[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Proposed Rules]
[Pages 49279-49282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24059]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-245562-96]
RIN 1545-AU46
Relief From Disqualification for Plans Accepting Rollovers
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Proposed regulations.
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SUMMARY: This document contains proposed regulations that would provide
guidance on the qualification of retirement plans that accept rollover
contributions from employees. These regulations affect plan
administrators of qualified plans that accept rollover contributions.
DATES: Written comments must be received by December 18, 1996.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-245562-96), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-
245562-96), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html
FOR FURTHER INFORMATION CONTACT: Marjorie Hoffman, (202) 622-6030 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 22, 1995, Final Income Tax Regulations (TD 8619) under
sections 401(a)(31) and 402(c) were published in the Federal Register
(60 FR 49199). The final regulations provide guidance for complying
with the Unemployment Compensation Amendments of 1992 (UCA).
UCA expanded the types of distributions from a qualified plan that
are eligible to be rolled over to an individual retirement account or
individual retirement annuity, or to another qualified plan that
accepts rollovers (collectively referred to as eligible retirement
plans). Such distributions are referred to as eligible rollover
distributions. UCA also added a new qualification provision under
section 401(a)(31) that requires qualified plans to provide employees
with a direct rollover option. Under a direct rollover option, an
employee may elect to have an eligible rollover distribution paid
directly to an eligible retirement plan. The direct rollover option is
provided in addition to the pre-existing rollover provisions under
section 402. Thus, an employee who receives an eligible rollover
distribution but who does not elect a direct rollover still has the
option to roll over the distribution to an eligible retirement plan
within 60 days of receipt.
The final regulations under section 401(a)(31) provide that a plan
that accepts a direct rollover from another plan will not fail to
satisfy section 401(a) or 403(a) merely because the plan making the
distribution is, in fact, not qualified under section 401(a) or 403(a)
at the time of the distribution, if, prior to accepting the rollover,
the receiving plan reasonably concluded that the distributing plan was
qualified under section 401(a) or 403(a). The regulations provide, as
an example, that the receiving plan may reasonably conclude that the
distributing plan was qualified
[[Page 49280]]
under section 401(a) or 403(a) if, prior to accepting the rollover, the
plan administrator of the distributing plan provided the receiving plan
with a statement that the distributing plan had received a
determination letter from the Commissioner indicating that the plan was
qualified. The plan administrator is not required to verify this
information, such as by obtaining a copy of the distributing plan's
plan document or determination letter, in order to reasonably conclude
that the distributing plan is qualified under section 401(a) or 403(a).
Explanation of Provisions
1. Overview
The relief to be provided in these proposed regulations is intended
to increase the portability of qualified plan benefits when an employee
changes jobs. This objective would be achieved by reassuring a plan
sponsor that acceptance of an amount as a rollover contribution, in
appropriate circumstances, will not affect the plan's qualification
under section 401(a) or 403(a).
2. Expansion of Existing Relief for Receiving Plans
These proposed regulations would expand and clarify in several
respects the relief provided in the regulations under section
401(a)(31) issued last year. First, the proposed regulations would
clarify and expand the relief from disqualification currently provided
for plans that accept direct rollovers. The protection would be
expanded to be available not only if the plan administrator reasonably
concludes the distributing plan is qualified under section 401(a) or
403(a) (even if later it is determined that the distributing plan is
not a qualified plan), but also if the plan administrator reasonably
concludes that a distribution meets the other requirements to be an
eligible rollover distribution (but later it is determined that this
conclusion was incorrect). Further, the proposed regulation would
clarify that if the plan administrator reaches these conclusions
reasonably, and satisfies the corrective distribution requirement
described below, the contribution will be treated as a rollover
contribution for purposes of applying qualification requirements under
section 401(a) or 403(a) to the plan. Thus, if the contribution was
not, in fact, a distribution from a qualified plan or for any other
reason fails to be an eligible rollover distribution within the meaning
of section 402(c), the contribution nevertheless would be treated as a
rollover contribution as opposed to, for example, an employee
contribution for purposes of section 401(m) or for purposes of section
415.
Second, the regulations would extend this expanded relief from
disqualification to plans that accept rollover contributions other than
direct rollover contributions. Thus, the relief would apply to plans
that accept rollover contributions made by an employee within 60 days
of the date of the distribution from a plan. Further, the relief would
apply to plans that accept rollover contributions from a ``conduit
IRAs,'' i.e., an individual retirement plan that does not contain any
amount attributable to any source other than a rollover contribution
(as defined in section 402) from a plan qualified under section 401(a)
or an annuity qualified under section 403(a). The relief would apply if
(a) when accepting a rollover contribution, the plan administrator of
the receiving plan reasonably concludes that the contribution is an
eligible rollover distribution from a qualified plan (or an amount
distributed from a conduit IRA) and that the contribution satisfies the
other applicable requirements of section 402(c) or 408(d)(3) for
treatment as a rollover contribution and (b) the receiving plan
satisfies the corrective distribution requirement described below.
The regulations would provide examples of the actions that a plan
administrator might take to reasonably conclude that an employee's
contribution satisfies the requirements for treatment as a rollover
contribution. The examples are intended to be merely illustrative. Plan
administrators may develop other approaches or procedures for
reasonably reaching this conclusion.
Finally, the regulations would provide that if the receiving plan
later obtains actual knowledge or otherwise determines that the
distributing plan was not qualified at the time of the distribution,
that any portion of the distribution was not an eligible rollover
distribution or an amount distributed from a conduit IRA, or that the
contribution to the plan otherwise did not satisfy the applicable
requirements of section 402 or 408 for treatment as a rollover
contribution, a corrective distribution equal to the amount of the
contribution plus any earnings attributable to the contribution would
be required to be made to the employee within a reasonable time after
such determination.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or comments transmitted via Internet that are
submitted timely to the IRS. All comments will be available for public
inspection and copying.
A public hearing may be scheduled if requested in writing by a
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal author of these regulations is Marjorie Hoffman,
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.401(a)(31)-1 is amended as follows:
1. Under the heading ``List of Questions,'' redesignating Q-14
through Q-18 as Q-15 through Q-19, respectively, and adding new Q-14.
2. Under the heading ``Question and Answers,'' removing designation
(a) and
[[Page 49281]]
the paragraph heading, and removing paragraph (b) from A-13.
3. Under the heading ``Question and Answers,'' redesignating Q&A-14
through Q&A-18 as Q&A-15 through Q&A-19, respectively, and adding Q&A-
14.
The additions read as follows:
Sec. 1.401(a)(31)-1 Requirement to offer direct rollover of eligible
rollover distributions; questions and answers.
* * * * *
List of Questions
* * * * *
Q-14: If a plan accepts an invalid rollover contribution,
whether or not as a direct rollover, how will the contribution be
treated for purposes of applying the qualification requirements of
section 401(a) or 403(a) to the plan?
* * * * *
Questions and Answers
* * * * *
Q-14: If a plan accepts an invalid rollover contribution, whether
or not as a direct rollover, how will the contribution be treated for
purposes of applying the qualification requirements of section 401(a)
or 403(a) to the plan?
A-14: (a) Acceptance of invalid rollover contribution. If a plan
accepts an invalid rollover contribution, the contribution will be
treated, for purposes of applying the qualification requirements of
section 401(a) or 403(a) to the receiving plan, as if it were a valid
rollover contribution, if the following two conditions are satisfied.
First, when accepting the amount from the employee as a rollover
contribution, the plan administrator of the receiving plan reasonably
concludes that the contribution is a valid rollover contribution.
Second, if the plan administrator of the receiving plan later
determines that the contribution was an invalid rollover contribution,
the amount of the invalid rollover contribution, plus any earnings
attributable thereto, is distributed to the employee within a
reasonable time after such determination.
(b) Definitions. For purposes of this Q&A-14:
(1) An invalid rollover contribution is an amount that is accepted
by a plan as a rollover within the meaning of Q&A-1 of Sec. 1.402(c)-2
(or as a rollover contribution within the meaning of section
408(d)(3)(A)(ii)) but that is not an eligible rollover distribution
from a qualified plan (or an amount described in section
408(d)(3)(A)(ii)) or that does not satisfy the other requirements of
section 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or
a rollover contribution.
(2) A valid rollover contribution is a contribution that is
accepted by a plan as a rollover within the meaning of Q&A-1 of
Sec. 1.402(c)-2 or as a rollover contribution within the meaning of
section 408(d)(3) and that satisfies the requirements of section
401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or a
rollover contribution.
(c) The provisions of paragraph (a) of this Q&A-14 are illustrated
by the following examples:
Example 1. (a) Employer X maintains for its employees Plan M, a
profit sharing plan qualified under section 401(a). Plan M provides
that any employee of Employer X may make a rollover contribution to
Plan M. Employee A is an employee of Employer X, will not have
attained age 70\1/2\ by the end of the year, and has a vested
account balance in Plan O (a plan maintained by Employee A's prior
employer). Employee A elects a single sum distribution from Plan O
and elects that it be paid to Plan M in a direct rollover.
(b) Employee A provides the plan administrator of Plan M with a
letter from the plan administrator of Plan O stating that Plan O has
received a determination letter from the Commissioner indicating
that Plan O is qualified.
(c) Based upon such a letter, absent facts to the contrary, a
plan administrator may reasonably conclude that Plan O is qualified
and that the amount paid as a direct rollover is an eligible
rollover distribution.
Example 2. (a) Same facts as Example 1, except that Employee A
elects to receive the distribution from Plan O and wishes to make a
rollover contribution described in section 402 rather than a direct
rollover.
(b) When making the rollover contribution, Employee A certifies
that, to the best of Employee A's knowledge, Employee A is entitled
to the distribution as an employee and not as a beneficiary, the
distribution from Plan O to be contributed to Plan M is not one of a
series of periodic payments, the distribution from Plan O was
received by Employee A not more than 60 days before the date of the
rollover contribution, and the entire amount of the rollover
contribution would be includible in gross income if it were not
being rolled over.
(c) As support for these certifications, Employee A provides the
plan administrator of Plan M with two statements from Plan O. The
first is a letter from the plan administrator of Plan O, as
described in Example 1, stating that Plan O has received a
determination letter from the Commissioner indicating that Plan O is
qualified. The second is the distribution statement that accompanied
the distribution check. The distribution statement indicates that
the distribution is being made by Plan O to Employee A, indicates
the gross amount of the distribution, and indicates the amount
withheld as Federal income tax. The amount withheld as Federal
income tax is 20 percent of the gross amount of the distribution.
Employee A contributes to Plan M an amount not greater than the
gross amount of the distribution stated in the letter from Plan O
and the contribution is made within 60 days of the date of the
distribution statement from Plan O.
(d) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the
distribution otherwise satisfies the requirements of section 402(c)
for treatment as a rollover contribution.
Example 3. (a) The facts are the same as in Example 2, except
that, rather than contributing the distribution from Plan O to Plan
M, Employee A contributes the distribution from Plan O to IRA P, an
individual retirement account described in section 408(a). After the
contribution of the distribution from Plan O to IRA P, but before
the year in which Employee A attains age 70\1/2\, Employee A
requests a distribution from IRA P and decides to contribute it to
Plan M as a rollover contribution. To make the rollover
contribution, Employee A endorses the check received from IRA P as
payable to Plan M.
(b) In addition to providing the certifications described in
Example 2 with respect to the distribution from Plan O, Employee A
certifies that, to the best of Employee A's knowledge, the
contribution to IRA P was made not more than 60 days after the date
Employee A received the distribution from Plan O, no amount other
than the distribution from Plan O has been contributed to IRA P, and
the distribution from IRA P was received not more than 60 days
earlier than the rollover contribution to Plan M.
(c) As support for these certifications, in addition to the two
statements from Plan O described in Example 2, Employee A provides
copies of statements from IRA P. The statements indicate that the
account is identified as an IRA, the account was established within
60 days of the date of the letter from Plan O informing Employee A
that an amount had been distributed, and the opening balance in the
IRA does not exceed the amount of the distribution described in the
letter from Plan O. There is no indication in the statements that
any additional contributions have been made to IRA P since the
account was opened. The date on the check from IRA P is less than 60
days before the date that Employee A makes the contribution to Plan
M.
(d) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the
contribution by Employee A is a rollover contribution described in
section 408(d)(3)(A)(ii) that satisfies the other requirements of
section 408(d)(3) for treatment as a rollover contribution.
Par. 3. Section 1.402(c)-2 is amended by adding a sentence to the
end of A-11 to read as follows:
Sec. 1.402(c)-2 Eligible rollover distributions; questions and
answers.
* * * * *
A-11. * * * See Sec. 1.401(a)(31)-1, Q&A-14, for guidance
concerning the
[[Page 49282]]
qualification of a plan that accepts a rollover contribution.
* * * * *
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 96-24059 Filed 9-18-96; 8:45 am]
BILLING CODE 4830-01-U
