Effective February 1, 2016, certain IRS private letter ruling (PLR) requests will cost $10,000 per application, including the PLR request to waive the 60-day deadline for completing rollovers. This is a giant step up in fees, as PLRs have ranged from $500 to $3000 for submissions before this date.
Since a favorable ruling isn’t guaranteed, this new $10,000 rate has made it even riskier to miss the 60-day deadline. Fortunately, the IRS has recently issued new guidelines that allow eligible individuals to avoid paying the $10,000 fee by using a self-certification option.
Background: How the 60-day deadline works
Generally, IRA or employer-sponsored retirement plan distributions are treated as ordinary income. Pre-tax distribution amounts are subject to income tax, and a 10% additional tax (early distribution penalty) if the account owner is under age 59½ at the time the distribution occurs and doesn’t qualify for an exception to that penalty. However, any distribution amount properly rolled over is excluded from income—and therefore nontaxable.
In order to be considered valid, a rollover must meet the 60-day deadline as one of its requirements. Once the account owner receives the distribution, he must complete a rollover contribution within 60 days. Note: The 60-day deadline doesn’t apply to a distribution processed as a direct rollover to or from an employer-sponsored retirement plan.
If the 60-day deadline is missed, the amount is no longer eligible for rollover unless the account owner qualifies for an exception, such as qualifying for an automatic waiver or if the IRS waives the deadline through a PLR.
But with this new self-certification option, retirement account owners now have a contingency provision that allows them to self-certify that they qualify for a waiver to the 60-day deadline.
New self-certification process
Revenue Procedure 2016-47 explains how an individual can qualify for a 60-day deadline waiver by using the self-certification procedure. It also has a sample self-certification letter that the retirement account owner can give to the plan administrator or IRA custodian with which the rollover contribution is being made.
An individual can use the self-certification procedure only if the following three requirements are met:
1. The IRS hasn’t already denied a waiver request for any portion of the distribution
As mentioned above, an individual can submit a PLR request to the IRS to get the 60-day deadline waived. If the retirement account owner already did this and the request was denied, no portion of that distribution is eligible for the self-certification process.
2. The reason for missing the deadline is on the IRS’s pre-approved list.
For the purposes of self-certification eligibility, Revenue Procedure 2016-47 contains a list of acceptable reasons for missing the 60-day deadline, providing the reason actually resulted in the missed deadline. These reasons are:
- The financial institution that made the distribution or received the rollover contribution made a mistake.
- The distribution was made in the form of a check that was misplaced and never cashed.
- The amount was deposited to a nonretirement account that the retirement account owner mistakenly believed was an eligible retirement account, such as an IRA or an account under an employer plan.
- The retirement account owner’s principal residence was severely damaged.
- A member of the retirement account owner’s family died.
- The retirement account owner or a member of her family was seriously ill.
- The retirement account owner was incarcerated.
- A foreign country imposed restrictions.
- The deadline was missed due to a postal error.
- The distribution was made due to an IRS levy and the proceeds of the levy was returned to the retirement account owner.
- The IRA custodian or trustee who made the distribution delayed informing the account owner that the receiving IRA or employer plan was required to complete the rollover, despite the account owner’s reasonable efforts to obtain that information.
These reasons are consistent with PLR requests for which the IRS often provides favorable rulings. But it’s important to note that the death exception (fifth bullet point) doesn’t extend to the retirement account owner, which means that this guidance can’t be used as an authority to waive the deadline for a deceased account owner. However, the illness exception (sixth bullet point) extends to both the retirement account owner and members of the retirement account owner’s family.
3. 30-day Safe Harbor contribution deadline
The rollover contribution must be made to the receiving account “as soon as practicable” after the reason for missing the deadline no longer prevents the retirement account owner from making the rollover contribution. This deadline is considered to have been met if the contribution was made within 30 days after the reason(s) no longer exist.
Power of self-certification
An IRA custodian or plan administrator may rely on the retirement account owner’s self-certification to determine if the individual qualifies for a waiver of the 60-day deadline. But such reliance isn’t permitted if the IRA custodian has knowledge that is contrary to the self-certification.
For example, if a distribution was processed via federal fund wire from an IRA to a checking account, the IRA owner won’t be eligible to claim “postal error” as the amount hadn’t been delivered by mail. The IRA custodian who processed the distribution would have known how the distribution was delivered, and such a custodian isn’t permitted to accept a reason of “postal error” for self-certification of the rollover contribution.
While a self-certification isn’t considered an IRS waiver of the 60-day deadline, the account owner may treat the amount as a proper rollover on her tax return by excluding the amount from income and following other requirements for reporting rollovers. If the IRS later informs the taxpayer that the rollover is, in fact, invalid, then the tax return would need to be amended to include the amount in income.
Over the course of its examination, the IRS will determine if the requirements for a waiver have been met. Falling short of the requirements includes:
- A material misstatement in the self-certification
- The reason(s) claimed for missing the deadline didn’t actually prevent the retirement account owner from meeting the deadline
- Not meeting the 30-day deadline
In such cases, the account owner would have to include the amount in income, and could be subject to IRS penalties for not paying the proper amount of income taxes that would have been owed on the distribution.
How advisors should use this information
Avoid having to deal with the 60-day deadline at all by ensuring that the trustee-to-trustee transfer method is used when assets are being moved between two IRAs. For movement of assets to or from an employer plan, use the direct rollover method. These methods are not subject to restrictions and limitations that apply to the 60-day rollover method.
Of course, there will be instances when using the 60-day rollover method is unavoidable. In those cases, take steps to not miss the 60-day deadline. If you become aware that a client missed the 60-day deadline, the first step is to find out if the client is eligible for an automatic waiver.
If your client doesn’t qualify for the automatic waiver, then the next step is to see if the self-certification process described above can be used. A copy of the self-certification letter can be found on page five of Revenue Procedure 2016-47.
If the client is not eligible for the self-certification process, then the PLR process might be a good solution. In this case, decide if the amount is significant enough to warrant the $10,000 fee charged by the IRS, plus any professional fees.
The cost of the PLR versus the loss of the tax deferral benefit should also be taken into consideration. Approvals for a PLR request are not automatic, and the reason for missing the deadline plays a significant role in the IRS determination process. The list of reasons provided by the IRS in Revenue Procedure 2016-47 is a good guideline for what the IRS might, and often does, find acceptable. If the PLR request is not pursued, or pursued and denied, the amount must be included in income.