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IRS Issues New Examples of Valid Rollover Diligence Procedures

Sidley Austin – On April 3, 2014, the Internal Revenue Service (the “IRS”) released an advance copy of Revenue Ruling 2014-9 providing two new examples of rollover due diligence procedures which, if followed, will allow a plan administrator to reasonably conclude that a potential rollover contribution is valid.

Background

In general, a potential rollover contribution will be treated as valid if (1) the plan administrator for the receiving plan “reasonably concludes” that the contribution is valid when accepting the contribution; and (2) if it is later determined that the contribution was invalid, the plan administrator distributes the amount of the invalid rollover contribution, plus earnings, to the employee within a reasonable time.

Income Tax Regulations provide several examples of situations in which the administrator for a receiving plan may reasonably conclude that a distributing plan is a qualified plan and that a potential rollover contribution is a valid rollover contribution. The Revenue Ruling adds two additional situations in which plan administrators are justified in reasonably concluding that a contribution is a valid rollover contribution.

Facts of Revenue Ruling

The Revenue Ruling involves a profit-sharing plan qualified under Section 401(a) of the Code (the “Plan”). The Plan provides that employees may make rollover contributions to the Plan. The Plan does not accept rollover contributions of after-tax amounts or amounts attributable to designated Roth contributions.

Situation 1: Rollover Distributions Made by Check

In Situation 1, an employee attempts to roll over a contribution from a prior employer’s plan (the “Prior Plan”) to the Plan by delivery of a check (with check stub) issued from the trustee of the Prior Plan made payable to the Plan trustee for the benefit of the employee. The employee certifies to the Plan administrator that the distribution does not include after-tax contributions or amounts attributable to designated Roth contributions. The Plan administrator finds the Prior Plan’s most recently filed Form 5500 in the EFAST2 database maintained by the Department of Labor and notes that Line 8a of the latest Form 5500 does not include code 3C (for a plan not intended to be qualified under Code Sections 401, 403 or 408).

Situation 2: Rollover Distributions Made from Certain IRAs

In Situation 2, an employee attempts to roll over a contribution from a non-inherited traditional IRA (rather than a Roth IRA or a SIMPLE IRA) to the Plan by delivery of a check (with check stub) issued by the trustee of the IRA made payable to the Plan trustee for the benefit of the employee. The employee certifies that the distribution does not include any after-tax amounts and that he/she will not have attained age 70½ years by the end of the year in which the check is issued.

Revenue Ruling Conclusions

In both Situations, the IRS determined that, absent any evidence to the contrary, the Plan administrator could reasonably conclude that the potential rollover contribution is valid. The IRS further clarified that the results would have been the same if there had been no check stub as long as the Plan administrator had knowledge of the source of the funds, either directly from the check or from communications with the Prior Plan administrator or IRA trustee, as applicable, in the case of a wire transfer or other electronic transfer.

Due Diligence Procedures for Plan Administrators
As permitted by the Revenue Ruling, plan administrators may want to consider using the following due diligence procedures when receiving proposed rollover contributions:

  • Review the check from the employee to confirm that the distribution is from a qualified plan or IRA. If the rollover is being made via wire transfer or other electronic means, confirm that information has been received as to the source of the funds from the trustee of the distributing plan or IRA.
  • Confirm that the distributing plan or IRA is tax qualified. Under the Revenue Ruling, this can be accomplished by checking the Form 5500 of a distributing plan on the EFAST2 database to confirm that the plan is intended to be tax qualified.
  • If the plan does not permit certain types of rollover contributions, such as Roth contributions or after-tax contributions, request a certification from the employee that the distribution does not include such contributions. Additionally, if the rollover is from an IRA, request a certification from the employee that he/she will not have attained age 70½ by the end of the year in which the check is issued.

Other methods continue to be available to allow a plan administrator to reasonably conclude that a potential rollover contribution is valid.

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