A Taxpayer Win - Self-Certification for Waiver of the 60-day Rollover Limit
On August 24, 2016, the IRS issued Revenue Procedure 2016-47, which provides that an individual taxpayer can self-certify that they are eligible for a waiver of the 60-day rollover requirement by using the model letter provided in the Revenue Procedure. The letter itself is not the waiver, and the taxpayer's eligibility for the waiver may be denied if the IRS audits the taxpayer's tax return and cannot verify eligibility for the waiver. However, a plan administrator or an IRA trustee, when presented with the completed letter, can choose to rely on it for purposes of accepting and reporting a rollover contribution and determining that the taxpayer has satisfied the conditions for a waiver of the 60-day requirement. The Revenue Procedure was effective upon its issuance, and can be found at www.irs.gov/pub/irs-drop/rp-16-47.pdf.
Although not perfect, the new self-certification procedure is a welcome addition to the array of ways that the IRS encourages and supports the preservation of qualified plan benefits for post-retirement use.
Applicable law provides that any eligible rollover distribution amount from a qualified retirement plan or an IRA can be excluded from income if it is transferred to an eligible retirement plan on or before the 60th day following the day of its receipt by the taxpayer. Annuity plans and tax-sheltered annuities under Section 403, as well as eligible governmental plans under Section 457, are subject to similar rules.
The vast majority of qualified plan participants choose to have their eligible distributions transferred directly to eligible retirement plans. Indirect rollovers occur more often when participants roll over plan loan balances. Whatever the reason for choosing an indirect rollover, if chosen, the odds of missing the 60-day rollover requirement increase.
Waiver of the 60-day rollover requirement has been possible for a long time, but its requirements were not easy, and, potentially, very expensive. Applicable regulations provide examples of situations in which a plan administrator may rely on certain documents or certifications that a rollover that is not a direct transfer from one of the foregoing plans is being made on or before the 60th day following receipt.
In addition, applicable law also provides for a waiver of the 60-day requirement for what may be described as catastrophic events, including service in a combat zone, terrorist action or in the event of a Presidentially-declared disaster.
Revenue Procedure 2003-16 provides that a taxpayer can request a private letter ruling from the IRS for a waiver of the 60-day requirement, and that an automatic waiver would be approved if the rollover was not timely due to a financial institution's mistake. However, as of February 1, 2016, the fee for a private letter ruling request for a waiver is generally $10,000, and instances giving rise to the automatic waiver are somewhat rare.
The New Procedure
In order to take advantage of the self-certification procedure, a taxpayer must meet the following conditions:
• The IRS must not have previously denied a waiver request with respect to the rollover of all or part of a distribution.
• The 60-day deadline must have been missed for one of the following reasons:
- An error by the financial institution receiving the contribution or making the distribution;
- The distribution was made in the form of a check, which was lost and never cashed;
- The distribution was made to and kept in an account that the taxpayer thought was an eligible
- The principal residence of the taxpayer was severely damaged;
- A member of the taxpayer's family died;
- The taxpayer or a member of the family was seriously ill;
- The taxpayer was incarcerated;
- Restrictions were imposed by a foreign country;
- A postal error occurred;
- The distribution was made on account of an IRS delinquent tax levy and the proceeds of the levy have
been returned to the taxpayer; or
- Despite the taxpayer's reasonable efforts, the distributing party delayed providing required information
to the recipient plan for completion of the rollover.
• The contribution is made to the plan or IRA as soon as practicable after the reason or reasons no longer prevent the contribution by the taxpayer (30 days is deemed to be a reasonable period).
The IRS noted that it intends to revise instructions for Form 5498. It will require an IRA trustee that accepts a tardy rollover contribution to report that the contribution was accepted after the 60-day limit.
What Happens if the Waiver is Denied Upon Audit?
If after using the model letter, the waiver is denied by the IRS, the taxpayer still has the option of requesting a private letter ruling. The IRS has provided detailed instructions in an informative FAQs discussion at https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement.