To simplify the rollover validation process, the Internal Revenue Service (IRS) has issued a new Revenue Ruling 2014-9 that provides guidance on the process for a trustee-to-trustee tax-free rollover between tax-qualified employer retirement plans. When new employees are hired, they will often roll over their retirement plan funds to a plan sponsored by their new employer. For the employee, the rollover is helpful because it allows the employee to continue the tax deferral of his or her retirement funds. For the new employer, the rollover can be a recruiting tool, while also increasing the size of plan assets. However, the new employer, usually acting as the legal plan administrator, must “reasonably conclude” that the rollover contribution is valid.
The new guidance provides a process by which plan administrators can access the Department of Labor’s EFAST2 online database to search for the transferor plan’s recent Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. In completing the Form 5500, plan administrators must enter codes on Line 8a of Form 5500 or on Line 9a of Form 5500-SF that identify the tax-qualified status of their plans. If a plan is not intended to be qualified under Internal Revenue Code Sections 401, 403, or 408, the plan administrator would use code 3C. If the Form 5500 reflects code 3C, the new plan administrator should not accept the rollover.
The new guidance also addresses a transfer from an individual retirement account (IRA) to the new employer plan. In that situation, where the check stub indicates the source as the “IRA of Employee A” (or there is similar information on a check or wire transfer), the employee certifies that the distribution does not include after-tax amounts, and the employee certifies that she has not attained age 70½ (regarding required minimum distributions), then the new employer plan may generally accept the rollover.
The revenue ruling does not replace prior guidance in Treasury Regulation Section 1.401(a)(31)-1, Q&A-14, which provides examples in which a receiving plan may reasonably conclude that a transferor plan is a qualified plan and that a potential rollover contribution is a valid rollover contribution. The regulation notes that the transferor plan is not required to have a determination letter in order for the plan administrator for the receiving plan to reasonably conclude that a potential rollover contribution is a valid rollover contribution. However, the plan administrator must still reasonably conclude that the rollover is valid.
Under the process provided in the regulations, some plan administrators will require a representation letter from the transferor plan regarding its tax qualification or even require a copy of the IRS determination, opinion, or advisory letter to effect a rollover. While that is permissible, the new Revenue Ruling provides an easier method to establish a reasonable basis for accepting the rollover. The plan administrator can check the Form 5500 rather than waiting on a representation letter or determination letter.