A distribution from a retirement account that is properly rolled over is excluded from income and continues to be eligible for tax-deferred growth. A rollover is proper if it meets certain requirements, including the amount being eligible for rollover and the rollover being completed within 60 days of receipt.
Individuals who miss this 60-day deadline are eligible for an extension—also known as a waiver—with the approval of the IRS, if certain requirements are met. Those who are ineligible for an automatic waiver may apply to the IRS for a private letter ruling (PLR). The IRS’s ruling usually depends on the facts and circumstances, including the reason the deadline was missed.
In PLR 201822033, the IRA owner blamed her husband for missing the deadline. The IRS approved the waiver request, allowing the rollover to be completed long after the 60-day deadline had expired.
Some facts of the PLR
The IRA owner, let’s call her Jada, retired on January 14, 2017 and requested a distribution from her employee stock ownership plan (ESOP). She received the amount in the form of a check, and on February 10, 2017, she deposited the amount to a regular account that she held jointly with her husband.
Since the amount was paid to her (and not her IRA), she had 60 days from the date of receipt to roll over the amount to an eligible retirement account, in order for it to be tax-deferred.
Because she planned to roll over a portion of the distribution to a traditional IRA, she and her husband transferred that amount to a separate joint account on February 27, 2017.
About early September of 2017, her husband contacted their income tax preparer regarding rolling over the amount to an IRA, at which time they then learned that they had 60 days from the date of receipt to complete the rollover.
Jada submitted a PLR request to the IRS to waive the 60-day deadline, on the basis that she missed the deadline due to her reliance on her husband and misinformed belief that she had until the end of the taxable year in which to complete the rollover.
Included with her application was documented proof that the amount remained in the joint account, untouched.
Why a PLR Request?
When clients ask for my help to resolve a missed 60-day deadline issue, the first thing I do is check to determine if the case qualifies for self-correction. If the account owner does not qualify for self-correction options, I recommend that they apply to the IRS for a PLR, if it is practical do so. Factors that should be taken into consideration for the PLR option include:
- The amount of funds involved. Consider that the IRS charges a fee of $10,000 to handle a 60-day waiver request, and additional expenses would apply for any professional services used to aid with the application. It follows then, that it would not make good financial or tax sense to request a waiver for a small amount.
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Whether the facts and circumstance fit into the parameters as explained under Revenue Procedure 2003-16. Under this revenue procedure, the IRS is required to consider all relevant facts and circumstances when determining whether to grant a waiver of the 60-day rollover requirement, including the use of the amount distributed. For instance, have the funds been sitting in an account since the distribution was made and remained uninvested? Or have the funds been in use for other purposes?
For example, see PLR 201547010 in which the taxpayer claimed that the failure to complete the rollover by the 60-day deadline was due to incorrect advice from parties including a financial advisor. IRS denied the waiver requests, because the taxpayer “…chose to use the proceeds…to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”
PLR 201822033 is a surprising ruling
Under IRC § Section 6110(k)(3), PLRs may not be used or cited as precedent. But that is not the only reason why one should not rely on a PLR for guidance. While they give a good idea of how the IRS could respond to a case with similar facts and circumstance, there have been PLRs for which different rulings have been made—when they claim similar reasons for requesting the PLR.
In PLR 201822033, the fact that the funds were sitting in the account uninvested and were never used is a plus. But, the excuse of missing the deadline because she relied on her husband and had a “misinformed belief” about the rules is not typical for approval.
Consider PLR 201545035, in which the IRA owner claimed he missed the 60-day deadline for reasons which included “his lack of information on rolling over nondeductible contributions” from his traditional IRA to his Roth IRA. The IRS denied the request because: The information presented and documentation submitted by the taxpayer did not demonstrate that he “failed to accomplish a rollover due to any of the factors cited in Rev. Proc. 2003-16.”
We know that Rev. Proc. 2003-16 does not provide for a waiver due to reliance on a spouse and/or misunderstanding of the rules. However, it does allow the IRS some flexibility by providing that the IRS may waive the deadline, “where the failure to waive such requirement would be against equity or good conscience.” This language does give the IRS some flexibility.
In the PLR 201822033 response, the IRS approved the waiver request because “The information and documentation submitted by Taxpayer A support her assertion that the failure to accomplish a rollover…within the 60-day period…was due to her reliance on her spouse and her misinformed belief that she had until the end of the taxable year in which to complete the rollover.”
Tip: A direct rollover would have avoided all of this
There are two ways to move assets from a qualified plan, such as an ESOP, to a traditional IRA:
- A direct rollover
- An indirect rollover
With a direct rollover, the amount would have been paid directly to the IRA custodian, for credit to Jada’s IRA. No income taxes would have been withheld, and the 60-day deadline would not have applied.
With an indirect rollover, income taxes would have been withheld from any taxable amount and—as explained above—the 60-day deadline applied.
So, Jada could have avoided this issue by having the amount processed as a direct rollover to her traditional IRA. Since she did not use the funds and instead had it sitting in her joint account until it was rolled over to her traditional IRA, there was no reason to choose the indirect rollover method.
How can advisors help?
Consumers sometimes feel empowered to handle rollovers on their own, because of the plethora of information available on the Internet and elsewhere. But, that information is not always complete and is sometimes inaccurate.
If these individuals do not seek the help of advisors, then one way advisors can help is by sharing applicable information as much as possible. For those who hold free seminars, information about the risk of making mistakes with rollovers should be emphasized.
In cases where the deadline has already been missed, an advisor can help to determine if an affected client is eligible for any of the waiver options.