In a private letter ruling, IRS has waived the 60-day rollover requirement for taxpayers who had rolled over funds from their employer-sponsored retirement plan into IRAs and, based on faulty advice, subsequently attempted to roll the funds back from the IRAs into the company plan. They learned from the plan administrator more than 60 days later that they couldn't do the rollovers because they were no longer participants in the plan.
Background. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))
IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))
IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc. (Rev Proc 2003-16, 2003-4 IRB)
Facts. Before their retirement, Taxpayers A and B were participants in Plan Z maintained by their former employer. Upon retirement, they liquidated their qualified plan accounts. Taxpayer A rolled the liquidated funds over into IRA X, and Taxpayer B rolled them over into IRA Y.
Taxpayers' long-term financial advisor, a licensed and practicing accountant, advised them that funds in IRA accounts are not as secure against third-party creditor claims as funds in tax qualified plans, and that they could achieve a tax-free rollover of their IRA funds back into Plan Z.
Observation: Before enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“the Act,” P.L. 109-8), to ensure maximum protection for retirement funds, advisors would counsel their clients to leave their ERISA-qualified plan interests in their plans, and not roll them over to an IRA. That's because under pre-Act law, plan interests rolled over into an IRA were not excluded from the debtor's bankruptcy estate, and the exemption for IRA funds was subject to restrictions. However, under the Act, a rollover to an IRA is now safe.
Acting on this advice, they requested distributions from their IRAs and deposited the amounts distributed into an account. They then directed the human resources manager at their former employer to transfer the parked IRA funds back into their accounts in Plan Z.
Subsequently, the human resources manager learned from the plan administrator that Taxpayers weren't eligible to make a rollover contribution to Plan Z because they were no longer participants in the Plan. However, he did not inform them that they could not make the rollover contributions until after the expiration of the 60-day period contained in Code Sec. 408(d)(3).
Waiver permitted. IRS observed that the information presented and documentation submitted by Taxpayers was consistent with their assertion that their failure to accomplish a timely rollover was caused by incorrect advice they received from their financial advisor. Accordingly, under Code Sec. 408(d)(3)(I), IRS waived the 60-day rollover requirement with respect to the distributions from IRAs X and Y. Taxpayers were granted a period of 60 days from the issuance of the letter ruling to contribute each amount to a Rollover IRA.
References: For waivers of the rollover period for IRAs, see Federal Tax Coordinator 2d ¶H-11472; United States Tax Reporter ¶4084.03; TaxDesk ¶144,034; TG ¶8705.