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###### Department of the Treasury

###### Internal Revenue Service 

          - 26 CFR Parts 1 and 31 
          - [TD 8880] 
          - RIN 1545-AU46 

# AGENCY:

Internal Revenue Service (IRS), Treasury. 

# ACTION:

Final regulations. 

# SUMMARY:

This document contains final regulations under section 401(a)(31) of the Internal Revenue Code. These final regulations provide specific rules that grant relief from disqualification to an eligible retirement plan that inadvertently accepts an invalid rollover contribution. The final regulations also clarify that it is not necessary for a distributing plan to have a favorable IRS determination letter in order for a plan administrator of a receiving plan to reach a reasonable conclusion that a contribution is a valid rollover contribution. 

# DATES:

These regulations are effective on April 21, 2000. 

# FOR FURTHER INFORMATION CONTACT:

Pamela R. Kinard, (202) 622-6030 (not a toll-free number). 

# SUPPLEMENTARY INFORMATION:

## Background 

                    On September 22, 1995, the Treasury Department and the IRS published in the                     **Federal Register**                     (60 FR 49199) Final Income Tax Regulations (TD 8619) under sections 401(a)(31) and 402(c). The final regulations provide guidance for complying with the Unemployment Compensation Amendments of 1992 (UCA). A proposed amendment to the regulations (REG-245562-96) under section 401(a)(31) was published in the                     **Federal Register**                     (61 FR 49279) on September 19, 1996. The 1996 proposed regulations under sections 401(a)(31) and 402(c) expand and clarify the guidance previously issued in the Final Income Tax Regulations. On December 17, 1998, an amendment to the proposed regulations (REG-245562-96) under section 401(a)(31) was published in the                     **Federal Register**                     (63 FR 69584). This amendment to the proposed regulations was issued in response to the congressional directive in section 1509 of Taxpayer Relief Act of 1997 (TRA '97), which directs the IRS to issue guidance clarifying that it is not necessary for a distributing plan to have a favorable IRS determination letter in order for a plan administrator of a                           ( print page 21313)                        receiving plan to reasonably conclude that a contribution is a valid rollover contribution. Written comments responding to the 1996 proposed regulations were received. There were no written comments responding to the 1998 amendment to the proposed regulations. No public hearing was requested or held. After consideration of the comments, the amended proposed regulations under section 401(a)(31) are adopted by this Treasury decision.                 

## Explanation of Provisions and Summary of Comments 

### A. Relief From Disqualification 

The final regulations under section 401(a)(31) of the Internal Revenue Code provide that an eligible retirement plan which accepts a direct rollover from another plan will not fail to satisfy section 401(a) or 403(a) merely because the plan making the distribution is, in fact, not qualified under section 401(a) or 403(a) at the time of the distribution if, prior to accepting the rollover, the plan administrator of the receiving plan reasonably concluded that the distributing plan was qualified under section 401(a) or 403(a). 

The proposed regulations clarify and expand upon this relief. Under the proposed regulations, an eligible retirement plan that accepts an invalid rollover contribution, whether as a direct rollover or as a rollover contribution other than a direct rollover, will be treated, for purposes of section 401(a) or 403(a), as accepting a valid rollover contribution, if the plan administrator of the receiving plan satisfies two conditions. First, when accepting the rollover contribution, the plan administrator of the receiving plan must reasonably conclude that the rollover contribution is a valid rollover contribution. Second, if the plan administrator of the receiving plan later determines that the rollover contribution was an invalid rollover contribution, the plan must distribute the amount of the invalid rollover contribution, plus earnings attributable thereto, to the employee within a reasonable period of time. 

### B. Documentation Offered as Evidence To Support a Reasonable Conclusion 

The 1996 proposed regulations do not mandate any particular documentation or procedures that a plan administrator must use in order to reach a reasonable conclusion that a rollover contribution is a valid rollover contribution. The 1996 proposed regulations contain a series of examples to illustrate the types of documentation and procedures that would be sufficient to support a reasonable conclusion. In each example, the employee making the rollover contribution provides the plan administrator of the receiving plan with a letter from the plan administrator of the distributing plan stating that the distributing plan has received an IRS determination letter indicating that the distributing plan is qualified under section 401(a). 

Several commentators stated that the examples in the 1996 proposed regulations appear to imply that the acknowledgment of the receipt of a favorable IRS determination letter by a distributing plan is a prerequisite to a plan administrator of a receiving plan reaching a reasonable conclusion that a rollover contribution is a valid rollover contribution. Commentators argued that the public policy goal of pension portability would be impeded if an eligible retirement plan is subject to complex administrative procedures when accepting rollover contributions. These concerns were addressed in the 1998 amendment to the proposed regulations implementing the congressional directive in section 1509 of TRA '97. That amendment clarifies that it is not necessary for a distributing plan to have a favorable IRS determination letter in order for a plan administrator of a receiving plan to reach a reasonable conclusion that a contribution is a valid rollover contribution. In addition, an example was added to the proposed regulations in which an employee does not provide a statement from the distributing plan administrator that the distributing plan has received a favorable IRS determination letter, but instead the employee provides a statement from the distributing plan administrator relating to the qualification of the distributing plan. In the preamble to the 1998 amendment to the proposed regulations, it is stressed that none of the examples in the proposed regulations are intended to describe the only types of information that a plan administrator can find to be sufficient and the examples are not intended to preclude reliance on other types of information, such as opinions or statements regarding the plan's qualification provided by appropriate professionals with expertise in plan qualification requirements. 

### C. Miscellaneous Comments 

                    One commentator stated that both Examples 1 and 3 in the proposed regulations, which provide that Employee A will not have attained age 70                    1/2                     by the end of the year in which the rollover contribution will occur, imply that if an employee were age 70                    1/2                     or older, a rollover option would be unavailable. This implication was not intended. The fact was included merely to illustrate the more common scenario of an employee who is under age 70                    1/2                     and rolls over a retirement plan distribution.                 

Some commentators proposed that guidance is needed regarding the procedures for correcting invalid rollover contributions. One commentator suggested that relief, similar to that provided to plans receiving invalid rollover contributions, should also be afforded to plans receiving assets and liability transfers in the event that a transferor's plan does not satisfy the qualification requirements under the Code. These comments will be taken into account in developing future guidance priorities. 

## Special Analyses 

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. 

## Drafting Information 

The principal author of these regulations is Pamela R. Kinard, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), IRS. However, other personnel from the IRS and Treasury Department participated in their development. 

# List of Subjects 

### 26 CFR Part 1

      - Income taxes
      - Reporting and recordkeeping requirements

### 26 CFR Part 31

      - Employment taxes
      - Estate taxes
      - Excise taxes
      - Gift taxes
      - Income taxes
      - Penalties
      - Reporting and recordkeeping requirements

## Adoption of Amendments to the Regulations 

Accordingly, 26 CFR parts 1 and 31 are amended as follows: 

      ( print page 21314)    

# PART 1—INCOME TAXES 

Paragraph 1. The authority citation for part 1 continues to read in part as follows: 

Authority:26 U.S.C. 7805 * * * 

**Par. 2.**                         Section 1.401(a)(31)-1 is amended as follows:                     

1. Under the heading “List of Questions,” redesignating Q-14 through Q-18 as Q-15 through Q-19, respectively, and adding new Q-14. 

2. Under the heading “Questions and Answers,” removing the paragraph designation (a) and the paragraph heading, and removing paragraph (b) from A-13. 

3. Under the heading “Questions and Answers,” redesignating Q&A-14 through Q&A-18 as Q&A-15 through Q&A-19, respectively, and adding new Q&A-14. 

4. Under the heading “Questions and Answers,” removing the language “Q&A-15” in the fourth sentence of the newly designated A-16 and adding “Q&A-16” in its place. 

5. Under the heading “Questions and Answers,” removing the language “Q&A-17” in the first sentence of the newly designated A-18 and adding “Q&A-18” in its place. 

The additions read as follows: 

§ 1.401(a)(31)-1 

* * * * *

#### List of Questions 

* * * * *

Q-14. If a plan accepts an invalid rollover contribution, whether or not as a direct rollover, how will the contribution be treated for purposes of applying the qualification requirements of section 401(a) or 403(a) to the plan?

* * * * *

#### Questions and Answers 

* * * * *

Q-14. If a plan accepts an invalid rollover contribution, whether or not as a direct rollover, how will the contribution be treated for purposes of applying the qualification requirements of section 401(a) or 403(a) to the plan? 

                            A-14. (a)                             *Acceptance of invalid rollover contribution.*                             If a plan accepts an invalid rollover contribution, the contribution will be treated, for purposes of applying the qualification requirements of section 401(a) or 403(a) to the receiving plan, as if it were a valid rollover contribution, if the following two conditions are satisfied. First, when accepting the amount from the employee as a rollover contribution, the plan administrator of the receiving plan reasonably concludes that the contribution is a valid rollover contribution. While evidence that the distributing plan is the subject of a determination letter from the Commissioner indicating that the distributing plan is qualified would be useful to the receiving plan administrator in reasonably concluding that the contribution is a valid rollover contribution, it is not necessary for the distributing plan to have such a determination letter in order for the receiving plan administrator to reach that conclusion. Second, if the plan administrator of the receiving plan later determines that the contribution was an invalid rollover contribution, the amount of the invalid rollover contribution, plus any earnings attributable thereto, is distributed to the employee within a reasonable time after such determination.                         

                            (b)                             *Definitions.*                             For purposes of this Q&A-14:                         

                            (1) An                             *invalid rollover contribution*                             is an amount that is accepted by a plan as a rollover within the meaning of § 1.402(c)-2, Q&A-1 (or as a rollover contribution within the meaning of section 408(d)(3)(A)(ii)) but that is not an eligible rollover distribution from a qualified plan (or an amount described in section 408(d)(3)(A)(ii)) or that does not satisfy the other requirements of section 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or a rollover contribution.                         

                            (2) A                             *valid rollover contribution*                             is a contribution that is accepted by a plan as a rollover within the meaning of § 1.402(c)-2, Q&A-1 or as a rollover contribution within the meaning of section 408(d)(3) and that satisfies the requirements of section 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or a rollover contribution.                         

                            (c)                             *Examples.*                             The provisions of paragraph (a) of this Q&A-14 are illustrated by the following examples:                         

# Example 1.

                                 (i) Employer X maintains for its employees Plan M, a profit sharing plan qualified under section 401(a). Plan M provides that any employee of Employer X may make a rollover contribution to Plan M. Employee A is an employee of Employer X, will not have attained age 700                                1/2                                 by the end of the year, and has a vested account balance in Plan O (a plan maintained by Employee A's prior employer). Employee A elects a single sum distribution from Plan O and elects that it be paid to Plan M in a direct rollover.                             

(ii) Employee A provides the plan administrator of Plan M with a letter from the plan administrator of Plan O stating that Plan O has received a determination letter from the Commissioner indicating that Plan O is qualified. 

(iii) Based upon such a letter, absent facts to the contrary, a plan administrator may reasonably conclude that Plan O is qualified and that the amount paid as a direct rollover is an eligible rollover distribution.

# Example 2.

                                 (i) The facts are the same as                                 *Example 1,*                                 except that, instead of the letter provided in paragraph (ii) of                                 *Example 1,*                                 Employee A provides the plan administrator of Plan M with a letter from the plan administrator of Plan O representing that Plan O satisfies the requirements of section 401(a) (or representing that Plan O is intended to satisfy the requirements of section 401(a) and that the administrator of Plan O is not aware of any Plan O provision or operation that would result in the disqualification of Plan O).                             

(ii) Based upon such a letter, absent facts to the contrary, a plan administrator may reasonably conclude that Plan O is qualified and that the amount paid as a direct rollover is an eligible rollover distribution.

# Example 3.

                                 (i) Same facts as                                 *Example 1,*                                 except that Employee A elects to receive the distribution from Plan O and wishes to make a rollover contribution described in section 402 rather than a direct rollover.                             

(ii) When making the rollover contribution, Employee A certifies that, to the best of Employee A's knowledge, Employee A is entitled to the distribution as an employee and not as a beneficiary, the distribution from Plan O to be contributed to Plan M is not one of a series of periodic payments, the distribution from Plan O was received by Employee A not more than 60 days before the date of the rollover contribution, and the entire amount of the rollover contribution would be includible in gross income if it were not being rolled over. 

                                (iii) As support for these certifications, Employee A provides the plan administrator of Plan M with two statements from Plan O. The first is a letter from the plan administrator of Plan O, as described in                                 *Example 1,*                                 stating that Plan O has received a determination letter from the Commissioner indicating that Plan O is qualified. The second is the distribution statement that accompanied the distribution check. The distribution statement indicates that the distribution is being made by Plan O to Employee A, indicates the gross amount of the distribution, and indicates the amount withheld as Federal income tax. The amount withheld as Federal income tax is 20 percent of the gross amount of the distribution. Employee A contributes to Plan M an amount not greater than the gross amount of the distribution stated in the letter from Plan O and the contribution is made within 60 days of the date of the distribution statement from Plan O.                             

(iv) Based on the certifications and documentation provided by Employee A, absent facts to the contrary, a plan administrator may reasonably conclude that Plan O is qualified and that the distribution otherwise satisfies the requirements of section 402(c) for treatment as a rollover contribution.

# Example 4.

                                 (i) The facts are the same as in                                 *Example 3,*                                 except that, rather than contributing the distribution from Plan O to Plan M, Employee A contributes the distribution from Plan O to IRA P, an individual retirement account described in                                       ( print page 21315)                                    section 408(a). After the contribution of the distribution from Plan O to IRA P, but before the year in which Employee A attains age 70                                1/2                                , Employee A requests a distribution from IRA P and decides to contribute it to Plan M as a rollover contribution. To make the rollover contribution, Employee A endorses the check received from IRA P as payable to Plan M.                             

                                (ii) In addition to providing the certifications described in                                 *Example 3*                                 with respect to the distribution from Plan O, Employee A certifies that, to the best of Employee A's knowledge, the contribution to IRA P was not made more than 60 days after the date Employee A received the distribution from Plan O, no amount other than the distribution from Plan O has been contributed to IRA P, and the distribution from IRA P was received not more than 60 days earlier than the rollover contribution to Plan M.                             

                                (iii) As support for these certifications, in addition to the two statements from Plan O described in                                 *Example 3,*                                 Employee A provides copies of statements from IRA P. The statements indicate that the account is identified as an IRA, the account was established within 60 days of the date of the letter from Plan O informing Employee A that an amount had been distributed, and the opening balance in the IRA does not exceed the amount of the distribution described in the letter from Plan O. There is no indication in the statements that any additional contributions have been made to IRA P since the account was opened. The date on the check from IRA P is less than 60 days before the date that Employee A makes the contribution to Plan M.                             

(iv) Based on the certifications and documentation provided by Employee A, absent facts to the contrary, a plan administrator may reasonably conclude that Plan O is qualified and that the contribution by Employee A is a rollover contribution described in section 408(d)(3)(A)(ii) that satisfies the other requirements of section 408(d)(3) for treatment as a rollover contribution. 

* * * * *

**Par. 3.**                         Section 1.402(c)-2 is amended as follows:                     

1. Section 1.402(c)-2 is amended by adding a sentence to the end of A-11. 

2. Under the heading “List of Questions,” removing the language “§ 1.401(a)(31)-1, Q&A-17” in Q-15 and adding “§ 1.401(a)(31)-1, Q&A-18” in its place. 

3. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-15” in the third sentence of A-9(a) and adding “§ 1.401(a)(31)-1, Q&A-16” in its place. 

4. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-15” in the introductory text of A-9(c) and adding “§ 1.401(a)(31)-1, Q&A-16” in its place. 

5. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-15” in the last sentence of *Example 1*                        (b) of A-9(c) and adding “§ 1.401(a)(31)-1, Q&A-16” in its place.                     

6. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-16” in the last sentence of A-10(b) and adding “§ 1.401(a)(31)-1, Q&A-17” in its place. 

7. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-17” in the last sentence of A-14 and adding “§ 1.401(a)(31)-1, Q&A-18” in its place. 

8. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-17” in Q-15 and adding “§ 1.401(a)(31)-1, Q&A-18” in its place. 

9. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-17” in the third sentence of A-15 and adding “§ 1.401(a)(31)-1, Q&A-18” in its place. 

The addition reads as follows: 

§ 1.402(c)-2 

* * * * *

A-11. * * * See § 1.401(a)(31)-1, Q&A-14, for guidance concerning the qualification of a plan that accepts a rollover contribution. 

* * * * *

§ 1.403(b)-2 

**Par. 4.**                         Section 1.403(b)-2 is amended as follows:                     

1. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-14” in the next to last sentence of A-2(a) and adding “§ 1.401(a)(31)-1, Q&A-15” in its place. 

2. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-18” in the second sentence of A-4(a)(1) and adding “§ 1.401(a)(31)-1, Q&A-19” in its place. 

# PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE 

**Par. 5.**                         The authority citation for part 31 continues to read in part as follows:                     

Authority:26 U.S.C. 7805 * * * 

§ 31.3405(c)-1 

**Par. 6.**                         Section 31.3405(c)-1 is amended as follows:                     

1. Under the heading “Questions and Answers,” removing the language “Q&A-17 of § 1.401(a)(31)-1” in the next to last sentence of A-10(a) and adding “Section 1.401(a)(31)-1, Q&A-18” in its place. 

2. Under the heading “Questions and Answers,” removing the language “§ 1.401(a)(31)-1, Q&A-16” in the third sentence of A-13 and adding “§ 1.401(a)(31)-1, Q&A-17” in its place. 

Robert E. Wenzel, 

Deputy Commissioner of Internal Revenue. 

Jonathan Talisman, 

Acting Assistant Secretary of the Treasury (Tax Policy). 

[FR Doc. 00-9815 Filed 4-20-00; 8:45 am] 

BILLING CODE 4830-01-P