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From the Pension Plan Fix-It Handbook, Thompson Publishing Group
Summary: Under newly proposed IRS regulations, retirement plan administrators would be able to accept an eligible rollover distribution without endangering their plans' qualified status even if the distribution turns out to be ineligible for rollover treatment -- as long as the administrators acted on a good faith belief that the rollover requirements were met.
(Oct. 25, 1996) The IRS has published proposed regulations that would allow a qualified plan to avoid disqualification due to an invalid rollover distribution as long as the plan administrator acted in good faith and distributed the invalid rollover amount, with earnings, to the participant within a reasonable period of time after discovering the error. The current regulations on rollovers do not specifically address the steps that administrators could take to ensure that they were acting in good faith; nor do the existing regulations address how to fix the problem that arises when an accepted rollover distribution turns out to be invalid.
The IRS developed the proposed regulations to reassure plan administrators that accepting eligible rollovers should not jeopardize their plans' qualified status, even if the distributions turn out to be invalid. The proposed rules were published in the Sept. 19, 1996, Federal Register. The IRS hopes the reduced risk will encourage more plans to accept rollovers, thereby increasing the portability of qualified retirement plan benefits.
The original direct rollover regulations provided detailed rules governing direct rollover requirements and the ability of plan administrators to require reasonable assurances of the qualified status of any rollover distribution. The 1995 final regulations also provided that plans would not be disqualified if they accepted direct rollovers that later turned out to be invalid. However, the regulations only addressed the consequences arising from direct rollovers from other plans and not individual rollovers from participants (within 60 days of receiving distributions). Also, the original regulations did not give examples of the information that recipient plans could require from other plans or employees to prove that a distribution was eligible for rollover treatment.
The proposed regulations provide many illustrative examples of the information that recipient plans could require from other plans and participants. For example, before accepting a direct rollover contribution, plans may require that participants submit a letter from the distributing plan's administrator indicating that the distributing plan had received a favorable IRS determination letter.
In the case of a regular (not a direct) rollover contribution, a plan also could require a similar statement or a certification from the employee that the rollover requirements are met; a copy of the distribution statement could be required to accompany the prior plan's distribution check. Similar certifications may be required from conduit IRA distributions.
The proposed regulations also provide relief for plan administrators who determine that a rollover contribution previously accepted was invalid (because the distributing plan was later determined to be disqualified or because the distribution did not meet the requirements for a direct rollover distribution). In these cases, the recipient plan will retain its qualified status as long as it acted in good faith in accepting the rollover contribution and it distributes the invalid rollover amount, with earnings, as soon as practical after learning that the rollover contribution was invalid. Also, the invalid rollover does not have to be treated as an employee contribution for any nondiscrimination or other limitation testing purposes.
Although the proposed regulations do not establish any new legal principles, they do provide a great deal of certainty for plan administrators concerned about the consequences of taking rollovers that turn out to be invalid.
Employers wishing to comment on the proposed regulations should contact the IRS by Dec. 18, 1996. Mail comments to: CC:DOM:CORP:R (REG - 2455562-96), Room 5228, IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Hand deliver comments to: CC:DOM:CORP:R (REG - 2455562-96), Courier's Desk, IRS, 1111 Constitution Ave., N.W., Washington, DC.
The IRS now accepts electronic submission of comments via the Internet. Select either the "Tax Regs" option on the IRS home page or transmit comments directly to: http://www.irs.ustreas.gov/prod/tax_regs/comments.html.
Excerpted from the November 1996 supplement to the Pension Plan Fix-It Handbook, ©Thompson Publishing Group, 1996. All rights reserved.
