On April 3, 2014, the Internal Revenue Service (“IRS”) issued Revenue Ruling 2014-9, which expands on previous IRS guidance addressing how a plan administrator may “reasonably conclude” that a potential rollover contribution is a qualified distribution and will not adversely affect the recipient plan’s qualified status. This revenue ruling updates the guidance provided under Treas. Reg. 1.401(a)(31)-1, Q&A-14(b)(2) by offering two additional examples of “due diligence” procedures a plan administrator of a recipient plan (a “recipient plan administrator”) may rely on to meet the “reasonableness” standard.

Interestingly enough, the IRS also recently updated its Form 5310 (Application for Determination for Terminating Plan — revised December 2013). One significant change on the Form is that applicants are now required to submit “proof” that any rollover contributions received by the applicant’s plan were from qualified plans or individual retirement accounts (“IRAs”) offering plan determination letters and timely interim amendments as examples of such proof. Accordingly, the updated instructions seem to require a higher level of compliance than in the guidance provided in the regulations under Code Section 401(a)(31) or the current Revenue Ruling.

Unemployment Compensation Amendments of 1992 and Code Section 401(a)(31) Regulations

The IRS first issued regulations under Code Section 401(a)(31) in 1995 to provide guidance on the Unemployment Compensation Amendments of 1992 (“UCA”). UCA expanded the types of plan distributions eligible for rollover under the Code and required qualified plans to offer a direct rollover option. Modifications were issued in 1996 to expand and clarify the 1995 guidance.

As a result of UCA and its goal to expand pension portability, many plan administrators were concerned that accepting rollovers under these regulations could jeopardize their own plans’ tax-qualified status if the IRS later determined that the rollovers were from disqualified plans. To help address these concerns, the IRS amended the 1996 guidance in 1998 to grant relief from disqualification to affected plans, in response to a congressional directive contained in the Taxpayer Relief Act of 1997. The 1998 amendment clarified that distributing plans did not need a favorable determination letter for a plan administrator to reasonably conclude that a potential rollover contribution was valid. The modification helped ease plan administrators’ compliance burden by simplifying their due diligence obligations, which would have required obtaining numerous supporting documents, as well as expert opinions in some cases, to verify the distributing plan’s qualified status.

In addition, the 1996 guidance clarified that the acceptance of a rollover contribution later found to be invalid would not jeopardize the qualified status of the recipient plan, as long as the following two conditions were met:

  • The recipient plan administrator “reasonably concluded” that the contribution was an “eligible rollover distribution” prior to accepting the rollover contribution; and
  • Following the discovery that a rollover contribution was invalid, the plan administrator distributes the rollover amount (including earnings) to the affected eligible employee within a reasonable time after making the discovery.

If the plan administrator satisfied these conditions, the defective rollover contribution in the recipient plan would still be treated as a rollover contribution for purposes of satisfying the recipient plan’s qualification requirements (e.g., the contribution would not be treated as an annual addition under Code Section 415 or an employee contribution for non-discrimination testing under Code Section 401(m)). The examples set forth in the 1996 guidance generally permit plan administrators to reach a reasonable conclusion that the rollover was an “eligible rollover distribution” based on certifications provided by the distributing plan administrator, trustee, and/or the eligible employee (along with some limited documentation in certain circumstances). These certifications could include statements that the distributing plan either received a determination letter, was a qualified plan at the time distribution was made or the plan administrator was not aware of any provision that would result in plan disqualification at the time of distribution.

This clarification addressed in the 1996 guidance was fully retained in final regulations issued in 2000 (the “2000 Final Regulations”). The “reasonableness” standard and the protection it affords, as well as the clarification concerning determination letters were both addressed in Section 1.401(a)(31)-1, Q&A-14 of the 2002 Final Regulations.

Revenue Ruling 2014-9

Rev. Rul. 2014-9 offers further clarification by providing two additional examples in which plan administrators would be deemed to have met the “reasonableness” standard as set forth in the previous guidance.

Situation One

An eligible employee requests a distribution of his prior employer’s vested plan benefit as a direct rollover into his current employer’s plan. The prior employer’s plan trustee issues the eligible employee a check made payable to the current employer’s plan trustee. The attached check stub identifies the source of funds as attributable to the prior employer’s plan. The eligible employee also certifies that the distribution does not include after-tax contributions or amounts attributable to designated Roth contributions (as the current employer’s plan does not accept such amounts for rollover).

To verify that the prior employer’s plan is a qualified plan, the recipient plan administrator obtains a copy of the distributing plan’s most recent Form 5500 submitted to the U.S. Department of Labor (the “DOL”) and checks line 8a (or 9a on Form 5500-SF) to ensure it does not include code 3C (i.e., Form 5500’s designated code for plans not intended to be qualified under Code Sections 401, 403, or 408).

Situation Two

The situation is the same as in situation one, except that the eligible employee’s distribution is from a traditional IRA rather than a qualified plan. On the attached check stub, the eligible employee’s IRA is identified as the source of funds. In addition, the eligible employee certifies that the distribution includes no after-tax amounts and that the employee will not have attained age 70½ by the end of the year in which the check is issued.

A Reasonable Conclusion

In these situations, the IRS determined in Rev. Rul. 2014-9 that a plan administrator could reasonably conclude that a potential rollover contribution is valid if, absent any evidence to the contrary, the following measures were taken:

  • With respect to rollovers from qualified plans, the recipient plan administrator verified that the distributing plan filed its most recent Form 5500 without using the code 3C. The IRS determined that the plan administrator could reasonably rely on the information reported on the distributing plan’s Form 5500, because such information was the plan administrator’s representation to the DOL that the plan was intended to be a qualified plan;
  • The recipient plan administrator could identify the rollover contribution’s source of funds as attributable to the distributing plan. The IRS has stated that the distributing plan could provide such identification on the check stub or the check itself. In addition, wire transfers (or other electronic methods) would also be acceptable, as long as the recipient plan administrator received some form of communication from the distributing plan identifying the source of funds.
  • The eligible employee certified to the recipient plan administrator that the rollover contribution did not include any amounts that were ineligible for rollover. For example, if the distributing plan included after-tax contributions or designated Roth contributions that the recipient plan did not accept, the plan administrator must have obtained the employee’s certification that the rollover contribution did not include such amounts. Likewise, with respect to distributions from an IRA, the plan administrator would need the eligible employee to certify that the employee would not have attained age 70½ by the end of the year in which the check was issued to avoid any concerns that the employee would have been required to receive a required minimum distribution (“RMD”) from the IRA.

In this regard, the Revenue Ruling notes that the IRS does not require a similar certification for RMDs made from qualified plans. By issuing the distribution in the form of a direct rollover, the distributing plan’s trustee had sufficiently asserted that the distribution met the requirements of an eligible rollover distribution. In this situation, the plan administrator could assume, for example, that the distribution occurred during or after the year in which the eligible employee had attained age 70½ and that the distributing plan had distributed the RMD to the eligible employee before making the direct rollover distribution.

As a result, the IRS permits plan administrators to continue relying on such certifications and limited documentation for compliance in Rev. Rul. 2014-9, thereby maintaining its objective to simplify plan administrators’ due diligence procedures before accepting rollover contributions on their eligible employees’ behalf.

But What about Updated Form 5310?

While Rev. Rul. 2014-9 limits the amount of due diligence required by plan administrators for accepting rollover contributions, the IRS appears to have a different compliance standard for reviewing the qualified status of terminated plans. In the instructions to Line 19c of its updated Form 5310 (revised December 2013), the IRS now requires applicants to provide evidence that any rollover contributions or asset transfers received by the plan during the termination year and the preceding five plan years were made from qualified plans or IRAs, referring to determination letters and timely interim amendments as acceptable forms of evidence.

However, as noted above, Section 1.401(a)(31)-1, Q&A-14 of the 2002 Final Regulations expressly states that a distributing plan is not required to have a determination letter for the recipient plan administrator to reasonably conclude that the potential rollover contribution is valid.

Rev. Rul. 2014-9 states that all Form 5310 applications must be submitted on the updated form after June 30, 2014. Going forward, this standard of “proof” could impose a significant burden on Form 5310 applicants, especially for plan administrators of larger plans with numerous participants.

Plan terminations occurring as a result of corporate acquisitions can present additional concerns. In many instances, it can be quite difficult to obtain records documenting a terminating plan’s qualification status, especially where a former service provider no longer maintains an ongoing relationship with the acquired company. This requirement may force many plan administrators to forgo submitting terminated plans for a ruling altogether to avoid the heightened scrutiny associated with providing inadequate proof.

Recommended Course of Action

The IRS has informally notified us that its forthcoming Employee Plans newsletter will include a statement clarifying that plan applicants using the revised Form 5310 are not actually required to provide the extensive documentation of proof outlined in the revised Form’s instructions, given the recently issued Rev. Rul. 2014-9. We also understand that the IRS has instructed its examiners not to request such items for verification during their examinations. However, we have also been told that it may take a few years for the agency to revise the actual Form and its instructions.

As a result, we recommend continuing to apply the simplified compliance standard provided in the 2002 guidance, as further modified by Rev. Rul. 2014-9. Regarding any imminent Form 5310 applications submitted for terminated plans, we suggest providing the IRS with the information received when the rollover was first accepted (e.g., the rollover forms completed by participants and related plan administrators). In recent examinations, we have seen the IRS accept these forms of verification from terminating plans and issue determination letters on their qualified status.

Finally, it should also be permissible for the plan administrator of the terminated plan to submit the related Forms 5500 for the rollover contributions as set forth in Rev. Rul. 2014-9, even though the plan administrator may not have used the ruling’s new standard of proof to conclude that a rollover was valid at the time of receipt. In any case, even though the instructions currently require a higher level of due diligence, we do not believe plan administrators need to modify their practices for accepting rollover contributions, provided they are currently following the standards set forth in the 2002 guidance, as modified by Rev. Rul. 2014-9.