The Internal Revenue Code (IRC) provides that distributions from certain retirement arrangements (e.g., qualified retirement plans, individual retirement accounts (IRAs), §403(a) annuity plans, §403(b) tax-sheltered annuities, and §457 eligible governmental plans) will not be taxed (the tax is deferred) if the distribution is transferred to an eligible retirement plan (typically one of the above-described arrangements) within 60 days of receipt (i.e., a rollover distribution). The 60 day transfer requirement is commonly referred to as the "60 day rollover requirement."
Typically, if the 60 day rollover requirement is not satisfied, the IRA trustee or retirement plan administrator will refuse to accept the rollover distribution. In such a case, the taxpayer (distributee) is faced with the option of either: (a) paying the taxes on the distribution (other than qualified Roth distributions and any amounts previously taxed) which may include a 10% additional tax on early distributions; or (b) requesting a ruling from the Internal Revenue Service ("IRS") to waive the 60 day rollover requirement.
The purpose of making a rollover is to defer the payment of taxes. Thus, paying the taxes of the late rollover is not much of an option. Likewise, requesting an IRS waiver of the 60 day rollover requirement involves the payment of a $10,000 filing fee. In certain situations (described below), the cost of the request will now significantly limit the value of the IRS waiver request option.
In Revenue Procedure 2016-47, the IRS announced a new self-certification procedure (subject to verification on audit) that provides (a) a taxpayer may claim eligibility for a waiver from the 60 day rollover requirement; (b) the plan administrator or IRA trustee may rely on the certification in accepting and reporting the receipt of the rollover contribution; and (c) the IRS may grant a waiver during an examination of the taxpayer's income tax return. Presumably, allowing the plan administrator and IRA trustee to rely on the certification will increase the acceptance of late rollovers.
The Revenue Procedure imposes three requirements on the taxpayer's self-certification of eligibility for a waiver of the 60 day rollover requirement. First, the self-certification is not available if the IRS has previously denied a waiver request with respect to any part of the rollover.
Second, self-certification is limited to 11 situations which cause the 60-day deadline to be missed (hereinafter referred to as "Permissible Late Events"). The taxpayer must have missed the 60-day deadline because of the taxpayer's inability to complete the rollover due to one or more of the following Permissible Late Events (the Permissible Late Events language below is quoted from the Revenue Procedure):
(a) an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
(b) the distribution, having been made in the form of a check, was misplaced and never cashed;
(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer's principal residence was severely damaged;
(e) a member of the taxpayer's family dies;
(f) the taxpayer or a member of the taxpayer's family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
(k) 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.
Third, the contribution must be made to the plan or IRA "as soon as practical" after the Permissible Late Event ceases to prevent the taxpayer from making the contribution. There is a 30 day safe harbor in which a contribution made within 30 days of when the Permissible Late Event ceases to prevent the taxpayer from making the contribution will be deemed to satisfy the "as soon as practical" requirement.
The taxpayer makes the self-certification by signing the model letter (on a word-for-word basis) that is attached to the Revenue Procedure or by signing a letter which is substantially similar to the model letter.
A plan administrator or IRA trustee may rely on the tax-payer's self-certification for purposes of accepting and reporting the rollover contribution. However, the plan administrator or IRA trustee may not rely on the self-certification if he or she has actual knowledge that the rollover is contrary to the self-certification.
The self-certification is not an IRS waiver of the 60 day rollover requirement. Thus, on examination, the IRS may determine that the requirements for a waiver have not been met. In such a case, the taxpayer may be subject to additional income tax, interest, and penalties.
Finally, the Revenue Procedure provides that the IRS may grant a waiver of the 60 day rollover requirement during an examination of a taxpayer's return where such failure to waive the requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the taxpayer. Hopefully, the IRS will use this authorization to grant waivers in cases where taxpayers self-certify, but fail to meet one of the self-certification requirements (such as failure to make the contribution as soon as practical after the end of the Permissible Late Event).
In summary, prior to the release of Revenue Procedure 2016-47, a failure to meet the 60 day rollover requirement typically resulted in a payment of the taxes on the late rollover or payment of a large filing fee to obtain an IRS waiver of the 60 day rollover requirement. In limited circumstances (the 11 enumerated Permissible Late Events), Revenue Procedure 2016-47 now provides an additional procedure which will permit plan administrators and IRA trustees to accept rollovers that do not satisfy the 60 day rollover requirement.