IRS Revises Hardship Exception to 60-Day Rollover Rule

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Deborah M. Beers, Esq.

By Deborah M. Beers, Esq. Buchanan Ingersoll & Rooney PC Washington, D.C.

Overview

In most cases, in order to defer current taxation on the receipt of a distribution from an individual retirement account (IRA) or certain qualified retirement plan, a §401 qualified retirement plan, a §403(b) annuity plan, or a §457(b) governmental deferred compensation plan, a recipient must roll over the distribution within 60 days of receipt. For distributions that occur after December 31, 2001, however, the IRS may waive this 60-day requirement on a showing of hardship.

In January 2003, the IRS issued Rev. Proc. 2003-16 instructing taxpayers how to apply for the waiver. Rev. Proc. 2003-16 provides that a taxpayer must apply for a hardship exception to the 60-day rollover requirement using the same procedure as that was applicable to letter rulings, accompanied by the required user fee.

In Rev. Proc. 2003-16, the IRS announced that it would “issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer.” In determining whether to grant a waiver, the IRS would consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred. The IRS also announced that an automatic waiver would be issued if the sole reason for a delay in depositing the rollover amount into a new account was attributable to the failure of the financial institution to follow the taxpayer's instructions to do so.

Since 2003, the IRS has issued a flood of such waivers in situations “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual.”

Rev. Proc. 2016-47

In Rev. Proc. 2016-47, the IRS modified Rev. Proc. 2003-16 to provide new guidance for requesting a waiver of the 60-day rollover rule. Under Rev. Proc. 2016-47, effective August 24, 2016, taxpayers may use a sample letter (or a substantially similar letter) to self-certify to plan administrators or IRA trustees that early distribution taxes should not apply because the 60-day rollover window was missed due to at least one of 11 enumerated reasons. The guidance also establishes another safe harbor under which a contribution to a new retirement account must be made within 30 days after the reason or reasons given for missing the 60-day deadline no longer prevent the taxpayer from making the contribution.

In order to self-certify, the following three conditions must be met:

  • 1. There must have been no prior denial by the IRS of a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates.
  • 2. The taxpayer must have missed the 60-day deadline because of the taxpayer's inability to complete a rollover due to one or more of the following 11 reasons:
  • (a) An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
  • (b) The distribution, having been made in the form of a check, was misplaced and never cashed;
  • (c) The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
  • (d) The taxpayer's principal residence was severely damaged;
  • (e) A member of the taxpayer's family died;
  • (f) The taxpayer or a member of the taxpayer's family was seriously ill;
  • (g) The taxpayer was incarcerated;
  • (h) Restrictions were imposed by a foreign country;
  • (i) A postal error occurred;
  • (j) The distribution was made on account of a levy under §6331 and the proceeds of the levy have been returned to the taxpayer; or
  • (k) The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer's reasonable efforts to obtain the information.
  • 3. The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed above no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution.

 

The IRS intends to modify the instructions to Form 5498, IRA Contribution Information, to require that an IRA trustee that accepts a rollover contribution after the 60-day deadline report that the contribution was accepted after the 60-day deadline. Further, for purposes of accepting and reporting a rollover contribution into a plan or IRA, a plan administrator or IRA trustee may rely on a taxpayer's self-certification in determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement. However, a plan administrator or an IRA trustee may not rely on the self-certification for other purposes or if the plan administrator or IRA trustee has actual knowledge that is contrary to the self-certification.

Comment

The IRS cautions that self-certification is not the same as a waiver of the 60-day rollover requirement as it may later (on audit) determine that the reason or reasons claimed by the taxpayer did not prevent timely rollover or that the self-certification contained a material misstatement. Additionally, the IRS may also grant waiver on examination of return, an option that was not within the parameters of the 2003 guidance.

Because the self-certification is not definitive in the same manner that the former letter ruling procedure, taxpayers desiring certainty may want to undergo the process (and expense) of obtaining a ruling under the procedure described in Rev. Proc. 2003-16, which presumably is still available.

Finally, despite the new self-certification options, eligible taxpayers should consider requesting that an administrator or trustee may direct trustee-to-trustee transfer, rather than effecting a rollover and running the risk of it failing to qualify as a tax-free rollover.

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