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By Eugene S. Griggs, Esq.
Poyner Spruill LLP, Charolotte, NC1
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:
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:
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. For more information or assistance implementing these safe harbors contact a member of our Employee Benefits team.
For more information, in the Tax Management Portfolios, see Bosley and Hutzelman, 370 T.M., Qualified Plans — Taxation of Distributions, and in Tax Practice Series, see ¶5550, Tax Aspects of Qualified Retirement Plans, and ¶5610, IRAs.
© Poyner Spruill LLP.
1 Gene Griggs has practiced in the employee benefits and executive compensation area for over 20 years advising public, private, nonprofit and governmental employers with regional, national and international operations, bank trustees and third-party administrators. His expertise covers the full range of retirement plans, welfare benefit plans, fringe benefit plans, non-qualified deferred compensation plans and other executive compensation arrangements. He may be reached in Poyner Spruill's Charlotte office at 704-342-5320 or firstname.lastname@example.org.
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