New IRS Self-Certification Procedure Eases Complexity of Obtaining Waiver of 60-Day Time Limit on Rollovers of IRA and Employer Plan Distributions

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Blank Rome LLPAction Item: On August 24, 2016, the Internal Revenue Service (“IRS”) issued new guidance that allows individuals who inadvertently fail to complete the rollover of a distribution from an individual retirement account (“IRA”) or employer qualified retirement plan within 60 days to obtain a waiver of the 60-day time limit through a self-certification procedure.

Background—the 60-day rollover requirement; obtaining a waiver of the requirement

An individual who receives a distribution from an IRA or an employer qualified retirement plan such as a 401(k) plan can avoid taxation on the distribution if the amount is transferred to another IRA or an employer plan no later than 60 days after the distribution is received by the individual.

It is not uncommon, as a result of inadvertent or unexpected circumstances such as the individual’s serious illness, for a distribution that was intended to be rolled over to violate the 60-day time limit. To address these situations, the Internal Revenue Code authorizes the IRS to grant waivers of the 60-day requirement “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”

Until the issuance of the new guidance, the IRS required an individual seeking a waiver to obtain a private letter ruling from the IRS, a costly and complicated undertaking.

How does the new guidance change the process for waiving the 60-day deadline?

Under the new guidance, which is set forth in IRS Rev. Proc. 2016-47, an individual who has missed the 60-day rollover deadline may obtain a waiver by submitting a written self-certification to the custodian of the IRA or the plan administrator of the employer plan to which the distribution is being rolled over.

In order to qualify for self-certification, the following three conditions must be satisfied:

  1. The IRS must not have previously denied a waiver request with respect to the missed deadline.
  2. The reason for missing the deadline must fall into one or more of the following categories:
    1. an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
    2. the distribution, having been made in the form of a check, was misplaced and never cashed;
    3. the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
    4. the taxpayer’s principal residence was severely damaged;
    5. a member of the taxpayer’s family died;
    6. the taxpayer or a member of the taxpayer’s family was seriously ill;
    7. the taxpayer was incarcerated;
    8. restrictions were imposed by a foreign country;
    9. a postal error occurred;
    10. the distribution was made on account of a levy by the IRS and the proceeds of the levy have been returned to the taxpayer; or
    11. the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
  3. The rollover contribution must be made to the IRA or the employer plan “as soon as practicable after the reason or reasons listed [in the self-certification] no longer prevent the taxpayer from making the contribution.” The IRS provides a 30-day safe harbor.

Rev. Proc. 2016-47 includes an appendix, which contains a model letter that can be used to create the self-certification.

What is the effect of self-certification?

The custodian of the IRA or the plan administrator of the employer plan that receives the late rollover contribution may rely upon the self-certification for purposes of determining whether the individual making the contribution is eligible for a waiver of the 60-day time limit, unless the IRA custodian or plan administrator “has actual knowledge that is contrary to the self-certification.”

The individual who has made the self-certification may report the rollover contribution as a valid rollover contribution. However, the IRS reserves the right, in the course of examining the individual’s tax return, to consider whether the requirements for a waiver have been met. Importantly, the IRS states that it may conclude that the reason cited in the self-certification for missing the rollover “did not prevent the taxpayer from completing the rollover within 60 days following receipt” of the distribution. In that event, the individual would be treated by the IRS as taxable on the distribution and could face the assessment of interest and penalties.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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