[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Proposed Rules]
[Pages 49279-49282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24059]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-245562-96]
RIN 1545-AU46


Relief From Disqualification for Plans Accepting Rollovers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Proposed regulations.

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SUMMARY: This document contains proposed regulations that would provide 
guidance on the qualification of retirement plans that accept rollover 
contributions from employees. These regulations affect plan 
administrators of qualified plans that accept rollover contributions.

DATES: Written comments must be received by December 18, 1996.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-245562-96), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-
245562-96), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html

FOR FURTHER INFORMATION CONTACT: Marjorie Hoffman, (202) 622-6030 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On September 22, 1995, Final Income Tax Regulations (TD 8619) under 
sections 401(a)(31) and 402(c) were published in the Federal Register 
(60 FR 49199). The final regulations provide guidance for complying 
with the Unemployment Compensation Amendments of 1992 (UCA).
    UCA expanded the types of distributions from a qualified plan that 
are eligible to be rolled over to an individual retirement account or 
individual retirement annuity, or to another qualified plan that 
accepts rollovers (collectively referred to as eligible retirement 
plans). Such distributions are referred to as eligible rollover 
distributions. UCA also added a new qualification provision under 
section 401(a)(31) that requires qualified plans to provide employees 
with a direct rollover option. Under a direct rollover option, an 
employee may elect to have an eligible rollover distribution paid 
directly to an eligible retirement plan. The direct rollover option is 
provided in addition to the pre-existing rollover provisions under 
section 402. Thus, an employee who receives an eligible rollover 
distribution but who does not elect a direct rollover still has the 
option to roll over the distribution to an eligible retirement plan 
within 60 days of receipt.
    The final regulations under section 401(a)(31) provide that a plan 
that 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 receiving plan reasonably concluded that the distributing plan was 
qualified under section 401(a) or 403(a). The regulations provide, as 
an example, that the receiving plan may reasonably conclude that the 
distributing plan was qualified

[[Page 49280]]

under section 401(a) or 403(a) if, prior to accepting the rollover, the 
plan administrator of the distributing plan provided the receiving plan 
with a statement that the distributing plan had received a 
determination letter from the Commissioner indicating that the plan was 
qualified. The plan administrator is not required to verify this 
information, such as by obtaining a copy of the distributing plan's 
plan document or determination letter, in order to reasonably conclude 
that the distributing plan is qualified under section 401(a) or 403(a).

Explanation of Provisions

1. Overview

    The relief to be provided in these proposed regulations is intended 
to increase the portability of qualified plan benefits when an employee 
changes jobs. This objective would be achieved by reassuring a plan 
sponsor that acceptance of an amount as a rollover contribution, in 
appropriate circumstances, will not affect the plan's qualification 
under section 401(a) or 403(a).

2. Expansion of Existing Relief for Receiving Plans

    These proposed regulations would expand and clarify in several 
respects the relief provided in the regulations under section 
401(a)(31) issued last year. First, the proposed regulations would 
clarify and expand the relief from disqualification currently provided 
for plans that accept direct rollovers. The protection would be 
expanded to be available not only if the plan administrator reasonably 
concludes the distributing plan is qualified under section 401(a) or 
403(a) (even if later it is determined that the distributing plan is 
not a qualified plan), but also if the plan administrator reasonably 
concludes that a distribution meets the other requirements to be an 
eligible rollover distribution (but later it is determined that this 
conclusion was incorrect). Further, the proposed regulation would 
clarify that if the plan administrator reaches these conclusions 
reasonably, and satisfies the corrective distribution requirement 
described below, the contribution will be treated as a rollover 
contribution for purposes of applying qualification requirements under 
section 401(a) or 403(a) to the plan. Thus, if the contribution was 
not, in fact, a distribution from a qualified plan or for any other 
reason fails to be an eligible rollover distribution within the meaning 
of section 402(c), the contribution nevertheless would be treated as a 
rollover contribution as opposed to, for example, an employee 
contribution for purposes of section 401(m) or for purposes of section 
415.
    Second, the regulations would extend this expanded relief from 
disqualification to plans that accept rollover contributions other than 
direct rollover contributions. Thus, the relief would apply to plans 
that accept rollover contributions made by an employee within 60 days 
of the date of the distribution from a plan. Further, the relief would 
apply to plans that accept rollover contributions from a ``conduit 
IRAs,'' i.e., an individual retirement plan that does not contain any 
amount attributable to any source other than a rollover contribution 
(as defined in section 402) from a plan qualified under section 401(a) 
or an annuity qualified under section 403(a). The relief would apply if 
(a) when accepting a rollover contribution, the plan administrator of 
the receiving plan reasonably concludes that the contribution is an 
eligible rollover distribution from a qualified plan (or an amount 
distributed from a conduit IRA) and that the contribution satisfies the 
other applicable requirements of section 402(c) or 408(d)(3) for 
treatment as a rollover contribution and (b) the receiving plan 
satisfies the corrective distribution requirement described below.
    The regulations would provide examples of the actions that a plan 
administrator might take to reasonably conclude that an employee's 
contribution satisfies the requirements for treatment as a rollover 
contribution. The examples are intended to be merely illustrative. Plan 
administrators may develop other approaches or procedures for 
reasonably reaching this conclusion.
    Finally, the regulations would provide that if the receiving plan 
later obtains actual knowledge or otherwise determines that the 
distributing plan was not qualified at the time of the distribution, 
that any portion of the distribution was not an eligible rollover 
distribution or an amount distributed from a conduit IRA, or that the 
contribution to the plan otherwise did not satisfy the applicable 
requirements of section 402 or 408 for treatment as a rollover 
contribution, a corrective distribution equal to the amount of the 
contribution plus any earnings attributable to the contribution would 
be required to be made to the employee within a reasonable time after 
such determination.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 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 the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or comments transmitted via Internet that are 
submitted timely to the IRS. All comments will be available for public 
inspection and copying.
    A public hearing may be scheduled if requested in writing by a 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these regulations is Marjorie Hoffman, 
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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

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 ``Question and Answers,'' removing designation 
(a) and

[[Page 49281]]

the paragraph heading, and removing paragraph (b) from A-13.
    3. Under the heading ``Question and Answers,'' redesignating Q&A-14 
through Q&A-18 as Q&A-15 through Q&A-19, respectively, and adding Q&A-
14.
    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. 
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 Q&A-1 of Sec. 1.402(c)-2 
(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 Q&A-1 of 
Sec. 1.402(c)-2 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) The provisions of paragraph (a) of this Q&A-14 are illustrated 
by the following examples:

    Example 1. (a) 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 70\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.
    (b) 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.
    (c) 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. (a) 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.
    (b) 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.
    (c) 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.
    (d) 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 3. (a) The facts are the same as in Example 2, 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 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.
    (b) In addition to providing the certifications described in 
Example 2 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 made not 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.
    (c) As support for these certifications, in addition to the two 
statements from Plan O described in Example 2, 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.
    (d) 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 by adding a sentence to the 
end of A-11 to read 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

[[Page 49282]]

qualification of a plan that accepts a rollover contribution.
* * * * *
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 96-24059 Filed 9-18-96; 8:45 am]
BILLING CODE 4830-01-U