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September 29, 2016

Save a Client $10,000 with New IRS Procedure for Waiving the 60-Day Rollover Deadline

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by Denise Appleby

Written for financial, tax and legal professionals

The IRS increased the fee for certain private letter rulings (PLR) requests to $10,000 per application, effective February 1, 2016. This include PLR requests to waive the 60-day deadline for completing rollovers, which is a significant increase as the fees for such PLRs used to range from only $500-$3,000.

Considering that there is no guarantee that a PLR request will receive a favorable ruling, this fee increase made it even riskier to miss the 60-day deadline. Fortunately, the IRS has issued new guidelines that now allow eligible individuals to avoid having to pay the $10,000 fee by using a new self-certification option. These guidelines are provided in Revenue Procedure 2016-47.

Background

Generally, distributions taken from an IRA or account under employer-sponsored retirement plan (employer plan) are treated as ordinary income. Any pre-tax portion of distributions is subject to income tax plus a 10% additional tax (early distribution penalty) if the retirement account owner is under age 59 ½ at the time the distribution occurs and does not qualify for an exception to that penalty. However, any eligible amount of a distribution that is properly rolled over is excluded from income, and therefore non-taxable.

The 60-day deadline is one of the requirements that must be met by a rollover in order for it to be considered valid. Under this requirement, the rollover contribution must be completed within 60 days after the account owner receives the distribution.

Note: The 60-day deadline does not apply to distributions to or from an employer-sponsored retirement plan that is processed as a direct rollover.

If the 60-day deadline is missed, the amount is no longer eligible for rollover unless the account owner qualifies for an exception- such as qualifying for an automatic waiver or if the IRS waives the deadline through a PLR.

But, with this new self-certification option, retirement account owners now have a contingency provision that allows them to self-certify that they qualify for a waiver of the 60-day deadline.

The New Self-Certification Process

Revenue Procedure 2016-47 includes an explanation of how an individual can qualify for a waiver of the 60-day deadline by using the self-certification procedure. It also includes a sample self-certification letter that the retirement account owner can provide to the plan administrator or IRA custodian with which the rollover contribution is being made.

Requirements for Self-Certification

An individual is eligible to use the self-certification procedure only if the following three requirements are satisfied:

1.The IRS has not already denied a waiver request for any portion of the distribution.

As mentioned above, an individual can apply to the IRS for a waiver of the 60-day deadline by submitting a PLR request. If the retirement account owner already submitted a PLR request to waive the 60-day deadline for any portion of a distribution and the request was denied, no portion of that distribution is eligible for the self-certification process.

2.The reason for missing the deadline is on the IRS’s preapproved list.

Revenue Procedure 2016-47 includes a list of acceptable reasons for missing the 60-day deadline for the purposes of being eligible for self-certification, providing the reason actually resulted in the deadline being missed. These are:

a)The financial institution that made the distribution or received the rollover contribution made a mistake.

b)The distribution was made in the form of a check that was misplaced and was never cashed.

c)The amount was deposited to a non-retirement account that the retirement account owner mistakenly believed was an eligible retirement account such as an IRA or an account under an employer plan.

d)The retirement account owner’s principal residence was severely damaged.

e)A member of the retirement account owner’s family died.

f)The retirement account owner or a member of his/her family was seriously ill.

g)The retirement account owner was incarcerated.

h)Restrictions were imposed by a foreign country.

i)The deadline was missed due to a postal error.

j)The distribution was made due to an IRS levy and the proceeds of the levy were returned to the retirement account owner.

k)The IRA custodian or trustee who made the distribution delayed providing information that the receiving IRA or employer plan required to complete the rollover despite the account owner’s reasonable efforts to obtain that information.

Most of these reasons are consistent with PLR requests for which the IRS often provide favorable rulings.

It is important to note here that the death exception (e) does not extend to the retirement account owner, which means that this guidance cannot be used as authority to waive the deadline for a deceased account owner. This too, is consistent with the IRS’s position in many PLRs.

On the other hand, the illness exception (f) extends to both the retirement account owner and members of the retirement account owner’s family.

3.30-day Safe Harbor Contribution Deadline

The rollover contribution must be made to the receiving account “as soon as practicable” after the reason for missing the deadline no longer prevents the retirement account owner from making the rollover contribution. This deadline is considered to have been met if the contribution it made within 30 days after the reason(s) no longer exist.

The Effect of Self-Certification

An IRA custodian or plan administrator may rely on the retirement account owner’s self-certification for the purposes of determining whether or not the individual qualifies for a waiver of the 60-day deadline. However, such reliance is not permitted if the custodian or administrator has knowledge that is contrary to the self-certification. For example, if a distribution was processed via federal fund wire from an IRA to a checking account, the IRA owner will not be eligible to claim “postal error” as the amount was not delivered by mail. The IRA custodian that processed the distribution would have knowledge of how the distribution was delivered, and such a custodian would not be permitted to accept a reason of “postal error” for self-certification of the rollover contribution.

While a self-certification is not considered a waiver of the 60-day deadline by the IRS, the amount may be treated as a proper rollover on the account owner’s tax return by excluding the amount from income and following other requirements for reporting rollovers. If the IRS later informs the taxpayer that the rollover is in fact invalid, then the tax return would need to be amended to include the amount in income.

According to the Revenue Procedure, the IRS may consider whether the requirements for a waiver have been met during the course of an examination, and may determine that the waiver requirements were not met because of:

  • Material misstatement in the self-certification;
  • The reason or reasons that were claimed for missing the deadline did not actually prevent the retirement account owner from meeting the deadline; or
  • The 30-day deadline was not met.

In such cases, the account owner would be required to include the amount in income and could be subject to IRS penalties for failure to pay the proper amount of income taxes that would have been owed on the distribution.

How Advisors Should Use This Information

The best solution is to avoid having to deal with the 60-day deadline at all by ensuring that the trustee-to-trustee transfer method is used when assets are being moved between two IRAs; and for movement of assets to or from an employer plan, the direct rollover method should be used. These methods are not subject to the restrictions and limitations that apply to the 60-day rollover method.

Of course, there will be instances when using the 60-day rollover method is unavoidable. In those cases, steps should be taken to ensure that the 60-day deadline is not missed. If you become aware that a client missed the 60-day deadline, the first step is to find out whether or not the client is eligible for an automatic waiver. See Waiver of the 60-day Rollover Requirement for information about the rules that apply to the automatic waiver.

If your client does not qualify for the automatic waiver, the next step is to see if the self-certification process described above can be used. A copy of the self-certification letter can be found on page 5 of the IRS’s Waiver of 60-Day Rollover Requirement (Rev. Proc. 2016-47).

If the client is not eligible for the self-certification process, then the PLR process might be a good solution. If that’s the case, decide whether the amount is significant enough to warrant the $10,000 fee charged by the IRS plus any professional fees. The cost of the PLR versus the loss of the tax-deferral benefit should be taken into consideration. Bear in mind, of course, that approvals for PLR requests are not automatic, and the reason for missing the deadline plays a significant role in the IRS’s determination process. The reasons provided by the IRS in Revenue Procedure 2016-47 are good examples of what the IRS might find acceptable, and often does. If the PLR request is not pursued, or is pursued and denied, the amount intended for rollover must be included in income.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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