Since 1992, the ability to move retirement money from one qualified plan to another qualified plan or individual retirement account has been simplified. One hiccup in this easing process has been determining the level of due diligence the recipient plan must do to confirm that the proposed rollover contribution is coming from a valid source. Initially, some plan administrators were leery about accepting rollover contributions from any source because of the risk of plan disqualification or sanctions that could result from accepting a “rollover contribution” of monies that are not permitted to be rolled over. In 1995, and again in 2000, the Internal Revenue Service (“IRS”) issued regulations providing safe harbors that plan administrators could use to avoid these negative consequences. On April 3, 2014, the IRS issued Rev. Rul. 2014-9 providing additional safe harbor guidance. If a plan administrator follows the safe harbors there will be no negative consequences if it is subsequently determined that the rollover was invalid.
General Safe Harbor
The general safe harbor that allows an invalid rollover to be treated as valid rollover has two conditions that must be satisfied. First, the plan administrator for the receiving plan must reasonably conclude that the proposed contribution is a valid rollover contribution. Second, if the plan administrator for the receiving plan later determines that the accepted contribution was invalid, the plan administrator must distribute the amount of the invalid rollover contributions, plus any related earnings, to the employee within a reasonable time after such determination. All the safe harbor examples in the regulations prior to Rev. Rul. 2014-9 required letters from the transferring plan. Rev. Rul. 2014-9 has now created an easier method for determining the qualification of the transferring plan.
Accessing Forms 5500s
Rev. Rul. 2014-9 permits the plan administrator of the receiving plan to review the Annual Report on Form 5500 of the transferring plan on the EFAST2 System at the U.S. Department of Labor for purposes of determining whether the transferring plan is qualified. If line 8a of that form does not include Code 3C (the code used by plans to indicate that the plan is not intended to be qualified under Internal Revenue Code Sections 401, 403, or 408) the plan administrator knows that the transferring plan holds itself out to be a qualified retirement plan.
The plan administrator in Rev. Rul. 2014-9 also had the employee certify that she would not attain age 70 ½ by the end of the year in which the rollover contribution is made and that the rollover contribution did not include after-tax contributions or designated Roth contributions. The 70 ½ certification confirms that the rollover contribution does not include funds that should have been distributed as a required minimum distribution from the transferring plan. The second representation confirms that the rollover contribution does not include forms of contributions that are not permitted in the receiving plan. Finally, the form of payment of the rollover contribution clearly indicated that it was coming from the transferring plan. Based on these facts the IRS held that in the absence of any evidence to the contrary, the plan administrator could reasonably conclude that the potential rollover contribution is valid. Rev. Rul. 2014-9 contains a similar analysis regarding proposed rollover contributions from traditional and conduit IRAs.
Will Rev. Rul. 2014-9 increase the portability of retirement plan accounts? Only time will tell. Accessing other companies’ Annual Reports on Forms 5500/5500-SF has become very easy in the age of the Internet and mandatory electronic filing of these forms. As a consequence, the administrative burden to the receiving plan has been significantly lessened. Accordingly, many plans that have been resistant to accepting rollover contributions may now want to revisit that decision.