Clients Have More Time To Enact Tax-Free Rollovers

The Internal Revenue Service (IRS) introduced a new self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement account (IRA).

In Revenue Procedure 2016-47, posted this week on IRS.gov, the IRS explains how eligible taxpayers “encountering a variety of mitigating circumstances” can qualify for the waiver, which will effectively extend the 60-day time limit on tax-qualified rollovers and therefore help investors avoid early distribution taxes and penalties stemming from rollover mistakes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

As the IRS explains, normally, an eligible distribution from an IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60th day after it was received. In most cases, taxpayers who fail to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

“Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances,” IRS says. “Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.”

NEXT: Important implications for retirement readiness  

IRS says this is an important, if modest, step towards boosting retirement readiness in the U.S.

State Street Global Advisors' Megan Yost, head of defined contribution (DC) participant engagement, agrees wholeheartedly with that assessment. Speaking recently about the importance of easing the rollover process with PLANADVISER, she said regulators, providers and plan sponsors are all coming into alignment on this important issue.

“I was just invited to discuss this topic at a meeting of the ERISA Advisory Council,” Yost explains. “The council is exploring ways to make plan-to-plan transfers easier. They are gathering feedback from a lot of different perspectives, from plan sponsors, advisers, lawyers, providers, academic, etc. They are bringing together everyone who is a part of the DC ecosystem and who will have to participate in building real solutions.”

Yost said her firm and others she speaks with are thrilled that distribution and rollover questions are getting more attention.

“Looking across everything we heard during the ERISA Advisory Council meeting, most people across the industry really think keeping money in plans and simplifying the process of consolidating accounts are important for the future,” she noted. “Everyone is looking at ways they can contribute to this end goal—which is so critically important because none of us can do this unilaterally. It’s a fairly complex issue and even more complex than I think a lot of people assume on the surface. There is a lot of operational complexity to be taken into account if we want to improve portability, and then there is also the task of marrying the processes with the user perception and experience.”

Yost says the DC retirement industry overall considers a solution to this problem to be critical. “In terms of specific recommendations we think are absolutely necessary for the next 10 years, first and foremost we need to see the automation of the rolling of savings from one employer plan to another via new collaborations among recordkeepers and investment companies. Tied to this, we should see the simplifying, standardizing and digitizing roll-in application paperwork, and it should be made very easy to find and access roll-in documentation,” she concludes.