[Federal Register Volume 65, Number 78 (Friday, April 21, 2000)]
[Rules and Regulations]
[Pages 21312-21315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9815]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 31

[TD 8880]
RIN 1545-AU46


Relief From Disqualification for Plans Accepting Rollovers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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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

[[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:

[[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:


Sec. 1.401(a)(31)-1  Requirement to offer direct rollover of eligible 
rollover distributions; questions and answers.

* * * * *

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 Sec. 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 Sec. 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

[[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 
``Sec. 1.401(a)(31)-1, Q&A-17'' in Q-15 and adding ``Sec. 1.401(a)(31)-
1, Q&A-18'' in its place.
    3. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-15'' in the third sentence of A-
9(a) and adding ``Sec. 1.401(a)(31)-1, Q&A-16'' in its place.
    4. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-15'' in the introductory text of A-
9(c) and adding ``Sec. 1.401(a)(31)-1, Q&A-16'' in its place.
    5. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-15'' in the last sentence of 
Example 1(b) of A-9(c) and adding ``Sec. 1.401(a)(31)-1, Q&A-16'' in 
its place.
    6. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-16'' in the last sentence of A-
10(b) and adding ``Sec. 1.401(a)(31)-1, Q&A-17'' in its place.
    7. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-17'' in the last sentence of A-14 
and adding ``Sec. 1.401(a)(31)-1, Q&A-18'' in its place.
    8. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-17'' in Q-15 and adding 
``Sec. 1.401(a)(31)-1, Q&A-18'' in its place.
    9. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-17'' in the third sentence of A-15 
and adding ``Sec. 1.401(a)(31)-1, Q&A-18'' in its place.
    The addition reads as follows:


Sec. 1.402(c)-2  Eligible rollover distributions; questions and 
answers.

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


Sec. 1.403(b)-2  [Amended]

    Par. 4. Section 1.403(b)-2 is amended as follows:
    1. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-14'' in the next to last sentence 
of A-2(a) and adding ``Sec. 1.401(a)(31)-1, Q&A-15'' in its place.
    2. Under the heading ``Questions and Answers,'' removing the 
language ``Sec. 1.401(a)(31)-1, Q&A-18'' in the second sentence of A-
4(a)(1) and adding ``Sec. 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 * * *


Sec. 31.3405(c)-1  [Amended]

    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 Sec. 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 ``Sec. 1.401(a)(31)-1, Q&A-16'' in the third sentence of A-13 
and adding ``Sec. 1.401(a)(31)-1, Q&A-17'' in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: April 6, 2000.
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