The Internal Revenue Service (IRS) has issued additional guidance on when it is reasonable for a qualified retirement plan to accept a direct rollover from another qualified plan or from an individual retirement account (IRA). Also, the Department of Labor (DOL) has issued new model notices in connection with COBRA healthcare continuation coverage.
Rollovers to Qualified Plans
The IRS regulations in connection with acceptance of rollovers by qualified plans provide some rules to help administrators of qualified plans judge the validity of potential rollover contributions. These regulations, for example, indicate that a distributing plan need not have a determination letter in order for the administrator of the receiving plan to reasonably conclude that a potential rollover contribution is valid.
In Revenue Ruling 2014-9, the IRS has provided additional guidance in two rollover scenarios:
- “A,” a participant in her former employer’s qualified retirement plan “Plan W” requested a distribution from Plan W in the form of a direct rollover to her new employer’s qualified plan, “Plan X.” The check for the distribution was made payable to the trustee for Plan X, for the benefit of A.
- The administrator of Plan X accessed the EFAST2 online database maintained by the DOL at www.efast.dol.gov and located the most recently filed Form 5500 for Plan W. The codes listed for Line 8a on the form did not include Code 3C, which describes a plan not intended to be qualified under Sections 401, 403 or 408 of the Internal Revenue Code (Code).
- The IRS concluded that, absent evidence to the contrary, it was reasonable for the administrator of Plan X to conclude that the distribution from Plan W was a valid rollover contribution, based upon the following analysis:
- Form 5500: By completing Form 5500 in this manner, the administrator of Plan W made a representation that Plan W was intended to be a plan qualified under Sections 401, 403 or 408. Therefore, as a result of this filing, it was reasonable for the administrator of Plan X to conclude that Plan W intended to be a qualified plan.
- Distribution Check: The issuance of the check to the trustee of Plan X indicated that the administrator of Plan W treated the distribution as an eligible rollover distribution to be directly rolled over, and therefore it was reasonable for the administrator of Plan X to conclude that the potential rollover contribution was an eligible rollover distribution from Plan W.
- RMDs: If the distribution had occurred during or after the year in which A had attained age 70½, it also would be reasonable for the administrator of Plan X to conclude that, in accordance with a regulation as to distributions from the account of a plan participant who had attained age 70½, that Plan W paid the required minimum distribution (RMD) to A under Code Section 401(a)(9) for the year, before making the direct rollover.
- An employee, “B,” who was a participant in her employer’s qualified plan, “Plan Y,” had an account balance in “Z,” an IRA, which was titled “IRA of B.” The IRA was a “traditional” IRA and not a Roth IRA, a SIMPLE IRA or an inherited IRA.
- B requested a distribution of her account balance in IRA Z in the form of a direct rollover payment to Plan Y. The trustee for IRA Z issued a check payable to the trustee for Plan Y for the benefit of B and provided the check to B. B then delivered the check, including a check stub that identified “IRA of B” as the source of the funds, to the administrator of Plan Y. B certified that she will not have attained age 70½ by the end of the year in which the check is issued.
- Based on the analysis used in the first scenario, the IRS concluded that absent any evidence to the contrary, it was reasonable for the administrator of Plan Y to conclude that the potential rollover contribution of the distribution from IRA Z was a valid rollover contribution.
- Distribution Check: The issuance of the check to the trustee of Plan Y indicated that the trustee for IRA Z treated the distribution as an eligible rollover distribution to be directly rolled over, and therefore it was reasonable for the administrator of Plan Y to conclude that the potential rollover contribution was an eligible rollover distribution from IRA Z.
- RMDs: Unlike the first scenario above, the IRS noted that if B had attained age 70½ or older by the end of the year in which the check was issued, then the administrator of Plan Y could not reasonably conclude that the potential rollover contribution was valid without additional information indicating that the RMD from IRA Z had been made in the year in which the check was issued.
In the first scenario, there was no certification by the former employee to the receiving plan that as to her age, yet the IRS found it reasonable for the administrator to conclude that any RMD was not included in the amount rolled over. In the second scenario, the IRA owner did certify to the receiving plan that she will not have attained age 70½ by the end of the year of the rollover. The difference appears to be that the source of the rollover amount in the first scenario was a plan whose administrator had represented that it was intended to be a qualified plan. Compliance with the RMD rules is a condition of maintaining plan qualification. By contrast, the source of the rollover in the second scenario was an IRA, which would not lose its tax exemption if it failed to timely pay an RMD. Therefore, the administrator of the receiving plan needed some representation by the IRA owner as to her age in order to assure that no RMD was payable for the year of the rollover.
Observation: In both scenarios, the administrator of receiving plan would know the age of the employee in any event, as part of the information it would have obtained in order to enroll the employee in that plan.
New Model COBRA Notices
The administrator of a group health plan subject to the COBRA healthcare continuation requirements is required to issue several types of written notices, including the following:
- A “general notice” of COBRA rights must be sent to each covered employee and spouse (if any) at the time of commencement of coverage under the plan. Generally, the notice must be furnished to each covered employee and to his or her spouse (if covered under the plan) no later than the earlier of (i) either 90 days from the date on which the covered employee or spouse first becomes covered under the plan or, if later, the date on which the plan first becomes subject to the continuation coverage requirements; or (ii) the date on which the administrator is required to furnish an election notice to the employee or to his or her spouse or dependent.
- An “election notice” must be sent at the time of certain COBRA “qualifying events” to “qualified beneficiaries” (those entitled to elect COBRA coverage following a qualifying event) – generally within 14 days after the plan administrator receives the notice of a qualifying event. The election describes a qualified beneficiary’s right to continuation coverage and how to make an election.
On its Employee Benefits Security Administration website, the DOL has released new forms of its model general notice and model election notice, in English and in Spanish. Although use of the model notices is not mandatory, such use, as appropriately modified and supplemented, will be deemed to satisfy the content requirements of the DOL regulations that govern the general notice and election notice.
The updated model general notice incorporates a number of revisions from the previous model notice, issued in 2004. In particular, the updated version explains that if group health coverage is lost, one may be able to buy an individual plan though the “Health Insurance Marketplace,” meaning the health insurance exchanges established under the Affordable Care Act (ACA). The updated election notice is basically identical to the updated version that the DOL released in 2013, which mentioned Marketplace coverage as an alternative when group health plan coverage is lost.
When group health plan coverage ends, the affected individuals may have HIPAA-mandated special-enrollment rights in another group health plan; both updated model notices refer to these rights.
Observation: Unfortunately, neither updated model notice mentions the right under the ACA of individuals who lose “minimum essential coverage” to immediately enroll in an individual plan offered by an exchange outside the normal open-enrollment period. Loss of minimum essential coverage would occur when group health plan coverage is lost, i.e., as a result of a COBRA qualifying event. It also would occur when COBRA coverage expires. The Centers for Medicare and Medicaid Services, however, take the position that if an individual’s COBRA coverage is dropped before it expires, he or she would not have special-enrollment rights under an exchange and would have to wait until the next open-enrollment period to buy an individual plan under an exchange.