The administrative burden of determining the validity of rollover contributions to qualified retirement plans, and the associated risk of jeopardizing the plan’s tax-qualified status, traditionally has been a significant headache for plan sponsors and administrators. In some cases plans have just decided not to accept rollovers from other qualified plans or individual retirement accounts (IRAs).
The IRS now has provided a streamlined process for validating rollover contributions in the form of two safe harbors, one for rollovers from other employer qualified plans and another for rollovers from IRAs. These safe-harbor rules eliminate the need for plan administrators to obtain a copy of a qualified plan’s IRS determination letter (or other evidence of qualified status, such as a plan representative certification), and in the case of rollovers from IRAs, obtain evidence that the rollover amount originated from a qualified or governmental 457(b) plan.
Qualified plan rules permit rollovers only of certain types of distributions (for example, hardship withdrawals cannot be rolled over) from certain types of plans. Therefore, before accepting a contribution as a rollover, the plan administrator must conclude that the contribution includes only amounts that are a valid rollover distribution and that the contribution is coming from an eligible retirement plan. Rollovers accepted by a qualified plan that do not meet all of the IRS requirements are considered invalid and could jeopardize the qualified status of the receiving plan. Plans that accept a rollover erroneously believed to be valid have relief (i.e., the rollover will not jeopardize the plan’s qualified status) if (i) the plan administrator reasonably concluded at the time the contribution was accepted that it was valid rollover, and (ii) any amounts later determined to be invalid are distributed, with associated earnings, to the employee within a reasonable time of the determination.
Under the new safe harbor for rollovers from qualified plans a plan administrator may reasonably conclude that a contribution is a valid rollover, in the absence of any evidence to the contrary, by relying on the distribution check made payable to the plan and a copy of the transferor plan’s Form 5500. To rely on the safe-harbor the following requirements must be met:
- A check payable to the accepting plan for the benefit of the employee entitles that plan administrator to reasonably conclude the distribution is a valid rollover distribution and that, if the employee is over 70-1/2, the transferor plan deducted the required minimum distribution for the year from the rollover amount prior to its distribution.
- The check, check stub or wire transfer identifies the transferor plan as the source of the funds.
- A search of the DOL database at www.efast.dol.gov for the latest Form 5500 for the transferor plan and determination that Code 3C (which indicates that the plan is not intended to be qualified) is not marked in line 8a of the Form 5500 entitles the plan administrator for the accepting plan to reasonably conclude the transferor plan is qualified.
Under the safe harbor for rollovers from IRAs a plan administrator may reasonably conclude that a contribution is a valid rollover, in the absence of any evidence to the contrary, by relying on the check from the IRA and a certification from the employee. To rely on this safe-harbor the following requirements must be met:
- A check payable to the accepting plan entitles that plan administrator to reasonably conclude the distribution is a valid rollover distribution.
- The check, check stub or wire transfer advice reflecting the source of the funds as the “IRA of Employee X” entitles that plan administrator to reasonably conclude the sources of the funds is a traditional, non-inherited IRA.
- A certification from the employee that the rollover includes no after-tax amounts and that the employee will not attain age 70½ by the end of the year of the transfer.
Plan sponsors should confirm that their plan document permits rollover contributions and should work with their administrators to update plan forms and procedures if they wish to rely on these safe harbors.