Plan administrators can assume certain rollovers are valid

In Rev. Rul. 2014-9, the IRS ruled that a plan administrator for a plan that is qualified under Sec. 401(a) may reasonably conclude in the situations described in the ruling that a potential rollover contribution is valid under Regs. Sec. 1.401(a)(31)-1, Q&A-14(b)(2), which governs the treatment of a plan that accepts an invalid rollover contribution. The holdings provide two safe harbors for plan administrators receiving rollover contributions to reasonably conclude that the rollover is valid.

Under the regulation, for purposes of applying the qualification requirements of Sec. 401(a) or 403(a) to the plan receiving the rollover, if a plan accepts an invalid rollover contribution, the contribution will be treated as if it were a valid rollover contribution if the following two conditions are met. First, when accepting the amount from the employee as a rollover contribution, the plan administrator of the receiving plan must reasonably conclude that the contribution is a valid rollover contribution. No evidence of an IRS determination, though helpful, is necessary to establish this. Second, if the receiving plan’s administrator later determines that the contribution was invalid, the amount of the invalid rollover contribution, plus any earnings on the amount, must be distributed to the employee within a reasonable time after that determination.

The revenue ruling describes two hypothetical situations. In Situation 1, Employee A requests a rollover contribution from her former employer’s Plan O to her new employer’s Plan M. She receives a check payable to her new plan with an attached check stub identifying Plan O as the payer, and she gives the check to Plan M’s administrator. Employee A also certifies that the distribution from Plan O does not include after-tax contributions or amounts attributable to designated Roth contributions.

When the Plan M administrator searches the Department of Labor’s databases, it finds Plan O’s Form 5500, Annual Return/Report of Employee Benefit Plan, for the 2012 plan year. The form does not include an entry of a code 3C on line 8a. The lack of this entry would indicate that the plan intended to be a qualified plan under Sec. 401, 403, or 408.

Situation 2 involves the same employee, but this time she is rolling over an IRA, which is identified as a traditional IRA, not a Roth, SIMPLE, or inherited IRA, to Plan M. Employee A requests her account balance be distributed by a direct payment from her IRA to Plan M. The IRA’s trustee issues a check payable to the trustee for Plan M for the benefit of Employee A and provides the check to Employee A. Employee A delivers the check and the check stub, which reads “IRA of Employee A,” to Plan M’s administrator. Employee A certifies that her IRA distribution includes no after-tax amounts and that she will not have attained age 70½ by the end of the year in which the check is issued.

For Situation 1, because the administrator of Plan O did not enter code 3C on its Form 5500, it was reasonable for the Plan M administrator to assume that Plan O intended to be a qualified plan. Issuing the check payable to Plan M indicates that the plan administrator for Plan O treated the distribution as an eligible rollover distribution. Accordingly, it is reasonable for the Plan M administrator to conclude that the potential rollover contribution is an eligible rollover distribution.

Thus, for example, if the distribution had occurred during or after the year in which Employee A had attained age 70½, it would be reasonable for the Plan M administrator to conclude that Plan O distributed the required minimum distribution for the year, before making the direct rollover. Under these facts, it was reasonable for the Plan M administrator to conclude that the rollover contribution is valid.

For Situation 2, because the check stub indicated that the distributing account was Employee A’s IRA, the Plan M administrator can reasonably conclude that the source of the funds is a traditional, noninherited IRA. In addition, Employee A has certified that the distribution included no after-tax amounts and that she will not have attained age 70½ by the end of the year of the transfer. Therefore, it is reasonable for the Plan M administrator to conclude that the IRA distribution is a distribution that can be rolled over and, absent any evidence to the contrary, it is reasonable for the Plan M administrator to conclude that the rollover contribution to Plan M of the IRA distribution is a valid rollover contribution. If Employee A had attained age 70½ by the end of the year in which the check was issued, the plan administrator for Plan M could not reasonably conclude that the potential rollover contribution was a valid rollover contribution absent additional information indicating a minimum distribution was made in the year the check was issued. 

The ruling concluded that the results would be the same under both fact patterns even if there had been no check stub to identify the source of the funds, as long as the check itself identified the source of the funds as Plan O or the IRA, respectively. A transfer by wire or other electronic means would satisfy the ruling’s requirements as long as the Plan O or the IRA administrator had provided the same information about the source of the funds to the administrator of Plan M.

Finally, the IRS explained that, for both situations, if Plan M later determined the rollover was invalid, the amount rolled over plus any earnings must be distributed to Employee A within a reasonable time after that is determined.

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.