PLR 1318031: Rollover deadline waived after a financial institution mishandled instructions

Plain-English summary

An employee took a distribution from a former employer's 401(k) plan and instructed the plan administrator to roll most of the account into an IRA. The financial institution instead transferred only a small portion to the IRA and placed the balance in a regular brokerage account. The IRS found that the missed rollover resulted from the institution's failure to follow the taxpayer's instructions. It waived the 60-day deadline and allowed the taxpayer 60 days from the ruling date to contribute the intended rollover amount to a rollover IRA, subject to the other rollover requirements.

Ruling snapshot

• Question: Should the IRS waive the 60-day rollover requirement when a financial institution failed to follow the taxpayer's rollover instructions?
• Outcome: Approved. The IRS waived the deadline subject to the ruling's conditions.
• Key authorities: IRC §§ 401(a)(9), 401(a)(31), 402(c), and 6110; Treas. Reg. § 1.401(a)(31)-1; Rev. Proc. 2003-16, 2003-4 I.R.B. 359

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20224 201318031

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 06 2013
Uniform Issue List: 402.00-00

Legend:

Taxpayer A:
Bank M:
Individual J:
Financial Institution T:
Amount S:
Amount R:
Amount Q:
Amount F:
Amount D:
Amount T:
Amount K:
Amount L:
Plan Y:
Account M:
IRA X:

Dear [illegible]:

This is in response to a request dated September 22, 2011, as supplemented by
correspondence dated September 13, 2012, submitted on your behalf by your
authorized representative, in which you request a waiver of the 60-day rollover
requirement contained in section 402(c)(3) of the Internal Revenue Code (Code).

The following facts and representations have been submitted under penalty of perjury in
support of the ruling requested.

Taxpayer A represents that she received a distribution from Plan Y totaling Amount R.
Taxpayer A asserts that her failure to accomplish a rollover of Amount K (a portion of
Amount R) within the 60-day period prescribed by section 402(c)(3) was due to the
failure of Financial Institution T to follow Taxpayer A's instructions. Taxpayer A further
represents that the remainder of the distribution from Plan Y, Amount D, has not been
used for any other purpose.

Taxpayer A was an employee at Bank M, but lost her job due to a bank merger and
decided to take a distribution from her former employer's 401(k) plan, Plan Y.

On November [illegible], 20[illegible], Taxpayer A had a telephone conversation with Individual J, a
representative of Financial Institution T, Plan Y's third party administrator. Taxpayer A
informed Individual J that she needed Amount S, and told Individual J that she wanted
Amount K (the remainder of her account, minus an offset for an outstanding plan loan,
Amount Q) rolled over to an Individual Retirement Account (IRA).

Taxpayer A understood that the distribution of Amount S and the loan offset of Amount
Q would be taxable income to her.

Individual J set up two accounts for Taxpayer A, one was a regular brokerage
Account, Account M, and the other was an IRA account, IRA X. Individual J did not
make it clear to Taxpayer A that only Amount F, a small percentage of the amount
instructed to be rolled over, was being transferred to IRA X with the balance of the
distribution, Amount D, being transferred to the regular brokerage account.

Taxpayer A subsequently received a Form 1099-R from Plan Y for 20[illegible] showing
a gross distribution of Amount R and a taxable amount of Amount T. Taxpayer A was
unaware that Financial Institution T failed to follow her instructions until her tax return
preparer informed her that she owed Amount L in tax because the amount she intended
to rollover from her account with Plan Y was not rolled over to IRA X.

Taxpayer A asserts that the failure to roll over the Amount K distribution within the 60-
day period prescribed by section 402(c)(3) of the Code was due to the failure of
Financial Institution T to follow Taxpayer A's instructions.

Based on the facts and representations, you request a ruling that the Internal Revenue
Service (Service) waive the 60-day rollover requirement contained in section 402(c)(3)
of the Code with respect to the distribution of Amount K from Plan Y.

Section 402(c) of the Code provides that if any portion of the balance to the credit of an
employee in a qualified trust is paid to the employee in an eligible rollover distribution,
and the distributee transfers any portion of the property received in such distribution to
an eligible retirement plan, and in the case of a distribution of property other than
money, the amount so transferred consists of the property distributed, then such
distribution (to the extent transferred) shall not be includible in gross income for the
taxable year in which paid. Section 402(c)(3)(A) of the Code states that such rollover
must be accomplished within 60 days following the day on which the distributee
received the property. An individual retirement account constitutes one form of eligible
retirement plan.

Section 402(c)(4) of the Code provides that an eligible rollover distribution shall not
include any distribution to the extent such distribution is required under section
401(a)(9) of the Code.

Section 402(c)(3)(B) of the Code provides, in relevant part, that the Secretary may
waive the 60-day requirement under section 402(c) of the Code where the failure to
waive such requirement would be against equity or good conscience, including casualty,
disaster, or other events beyond the reasonable control of the individual subject to such
requirement. Only distributions that occurred after December 31, 2001, are eligible for
the waiver under section 402(c)(3)(B) of the Code.

Section 401(a)(31) of the Code provides the rules for governing “direct transfers of
eligible rollover distributions”.

Section 1.401(a)(31)-1 of the Income Tax Regulations, Question and Answer-15,
provides, in relevant part, that an eligible rollover distribution that is paid to an eligible
retirement plan in a direct rollover is a distribution and rollover, and not a transfer of
assets and liabilities.

Rev. Proc. 2003-16, 2003-4 I.R.B. 359, (January 27, 2003), provides that in determining
whether to grant a waiver of the 60-day rollover requirement pursuant to section
402(c)(3) of the Code, the Service will consider all relevant facts and circumstances,
including: (1) errors committed by a financial institution; (2) inability to complete a
rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a
foreign country or postal error, (3) the use of the amount distributed (for example, in the
case of payment by check, whether the check was cashed); and (4) the time elapsed
since the distribution occurred.

The information presented and documentation submitted by Taxpayer A is consistent
with her assertion that her failure to accomplish a timely rollover was caused by the
failure of Financial Institution T to follow Taxpayer A's instructions.

Therefore, pursuant to section 402(c)(3)(B) of the Code, the Service hereby waives the
60-day rollover requirement with respect to the distribution of Amount K from Plan Y.
Taxpayer A is granted a period of 60 days from the issuance of this ruling letter to
contribute Amount K into a Rollover IRA. Provided all other requirements of section
402(c)(3) of the Code, except the 60-day requirement, are met with respect to such
contribution, Amount K will be considered a rollover contribution within the meaning of
section 402(c)(3) of the Code.

No opinion is expressed as to the tax treatment of the transaction described herein
under the provisions of any other section of either the Code or regulations which may be
applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

This ruling does not authorize the rollover of amounts that are required to be distributed
by section 401(a)(9) of the Code.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling is being
sent to your authorized representative.

If you have any questions, please contact [illegible]. Please address all correspondence to
SE:T:EP:RA:T3.

Sincerely yours,

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

Enclosures:

Deleted Copy of Ruling Letter
Notice of Intention to Disclose

cc: