Self-certification for 60-day Rollover Rule

Taxpayers have the flexibility to transfer funds from a qualified plan to an IRA either by a trustee-to-trustee transfer or by a personal rollover. They are limited to one rollover every 365 days, and it must be completed within 60 days of the initial distribution. Initially, there were no exceptions to complying with the 60-days limit since the Internal Revenue Code (IRC) didn’t provide the IRS any flexibility in applying this rule.

In 2001, Congress granted authority to waive or relax the 60-day rollover rule. Since then, the IRS has provided guidance for requesting a waiver of the rule. It recently issued Rev. Proc. 2016-47 (2016-37 IRB 346), which gives taxpayers the ability to self-certify their compliance with a qualified exception to the 60-day rule if the time limit is missed inadvertently. Although the new procedure is appealing, it may turn out to be more troublesome than beneficial.

ROLLOVER PROVISIONS

Section 644 of the Economic Growth and Tax Relief Reconciliation Act granted the IRS the authority to waive or relax the 60-day rollover rule pursuant to the hardship exception. This legislation permits the Secretary of the Treasury to waive the 60-day rule when it would be against equity or good conscience to not do so, such as with a casualty, disaster, or other event beyond the reasonable control of the individual (IRC §402(c)(3) and §408(d)(3)(I)).

In response to this legislation, the IRS issued Revenue Procedure 2003-16 (January 8, 2003), which provides an automatic waiver to the 60-day rollover requirement only if:

• The financial institution receives the funds on behalf of the taxpayer before the end of the 60-day rollover period,
• The taxpayer follows all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan),
• The funds aren’t deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution,
• The funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period, and
• The rollover would have been valid if the financial institution had deposited the funds as instructed.

If a taxpayer can’t satisfy the automatic waiver conditions, then he or she needs to apply for a letter ruling from the IRS. The request must include all relevant facts and circumstances, including whether the errors were made by the financial institution; whether the taxpayer was unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error; whether the taxpayer used the amount distributed (e.g., did the individual cash the check?); and how much time has passed since the date of distribution.

REVENUE PROCEDURE 2016-47

The IRS now has provided guidance for a taxpayer to “self-certify” eligibility for a waiver. Thus the taxpayer doesn’t need to request a private letter ruling; rather, the individual provides a written certification to the plan administrator or IRA trustee that the rollover satisfies the conditions set forth.

There are three conditions that must be satisfied for self-certification. First, the IRS didn’t previously issue a waiver request denial to the taxpayer. Second, the reason for missing the 60-day deadline is due to one or more of the qualified reasons set forth in the procedure. They are essentially the same reasons that existed previously for qualifying for the automatic waiver, with a few new ones added in:

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 under IRC §6331, and the proceeds of the levy have been returned to the taxpayer.
11. The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA needed in order to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.

The third condition that must be satisfied for self-certification is that the rollover contribution must be completed as soon as practicable (but no later than 30 days) after the reason(s) are no longer an issue. Obviously, documentation is critical here in the event the IRS challenges the self-certification at a later time.

The good news is that the plan administrator or IRA trustee may rely on the self-certification unless he or she has actual knowledge that’s contrary to the self-certification. In addition, the IRS plans to modify Form 5498 to require the plan administrator or IRA trustee to report that the rollover was accepted after the deadline and probably to indicate a self-certification has been received.

THE CATCH

A self-certification isn’t a waiver. The bad news is that if the IRS audits the taxpayer and determines that the conditions for self-certification weren’t satisfied, then the taxpayer is likely to have additional income and incur penalties such as excess contribution tax and failure to pay tax under IRC §6651.

In cases where a taxpayer legitimately qualifies to file the self-certification form, there is no real issue. But a review of private letter ruling requests suggests that a number of taxpayers didn’t qualify for a waiver—which has to give one pause for the potential abuse. The best answer for a taxpayer is to do a trustee-to-trustee transfer, if possible. If that isn’t possible, then roll over a plan or IRA distribution within the 60-day period. This new option at least provides possible relief if something goes wrong meeting that deadline.

© 2017 A.P. Curatola