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A "hardship waiver" may be available if the timeframe for participants to roll over funds is missed
If a plan participant's indirect rollover of funds between retirement plans does not occur within the required 60-day timeframe, the IRS will now allow the affected individuals to self-certify that they meet a "hardship waiver" exception to the 60-day rule in a broad array of circumstances. Plan administrators and individual retirement account (IRA) trustees can then rely on the self-certification in deciding whether to accept a rollover contribution after the 60-day period ends.
Distributions that are eligible to be rolled over from qualified retirement plans, such as 401(k) plans, 403(b) tax-sheltered annuities, 457(b) governmental plans, and IRAs, can be deposited to another eligible retirement plan—either via a direct rollover or an indirect rollover—without the participant having to include the amount transferred in their gross income (assuming that the rollover is not from traditional pretax assets into a Roth IRA or designated Roth account).
Direct rollovers allow the participant's entire balance to stay in the system; indirect rollovers are hampered by the income tax withholding rules because the individual needs to come up with the 20 percent withheld if they want the full benefit to stay in an eligible plan. Most participants opt for direct rollovers, but the 60-day rule is typically used when participants roll over outstanding loan balances.
Indirect rollovers must be completed within 60 days of receipt. The IRC provides a safety valve in the form of a hardship waiver when life events get in the way of meeting the 60-day deadline. Aside from situations that are eligible for automatic approval (such as delays up to one year caused by errors made by a financial institution, delays due to frozen deposits at a financial institution or in connection with combat zone service), individuals had to apply for an IRS letter ruling and pay an IRS user fee (currently $10,000) if they wanted to be sure they qualify for a waiver.
In 2015, the IRS user fee for letter rulings that requested a waiver of the 60-day rollover rule were much less than they are now and were based on the amount of the rollover. The 2015 user fee was $500 for rollovers less than $50,000; $1,500 for rollovers between $50,000 and $100,000; and $3,000 for rollovers of $100,000 or more. IRS Revenue Procedure 2016-8 announced that effective Feb. 1, 2016, the special fees for these rollover waiver rulings would no longer apply and that the $10,000 fee applicable to most other IRS letter rulings will apply going forward. It is expected that with this new process and the higher IRS letter ruling fees, fewer distributees will be interested in pursuing a letter ruling.
Streamlining the Process with Self-Certification
In Revenue Procedure 2016-47, the IRS has created a simplified method for self-certifying the reason for a waiver. Eleven reasons are identified as acceptable hardships justifying the waiver. The individual identifies the reason applicable to their situation in a standardized letter that is provided to the plan administrator or IRA trustee and retained in the individual's tax records for production if requested on audit. The Revenue Procedure also contains a model "Certification for Late Rollover Contribution" form. The specific reasons justifying an automatic waiver that can be self-certified are:
A plan administrator or IRA trustee can rely on the self-certifications in determining whether an extension of the 60-day rollover period applies to the rollover, but is not required to do so.
This self-certification process is not necessary for the automatic waivers that apply in the case of certain errors by financial institutions (where the failure to deposit is the fault of the institution and the deposit is made within one year of the distribution), where delays are caused by frozen deposits at financial institutions, or where a combat or disaster relief waiver applies. These situations are covered in other IRS guidance.
Note: This list should cover the vast majority of extenuating circumstances for missing the 60-day deadline and go far in helping to plug the "leakage" problem.
Restrictions, Caveats, and Cautions
The new procedure includes a few modest conditions for using self-certification:
The new IRS procedure is effective immediately and should remove barriers that may have stood in the way of preserving the tax-favored treatment of rollover deposits that were not completed in time due to circumstances that are mostly no fault of the affected individual.
Additional information for individuals on waivers is provided by the IRS in FAQs that have been updated to reflect this new option of self-certification. The IRS has also updated their collection of information for retirement plan administrators and IRA trustees.
Marjorie Martin, EA, FSPA, MAAA, is a principal with Xerox HR Services in their Knowledge Resource Center. Fred Farkash, CEBS, Fellow – ISCEBS, is a seneior consultant with Xerox. This article originally appeared in the Aug. 31, 2016, issue of For Your Information, produced by Xerox HR Service's Knowledge Resource Center. © 2016 Xerox Corp. All rights reserved. Republished with permission.
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