On April 3, 2014, the Internal Revenue Service issued guidance (Revenue Ruling 2014 9) that should make it much easier for qualified plans (including section 403(b) plans) to accept direct rollover contributions from other qualified plans and IRAs. While qualified plans have long been allowed to accept such rollovers, the new guidance should encourage more plans to accept rollovers by simplifying the process of determining whether a proposed rollover is an “eligible” one which the plan can accept without jeopardizing the plan’s on-going compliance.
The ruling describes two situations involving rollovers to qualified plans. The first, “Situation 1,” involves a rollover (by check) from another employer plan. To simply the acceptance process for these types of rollovers, the guidance provides that it would be okay for the plan to accept the rollover if –
1. The most recent Form 5500 filing for the transferring plan (which is available on the Department of Labor website) does not contain Code “3C” (which must be used if the plan is not intended to be qualified), and
2. The check or checkstub has a notation that identifies the transferring plan as the source of the funds, indicating that the amount is an “eligible rollover distribution” from the transferring plan.
Situation 2 addresses a rollover from an IRA to a qualified plan. For these rollovers, the guidance provides that it would be okay to accept the rollover if – (i) the check or checkstub indicates that the distributing account is an IRA and (ii) the employee certifies that the IRA does not include after-tax amounts and (if needed) the employee will not reach age 70 ½ in the year involved.
Note that this guidance also extends to wire and other electronic transfers so long as the fund source is communicated or otherwise verified by the transferring plan or IRA custodian. Lastly, the guidance provides that it is later discovered that the rollover was invalid, all that is required to correct the matter is distribute the rolled over amount (as adjusted for any gain or loss) within a reasonable period after discovery.