Revenue procedure eases IRA 60-day rollover rules

Human Capital Bulletin: Revenue procedure eases IRA 60-day rollover rulesA new revenue procedure makes obtaining relief from the individual retirement account (IRA) 60-day rollover rules simpler.

Rev. Proc. 2016-47 provides relief for taxpayers who have trouble complying with IRA 60-day rollover rules for reasons specified in the revenue procedure. While the law has long permitted the IRS to waive the 60-day timing requirement for events beyond the taxpayer’s reasonable control, this procedure makes obtaining that relief much easier when the problem is due to one of the causes listed.

Sections 402(c)(3) and 408(d)(3) require that any amount distributed to a taxpayer from a qualified retirement plan or IRA that is rolled over to another eligible retirement plan or IRA must be rolled over no later than the 60th day following the date of receipt. (The same rule applies to 403(b) plan distributions.) If the rollover isn’t made within this time frame, the taxpayer must include the distribution in his or her gross income regardless of whether the distribution actually may have been transferred to an eligible retirement plan.

The revenue procedure permits taxpayers to self-certify to the rollover recipient institution that the reason the rollover missed the 60-day deadline was one listed in a model letter provided by the IRS that the taxpayer sends to the recipient institution. So long as the taxpayer has not previously been denied a waiver with respect to the rollover’s timing, the recipient institution and the taxpayer may treat the rollover as timely if the rollover was completed as soon as practicable once the reason for the delay, listed in the letter, ceased to prevent or delay the transfer of the rollover.  

The IRS lists the following reasons as permissible for delaying the rollover beyond the usual 60-day deadline:

  1. An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
  2. The distribution, having been made in the form of a check, was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.
  4. The taxpayer’s principal residence was severely damaged.
  5. A member of the taxpayer’s family died.
  6. The taxpayer or a member of the taxpayer’s family was seriously ill.
  7. The taxpayer was incarcerated.
  8. Restrictions were imposed by a foreign country.
  9. A postal error occurred.
  10. The distribution was made on account of a federal levy that was then returned.
  11. The distributing institution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

Taxpayers should note that while they may treat the rollover as timely upon filing the proper form, the IRS reserves the right to disallow the waiver for reasons such as material misstatements in the self-certification letter.

The revenue procedure provides a 30-day safe harbor in which taxpayers may assume they have satisfied the “as-soon-as-practicable” requirement to complete the rollover when the reason for the delay is resolved.

Taxpayers may continue to apply for a hardship exception under Part 3 of Rev. Proc. 2003-16 for reasons other than those noted above.

It’s important to note that under the direct rollover rules, whereby a distribution is transferred directly from one retirement plan or IRA to another, the 60-day rule does not apply because the taxpayer at no time has possession of the funds. This method of rolling over between qualified accounts should normally be considered first.

The revenue procedure shows that issues continue to exist with rollovers in which taxpayers have temporary possession of qualified retirement funds as the IRS seeks to allow reasonable processes but also to prevent abusive transactions in which taxpayers use the funds to essentially make temporary “loans” to themselves by slow or multiple rollover transactions. The Tax Court in the 2014 Baybrow v. Commissioner ruling, for example, agreed with the IRS that the once-per-year rollover rule should apply to all a taxpayer’s accounts in aggregate (rather than on a per-account basis) to prevent the use of sequential rollovers as a way of getting the use of qualified retirement funds for a series of 60-day windows.

Contact Mark Ritter, Managing Director, Human Capital Services, at +1 404 704 0114, for more information.

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