Tag Archive for: RMD

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There’s More to Love about Qualified Charitable Distributions in 2023

“Can you summarize the rules and changes to qualified charitable distributions (QCDs)?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from California is representative of a common inquiry related to charitable giving.

Highlights of the Discussion
• I’d love to. As you have likely heard the SECURE Act of 2022 made changes to the rules for QCDs, making more opportunities for gifting. Let’s review the existing rules, enhancements that took effect in 2023 and the change that will happen next year and going forward.
• To review, a QCD is any otherwise taxable distribution (up to $100,000 for 2023) that an “eligible IRA owner or beneficiary” directly transfers from an IRA to a “qualifying charitable organization.” The deadline to complete the transfer for 2023 tax purposes is December 31, 2023. For 2024 and later years, the $100,000 will be adjusted for inflation. In fact, the 2024 maximum increased to $105,000 as announced in IRS Notice 23-75.
• An eligible IRA owner or beneficiary for QCD purposes is a person who has attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactive” Simplified Employee Pension (SEP) IRAs or Savings Incentive Match Plans for Employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
• Beginning in 2023 and for later years, a QCD also can include a one-time gift of up to $50,000 (adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. The $50,000 limit will increase to $53,000 for 2024

Charitable remainder trusts and gift annuities provide current income to a beneficiary and when the beneficiary passes on, the remaining amount in the trust or annuity goes to a named charitable cause. According to the rules, up to 90% of the value of the initial gift ($45,000 in this case) can be paid to the beneficiary over a maximum of 20 years, with at least 10% of the initial gift going to the named charity after that.
• What are the benefits of making a QCD? Generally, IRA owners/beneficiaries must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD

 Is excludable from taxable income,
 May count towards the individual’s RMD for the year,
 May lower taxable income enough for the person to avoid paying additional Medicare premiums;
 Is a philanthropic way to support a favored charity; and
 May provide income to a beneficiary of a charitable remainder trust or gift annuity during his or her lifetime and a gift to a charitable cause thereafter.

• Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.
• Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
• Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
• Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
• Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).
Conclusion
Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations. And with the SECURE Act 2.0 changes, there’s more to love about QCD gifting.

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New RMD Age and Plan Delay

“Several of my clients’ qualified retirement plans include the ability for certain participants who are still working to delay the required beginning date (RBD) for taking required minimum distributions (RMDs) until after retirement. Does the change in the RMD age from 72 to 73 for 2023 through 2032 affect the ability to delay RMDs past retirement if their plans give them that option?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California dealt with a question on 401(k) plans and required minimum distributions (RMDs).

Highlights of Discussion

Great question. Section 107 of SECURE Act 2.0 of 2022 changes the RMD age in the Internal Revenue Code (IRC) from age 72 to “the applicable age,” which is further defined as 73 for years 2023 through 2032 (and 75 for 2033 and years thereafter). The ability for some workers to delay RMDs until after retirement (even after reaching the applicable age) is driven by plan design and Treasury Regulations.

Pursuant to Proposed Treasury Regulation §1.401(a)(9)–2(b)(3), plan sponsors have the option (depending on the document they use) to allow participants who 1) continue to work and 2) are not five percent owners (i.e., participants who own five percent or less of the employer) to wait to begin RMDs until April 1 of the year following the later of the calendar year in which the employee—

  • Attains age 72; or
  • Retires from employment with the employer maintaining the plan.

We currently have proposed RMD regulations, and the Treasury Department has indicated final regulations at 1.409(a)(9) are imminent. We fully anticipate the regulations will reflect the new “applicable age” language of SECURE 2.0 and will continue to allow eligible participants to delay RMDs until after retirement if their plans currently allow the option.

Conclusion

SECURE 2.0 changes the current RMD age of 72 to 73 for years 2023 through 2032 (and to 75 for 2033 and years thereafter).  The Treasury Department is schedule to issue final treasury regulations to provide further implementation guidance in the near future. Plans with the appropriate language may still allow non-five-percent owners who are still working to delay their RMDs until after retirement.

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The Dos and Don’ts of Aggregating Required Minimum Distributions

“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the amount not taken).

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Don’t Forget About the Benefits of a Qualified Charitable Distribution for 2022

“I have an 84-year-old client with a multi-million dollar IRA.  As you can well image, his required minimum distribution (RMD) for the year is quite large. Do you have any suggestions on how he might reduce the tax impact of such a large RMD?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Illinois is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, the first idea that comes to mind is making a qualified charitable distribution (QCD) by December 31, 2022. A QCD is any otherwise taxable distribution (up to $100,000 per year) that an “eligible IRA owner or beneficiary” directly transfers to a “qualifying charitable organization.”(The IRA owner cannot have received the amount.) QCDs were a temporary provision in the Pension Protection Act of 2006. After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • What are the benefits of making a QCD? Generally, IRA owners must include any distributions of pre-tax amounts from their IRAs in their taxable income for the year. A QCD
    • Is excludable from taxable income (up to $100,000),
    • May count towards the individual’s RMD for the year,
    • May lower taxable income enough for the person to avoid paying additional Medicare premiums and
    • Is a philanthropic way to support a favored charity.
  • Note that making a QCD does not entitle the individual to an additional itemized tax deduction for a charitable contribution.*
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • Generally, qualifying charitable organizations include those described in 170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Exempt Organization Select Check, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting steps that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7, Q&A 40 ).

Conclusion

Eligible IRA owners and beneficiaries age 70 ½ and over, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.

* Apart from a QCD, IRA owners who take taxable IRA distributions and donate them to charitable organizations may be eligible to deduct such amounts on their tax returns for the year if they itemize deductions (Schedule A of Form 1040).  See IRS Tax Topic 506 and IRS Publication 526, Charitable Contributions for more information

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Qualified Charitable Distributions in 2020

“I have a client who consistently has made Qualified Charitable Distributions (QCDs) for the last several years and wants to make another for 2020.  Are they still available even though required minimum distributions (RMDs) are suspended for 2020?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from South Dakota is representative of a common inquiry related to charitable giving.

Highlights of the Discussion

  • Yes, if your client is an “eligible IRA owner or beneficiary,” s/he can still make a QCD for 2020 if s/he does so by December 31, 2020. Although the gift will not have the added benefit of counting towards an RMD for the year (since none are due pursuant to the CARES Act), s/he’ll still be able to exclude the QCD from taxable income and have the satisfaction of supporting a good cause. Because the QCD reduces taxable income, other potential benefits may result, for example, a person may be able to avoid paying higher Medicare premiums because of the reduced income. Note that for those who make both QCDs and deductible IRA contributions in the same year, new rules as a result of the SECURE Act may limit the portion of a QCD that is excluded from income.
  • An eligible IRA owner or beneficiary for QCD purposes is a person who has actually attained age 70 ½ or older, and has assets in traditional IRAs, Roth IRAs, or “inactiveSEP IRAs or savings incentive match plans for employees (SIMPLE) IRAs. Inactive means there are no ongoing employer contributions to the SEP IRA or SIMPLE IRA. A SEP IRA or a SIMPLE IRA is treated as ongoing if the sponsoring employer makes an employer contribution for the plan year ending with or within the IRA owner’s taxable year in which the charitable contribution would be made (see IRS Notice 2007-7, Q&A 36).
  • A QCD is any otherwise taxable distribution (up to $100,000 per year) that an eligible person directly transfers to a “qualifying charitable organization.” QCDs were a temporary provision in the Pension Protection Act of 2006.  After years of provisional annual extensions, the Protecting Americans from Tax Hikes Act of 2015 reinstated and made permanent QCDs for 2015 and beyond.
  • Generally, qualifying charitable organizations include those described in §170(b)(1)(A) of the Internal Revenue Code (IRC) (e.g., churches, educational organizations, hospitals and medical facilities, foundations, etc.) other than supporting organizations described in IRC § 509(a)(3) or donor advised funds that are described in IRC § 4966(d)(2). The IRS has a handy online tool Tax Exempt Organization Search, which can help taxpayers identify organizations eligible to receive tax-deductible charitable contributions. Note that s/he would not be entitled to an additional itemized tax deduction for a charitable contribution when making a QCD.
  • Changes under the Coronavirus Aid, Relief, and Economic Security (CARES) Act made the decisions related to charitable giving more complicated in 2020. In addition to the above information on QCDs, the CARES Act created a new above-the-line deduction of $300 for charitable contributions, and allows for cash gifts to most public charities of up to 100 percent of adjusted gross income in 2020.  Because of the added complexity, seeking the advice of a tax professional regarding charitable giving would be the best course of action. IRS Publication 526, Charitable Contributions, provides good basic information on the topic.
  • Where an individual has made nondeductible contributions to his or her traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.
  • Be aware there are special IRS Form 1040 reporting instructions that apply to QCDs.
  • Section IX of IRS Notice 2007-7 contains additional compliance details regarding QCDs. For example, QCDs are not subject to federal tax withholding because an IRA owner that requests such a distribution is deemed to have elected out of withholding under IRC § 3405(a)(2) (see IRS Notice 2007-7 , Q&A 40).

 Conclusion

Eligible IRA owners and beneficiaries, including those with inactive SEP or SIMPLE IRAs, should be aware of the benefits of directing QCDs to their favorite charitable organizations.  Law changes have enhanced other giving options, making professional tax advice essential when making a gifting decision.

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401(k)s, the 2020 RMD Waiver and Rollovers

“My client was told by his human resources representative that the 401(k) plan from his former place of work will distribute his 2020 RMD from the plan this year as usual. I thought that under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, all RMDs were waived for 2020. Can you clarify, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from California is representative of a common inquiry related to required minimum distributions (RMDs) from 401(k) plans.

Highlights of the Discussion

The application of the IRS’s waiver of 2020 RMDs can be confusing for qualified retirement plans, because the plan sponsor can choose whether it will suspend all RMDs for 2020 or continue to distribute RMDs as usual under the terms of the plan.[1] Plans have the ability to distribute a participant’s plan balance without his or her consent once the assets are no longer “immediately distributable,” which is the later of the time a participant attains normal retirement age or age 62  [Treasury Regulation 1.411(a)-11(c)(4)].  Consequently, despite the IRS not treating the distribution as an RMD for 2020, a plan may continue to force the payment for the year. A likely reason would be to maintain consistent distribution processing procedures from year to year.

There is good news, however, for your client. Although, typically, RMDs are ineligible for rollover [IRC Sec. 402(c)(4)(B)], in this case, because the IRS does not consider the distribution as an RMD for 2020 (as a result of the CARES Act waiver), your client may roll over the amount —if it is otherwise eligible. (Note that the plan does not have to offer a direct rollover of the amount, nor withhold 20 percent for federal tax purposes. A 60-day, indirect rollover would still remain an option.)

Conclusion

Despite the temporary waiver of RMDs for 2020 allowed under the CARES Act, qualified plans may still choose to distribute such amounts. Therefore, it is imperative for participants and their financial advisors to know how their plans intend to address the optional 2020 RMD waiver and plan accordingly.

[1] The 2020 RMD waiver does not apply to defined benefit plans.

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RMDs as annuitized payments

“A unique question arose late last week from an advisor with a wealthy 72-year-old client. In 2018, the client annuitized a large annuity contract to begin his required minimum distributions (RMDs) from his IRA. The client heard that because of a law change, he could suspend his RMD payment for 2020, so he wanted to skip his 2020 annuity payment. Can the client stop his 2020 RMD annuity payment from his IRA?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to required minimum distributions (RMDs)

Highlights of the Discussion

  • While we are still awaiting additional operational guidance from the IRS on the Coronavirus Aid, Relief, and Economic Security (CARES Act), which allows for the waiver of RMDs for 2020, the answer in this scenario is most likely no—an IRA owner may not waive an annuitized payment. The form of his distribution (i.e., annuitized payments) makes the 2020 suspension or RMDs problematic and unlikely.
  • Payments from an annuity contract take several forms. The most common payout option is periodic payments, calculated on an annual basis using a contract value and life expectancy figure, which, generally, may be stopped or modified in certain circumstances [IRC Sec. 401(a)(9)].
  • A less common choice is annuitization, where the contract is surrendered to an insurance provider in exchange for a promise to make payments for a specified time and amount. Annuitized payment choices are irrevocable ([Treasury Regulation 1.401(a)(9)-6].
  • The suspension of 2020 RMDs comes from the newly enacted federal law (the CARES Act). However annuity contracts are regulated by state not Federal law. The annuity payments obligations are based the annuity contract terms. Once the contract is annuitized the payments cannot be modified. Thus, while periodic RMD payments from an annuity could be suspended for 2020, if the client annuitized the contract—no change to the payments is permitted.
  • After additional discussion with the client, we determined the IRA contract had been annuitized and, conservatively, no changes to the payments would be possible.

Conclusion

While many who are subject to 2020 RMDs have the option to waive the withdrawals pursuant to the CARES Act, there are some exceptions, including annuitized payments.

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SECURE RMDs

“I have a client who has a 401(k) plan and an IRA. She turned age 70½ in 2019. How do the changes to required minimum distribution (RMD) rules affect her?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to required minimum distributions.

Highlights of the Discussion

The short answer is that she is unaffected by the increase in the age at which RMDs must begin as a result of recent law changes. The increase in the RMD age (from 70 ½ to 72) as enacted under provisions from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is effective for individuals turning 70 ½ after December 31, 2019. (See Sec. 114 on page 623 of Further Consolidated Appropriations Act, 2020.)

Because your client turned 70 ½ in 2019, as an IRA owner, her required beginning date (RBD) for taking her first RMD remains April 1, 2020. Her RBD for the RMD due from her 401(k) plan is subject to the specific provisions of the plan, and would be April 1, 2020, if her plan does not include the special language that allows certain participants to delay their RBD until April 1 following the year they retire. The delayed RBD provision that some plans offer allows still-working participants who do not own more than five percent of the business to delay their RBD until April 1 of the year following their retirement.

Keep in mind that a 50 percent penalty tax could apply if a person fails to take his or her RMD on a timely basis.

Conclusion

The new rule that delays a person’s RBD until April 1 following the year he or she turns age 72 applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.

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Safe Harbor Validation of Rollovers

“What responsibility does a plan sponsor have in validating whether an incoming rollover contribution is legitimate?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Texas is representative of a common inquiry related to rollover contributions.

Highlights of Discussion

A qualified retirement plan isn’t required to accept rollover contributions from other plans or IRAs, but if it does under the terms of its governing plan document, the incoming assets must consist of valid rollover amounts. In order for the plan to retain its tax-preferred status, the plan sponsor must reasonably conclude that an amount is a valid rollover contribution as defined in Treasury Regulation Section (Treas. Reg. §) 1.401(a)(31)–1, Q&A–14(b)(2) and retain documentation. The IRS has provided examples of what would constitute proof of a valid rollover, including safe harbor options detailed in IRS Revenue Ruling 2014-9 .

Historically, plan sponsors followed the guidance of Treas. Reg. 1.401(a)(31)-1, Q&A-14(b)(2) for acceptable forms of documentation, which include a participant providing the sponsor of the receiving plan with a letter from the plan sponsor of the distributing plan that states the distributing plan has received a determination letter from the IRS or that the plan, to the best of the sponsor’s knowledge, is qualified. Further guidance from IRS Form 5310, Application for Determination for Terminating Plan, states a sponsor  who is filing this form is required to “… submit proof that any rollovers or asset transfers received were from a qualified plan or IRA.” The instructions to the form indicate that a copy of the distributing plan’s determination letter and timely interim amendments is one example of acceptable proof.

For an indirect rollover where a plan participant has received the assets from a distributing plan or IRA and, within 60-days, rolls over the amount to the receiving plan the individual can certify that the distribution is eligible for rollover and was received not more than 60 days before the date of the rollover. Many plans use a type of standard rollover certification form for this purpose. If the rollover contribution is late, the plan sponsor can accept the contribution if the individual has a waiver from the IRS or self-certifies under Revenue Procedure 2016-47.

In addition to the methods listed in the regulations, IRS Revenue Ruling 2014-9 provides additional streamlined safe harbor due diligence procedures described below that, in the absence of evidence to the contrary, will allow the sponsor of the plan receiving the rollover to reasonably conclude that the amount is a valid rollover contribution.

Plan-to-Plan Rollovers

The sponsor of the receiving plan can confirm the previous employer’s plan is intended to be qualified by looking up the plan on the DOL’s EFAST2 website. If Code 3C appears on the plan’s most recent Form 5500 filing, then the plan IS NOT intended to be qualified under IRC Code §§ 401, 403, or 408, indicating that a distribution from the plan would not be eligible for rollover.

If the receiving plan receives a check made payable to the trustee of the plan for the benefit of the participant from the trustee of another qualified plan, it is reasonable for the receiving plan sponsor to conclude that the plan that initiated the rollover determined the distribution is an eligible rollover distribution.

IRA-to-Plan Rollovers

When a receiving plan gets a check that is made payable to the trustee of the plan from the trustee of an IRA for the benefit of an employee, the recipient plan administrator may reasonably conclude that the source of the funds is a traditional IRA and not an inherited IRA and, therefore, eligible for rollover.

Keep copies of documentation

As proof rollover amounts were valid, plan sponsors should keep copies of the following items:

  • Checks or check stubs with identifying information;
  • Confirmations of wire or other electronic transfers; and
  • Participant certifications.

Special considerations for RMDs

Required minimum distributions (RMDs) are not eligible rollover distributions. A qualified plan is responsible for ensuring that any RMDs are paid to plan participants. Therefore, the IRS has indicated it is reasonable for the receiving plan to conclude that the distributing plan has already paid to the participant any RMDs and remaining amounts are eligible for rollover.

In contrast, IRA trustees and custodians are not responsible for automatically distributing RMDs to IRA owners. Therefore, a plan sponsor may not reasonably conclude that an IRA rollover consists only of eligible rollover funds. The plan administrator should seek additional documentation to confirm that the IRA owner has satisfied any RMD that may be due.

Conclusion

When rollovers to a qualified plan are permitted, plan sponsors must ensure such incoming amounts are, indeed, eligible for roll over. Validation can be done through employee certification of the source of the funds for a 60-day rollover; verification of the payment source (via information on the incoming rollover check or wire transfer) from the participant’s IRA or former plan; or, if the funds are from a plan, looking up that plan’s Form 5500 filing for assurance that the plan is intended to be a qualified plan.

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