Tag Archives: rollovers

IRS adds flexibility to rollover timing

Moen-AlexOn August 24, 2016, the Internal Revenue Service (IRS) released Rev. Proc. 2016-47, allowing quicker and easier relief of the existing 60-day rollover rule for retirement plans, including 403(b) and governmental 457 plans and IRAs. In the past, under Rev. Proc. 2003-16, an individual had to submit for a private letter ruling requesting a waiver of the 60-day rule and await a response before proceeding with the rollover. The request for waiver via private letter ruling from the IRS is not free; in 2016, an individual may be required to pay up to $10,000 for the waiver. Under Rev. Proc. 2016-47, an individual can proceed with the rollover, at no cost, as long as he or she self-certifies the reason for the delay.

The revenue procedure provides a sample letter that can be supplied to the plan administrator or financial institution, and allows an individual to submit a request for waiver as long as the IRS has not already issued a denial. There are 11 acceptable reasons for waiver of the 60-day rule, including:

• The financial institution made mistakes or did not supply needed information when requested
• A lost check or postal service errors
• An IRS levy
• The check was deposited into an account incorrectly believed to be a retirement plan or IRA
• Personal reasons: family death or illness/disability, natural disaster, incarceration, or foreign country restrictions

If none of the above situations apply, a person can still use the old private letter ruling process to request relief.

As expected, there are timing conditions associated with the self-certification. An individual must complete the rollover contribution “as soon as practicable” after the reasons that caused the delay in the first place are no longer present. The revenue procedure refers to this as the 30-day safe harbor.

What happens if it is discovered during an IRS audit that the waiver is not accepted? The individual would receive additional income and be required to pay the taxes and, potentially, penalties.

This new rule reduces the burden on plan administrators, trustees, and custodians to verify the legality of the rollover. In addition, the ruling simplifies procedures for the individual because the rollover can be processed efficiently, without having to wait for an IRS review of the situation and response letter.

Plan sponsors, you may be wondering if there is any action you need to take, or if this is even relevant to you. The answer is no. This is simply for your reference in case a participant asks whether the 60-day rollover rule has any exceptions. I’ve found that with some of our smaller clients, plan sponsors receive a variety of questions and become more involved in assisting participants with the distribution process. You may get a question about this new Rev. Proc. from a participant and after reading this, hopefully, you are more equipped to assist them.

Roll over to stay on top of retirement planning

Today’s migratory workforce, in an unsteady economy, means that many of my peers are changing jobs every couple of years. Many millennials are saving in their employer retirement accounts, but the mobility of this generation creates a challenge for those employees as they begin accumulating assets for retirement: multiple low-balance 401(k) accounts with a handful of different employers. Often, for young employees, these balances are pretty small, representing one to two years of their contributions, plus perhaps a small amount of vested employer contributions. If participants were automatically enrolled, or if their accounts consist solely of employer safe harbor contributions, they might not have even logged in to check their account balances.

We’re busy: in a recent survey by Northwestern Mutual, 38% of millennials, also known as Generation Y, responded that they are “always” or “often” too busy to think about long-term goals, so rolling over an account from a previous employer might be pretty low on your to-do list, but here are a few reasons to do it sooner rather than later:

• It’s easy to think of a previous employer’s plan as static, but it’s not. Consolidating accounts is usually a simple and painless process: Decide where you’d like to consolidate accounts (a new employer’s plan, or an IRA); submit your rollover request (note, you may need to complete paperwork for both the distributing and the receiving institutions); then confirm the rollover has gone through as planned. Taking the time to complete these steps should give you a more comprehensive view of your savings to date, enabling you to better determine your future path to retirement readiness.

• If a former employee’s account has less than $5,000, depending on the rules of the plan, the employer may decide to roll it out of their plan, creating an IRA. If you haven’t updated your address and have missed the information sent about the account, you might not get to choose where your money goes, or how it’s invested.

• The service provider for a previous employer’s 401(k) plan could change, which would mean a new website to manage your account and potentially new investments or plan rules. The fee structure could change significantly. Again, if your address hasn’t been updated, you might miss those important notifications.

• Some plans will charge an additional fee to let you leave an account in the plan after you have stopped working for that employer.

It’s easy to think of a previous employer’s plan as static, but it’s not. Consolidating accounts is usually simple and painless – with most 401(k) providers, a rollover transaction can be completed online, or with a short form, in less than half an hour. It is an easy way to simplify the management of retirement accounts, giving you a comprehensive view of savings to date and enabling you to better determine your future path to retirement readiness.

Auto rollovers: They’re not just for crash test dummies

With so much talk these days about offering lump sums to terminated vested employees and de-risking defined benefit plans (see, for example, the September 2012 DB Digest), it might be worth taking a look at simple ways plan sponsors can shed some old, forgotten liabilities.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) reduced the maximum mandatory force-out limit from $5,000 to $1,000. For once, they amended the Internal Revenue Code in a way that kept money out of the IRS’s coffers. Instead, they decided that if participants don’t affirmatively elect to receive a lump sum of between $1,000 and $5,000, then the money should either stay in the plan or be automatically rolled over to a default IRA.

Even though these rules have been around for over a decade, many plans have never adopted an auto rollover provision.

Default IRAs are handy because they get the liabilities out of the plan and eliminate the need to keep track of long forgotten, barely vested participants and pay their Pension Benefit Guaranty Corporation (PBGC) premiums. In addition, as irritating as these small benefits are to plan sponsors, many IRA providers are clamoring to accept the auto rollovers, and because the providers manage the assets, there is usually no cost to the plan sponsor.

A word of caution. As with any lump sum payouts, it behooves plan sponsors to keep a list of who is holding the IRAs for these participants. Years down the road, you don’t want to be paying lump sums out again just because you have no record of where it was paid the first time.

IRS allows pension annuity purchases with rollovers from sponsor’s DC plan

IRS’s Revenue Ruling 2012-4 provides retirement plan sponsors guidance that permits their qualified defined benefit (DB) plans the ability to accept a direct rollover from their qualified defined contribution (DC) plans, allowing participants to purchase an annuity that is incremental to the amount the DB plan would ordinarily provide. The ruling, which only applies to an employer that sponsors both a DB and a DC plan, is effective for rollovers beginning on or after January 1, 2013, but may be relied upon for rollovers made before that date. The DB plan will need to be amended to permit such direct rollovers if it does not currently do so.

The new guidance uses an example to illustrate the conditions that a plan must satisfy, including the following:

  • The annuity payable from the DB plan must be converted on an actuarially equivalent basis from the amount rolled over from the DC plan using the applicable interest rate and applicable mortality table prescribed in Internal Revenue Code section 417(e)
  • If the assumptions used are more favorable in the conversion (i.e., a higher interest rate or a mortality table with shorter life expectancies), the “excess” portion of the annuity will be subject to the nonforfeitable rules applicable to benefits derived from employer contributions and must be taken into account under the (section 415) annual benefit limits
  • If the assumptions used are less favorable in the conversion (i.e., a lower interest rate or a mortality table with longer life expectancies), the DB plan will fail to satisfy the nonforfeitable rules (under section 411(a)(1)) applicable to accrued benefits
  • The DB plan annuity, increased by the rollover conversion, must commence within a period of not more than 180 days after the date of the rollover election, and interest must be credited at 120% of the federal midterm rate (under section 1274) for the period between the rollover date and the annuity starting date

At present, it is unclear how many plan sponsors will actually adopt such rollover provisions.