of Employee A, which indicates that the trustee for IRA N treated the distribution as a rollover contribution paid directly to Plan M. Because the check stub indicates that the distributing account is titled ‘IRA of Employee A,’ the plan administrator for Plan M can reasonably conclude that the source of the funds is a traditional, non-inherited IRA.”

2. “In addition, Employee A has certified that the distribution included no after-tax amounts and that she will not attain age 70 1/2 by the end of the year of the transfer. Therefore, it is reasonable for the plan administrator for Plan M to conclude that the distribution from IRA N is a distribution that can be rolled over.”

Based on this analysis and “absent any evidence to the contrary” the plan administrator may reasonably conclude that this is a valid rollover contribution. If the employee had attained age 70 1/2, the plan administrator would have to require additional information showing that applicable required minimum distribution rules had been satisfied.

Wire transfers

IRS (briefly) notes that: “the results would be the same if the rollover had been accomplished through a wire transfer or other electronic means, provided that the plan administrator or trustee for the sending plan or IRA had communicated to the plan administrator for Plan M the same information regarding the source of the funds.”

Different plans will have different practices, but a shift from physical checks issued to participants and then delivered to the new employer’s plan to wire transfers will certainly address some of the difficulties with respect to direct “plan-to-plan” rollovers identified by the GAO.

* * *

Rev. Rul. 2014-9 may simplify the direct rollover process for some participants and sponsors. The processes outlined in it are simpler than current practice for some plans. A fundamental problem, however, remains: qualified plan sponsors have to make a determination with respect to incoming rollovers – that they represent only qualified plan money – that does not have to be made with respect to a rollover to an IRA.

We will continue to follow the issue of the regulation of rollover practice.