Changes proposed to allocation rules for rollovers

By Sally P. Schreiber, J.D.

Disbursements containing both pretax and after-tax contributions may be treated as a single distribution.

The IRS says it has become aware that some plan providers have been treating disbursements from retirement plans that contain both pretax and after-tax contributions as a single distribution of the aggregate disbursement amount, rather than as separate distributions, as required by the regulations. In proposed regulations and a Notice, the IRS gave its blessing to this treatment, providing rules on how to allocate pretax and after-tax amounts distributed from IRAs, including Roth IRAs, to multiple destinations.

Current Regs. Sec. 1.402A-1, Q&A-5(a) provides that “any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee.” Under the proposed amendment, that separate distribution requirement would not apply to distributions made on or after Jan. 1, 2015, or, if the taxpayer chooses, on or after Sept. 19, 2014, the date the proposed regulations were filed for public inspection in the Federal Register.

Under the new rules, all disbursements of benefits from the plan to the recipient that are scheduled to be made at the same time are treated as a single distribution regardless of whether the recipient has directed them to be made to a single destination or multiple destinations.

If the pretax amount of the aggregated disbursements that are treated as a single distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over. If the rollover is to two or more plans, then the recipient can select how the pretax amount is allocated among these plans. To make this selection, the recipient must inform the plan administrator before the direct rollovers are made.

If the pretax amount equals or exceeds the amount of the distribution that is directly rolled over, it is assigned to the portion of the distribution that is directly rolled over, up to the amount of the direct rollover. Any remaining pretax amount is then assigned to any 60-day rollovers (not direct rollovers).

If the remaining pretax amount is less than the amount rolled over in 60-day rollovers, the recipient can select how the pretax amount is allocated among the plans that receive 60-day rollovers. If, after the assignment of the pretax amount to direct rollovers and 60-day rollovers, any pretax amount remains, it is includible in the distributee’s gross income. If the amount rolled over to an eligible retirement plan exceeds the portion of the pretax amount assigned or allocated to the plan, the excess is an after-tax amount.

By Sally P. Schreiber, J.D., a JofA senior editor.

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