PLR 1331010: IRS declines waiver for tax withheld from 401(k) and IRA distributions

Plain-English summary

The IRS declined to waive the 60-day rollover requirement for amounts withheld from a taxpayer's 401(k) and IRA distributions. The taxpayer rolled over the net proceeds but wanted to roll over the withheld amounts after receiving a tax refund. The IRS found that the taxpayer had no other funds available to replace the mandatory withholding from the 401(k) distribution, and that he could have elected not to have tax withheld from the IRA distribution. Because neither failure was caused by an event beyond the taxpayer's reasonable control, the requested waiver was denied.

Ruling snapshot

• Question: May the IRS waive the 60-day rollover requirement for tax withheld from the 401(k) and IRA distributions?
• Outcome: Denied, the requested waiver was declined.
• Key authorities: IRC §§ 402(c)(3), 402(c)(4), 408(d)(3), 3405, 72(t), and 6110(k)(3); Treas. Reg. § 1.402(c)-2, Q&A-11; Rev. Proc. 2003-16.

Full text (IRS public release)

TAX EXEMPT

AND

GOVERNMENT ENTITIES

DIVISION

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

MAY 08 2013

Uniform Issue List: 402.00-00 and 408.03-00

T:EP:RA:T1

Legend:

Taxpayer A

Plan B

Company C

Financial Institution D
IRA E

Financial Institution F
IRA G

Financial Institution H
Amount 1

Amount 2

Amount 3

Amount 4

Amount 5

Amount 6

Amount 7

Amount 8

Amount 9

Amount 10

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T:EP:RA:T1

2

Dear

This letter is in response to a request for a letter ruling dated September 27, 2011,
as supplemented by additional information dated January 4, 2012, from your
authorized representative, in which you request a waiver of the 60-day rollover
requirement contained in sections 402(c)(3) and 408(d)(3) of the Internal Revenue
Code ("Code"), regarding the distribution of Amount 1 from Plan B and Amount 6
from IRA E, respectively.

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

Taxpayer A represents that he took distributions of Amount 1 from Plan B and
Amount 6 from IRA E. The distribution of Amount 1 was subject to [illegible]
percent withholding for federal income tax (Amount 2) under section 3405(c) of the Code.
Coinciding with the distribution of Amount 6 from IRA E, Amount 7 was remitted to
the Internal Revenue Service (“Service”) to cover the withholding tax and penalties
owed on Amount 6. Taxpayer A asserts that his failure to accomplish a rollover
within the 60-day period prescribed by sections 402(c)(3)(A) and 408(d)(3)(A) of
the Code with respect to Amounts 2 and 7 that were withheld on distributions from
Plan B and IRA E, respectively, was the result of Taxpayer A not knowing how the
income tax withholding rules could affect the amount of the Plan B or IRA E
distributions that could be rolled over.

Taxpayer A participated in Plan B, a cash or deferred arrangement under section
401(k) of the Code, sponsored by his employer (Company C). Funds in Plan B
were held by Financial Institution D. In July of 20 , Taxpayer A was terminated
from his position with Company C. In order to cover his living expenses and
monthly alimony obligation, on August 1, 20 , Taxpayer A took a distribution of
Amount 1 from Plan B. From this distribution: 1) Amount 2 represents mandatory
withholding of [illegible] percent of the distribution which was paid to the Service; 2)
Amount 3 was used to pay off a loan owed to Plan B; 3) Amount 4 was paid to
Taxpayer A; and 4) on September 21, 20 , a portion of Amount 4 (i.e., Amount 5)
was deposited by Taxpayer A into IRA G with Financial Institution H.

In addition to participating in Plan B, Taxpayer A maintained IRA E with Financial
Institution F. Also for purposes of financial planning, on July 29, 20 , Taxpayer A
withdrew Amount 6 from IRA E. From this distribution: 1) Amount 7 represents
[illegible] percent withholding for federal income tax as elected by Taxpayer A; 2) Amount 8
was paid to Taxpayer A; and 3) on July 29, 20 , a portion of Amount 8 (i.e.,
Amount 9) was deposited by Taxpayer A into IRA G with Financial Institution H.
The total amount from the distributions of Amounts 1 and 6 deposited into IRA G
was Amount 10 (Amount 5 plus Amount 9).

Taxpayer A was eventually able to find new employment. At the time he took the
distributions from Plan B and IRA E, Taxpayer A was not fully aware of the tax
consequences which included a penalty (equal to [illegible] percent of Amount 6) for
premature distributions from an IRA under section 72(t) of the Code. The
distribution of Amount 1 from Plan B, however, was not subject to the [illegible] percent
penalty because it satisfied an exception to the application of Code section 72(t).
When Taxpayer A filed his Form 1040 Tax Return for 20 , it was anticipated he
would receive a refund of a significant percentage of the taxes withheld from both
the distribution of Amount 1 from Plan B pursuant to section 3405(c) of the Code
and the distribution of Amount 6 from IRA E pursuant to section 3405(b) of the
Code.

Based on the above facts and representations, you request that the Service waive
the 60-day rollover requirement contained in sections 402(c)(3) and 408(d)(3) of
the Code with respect to the full amount of the refund of income taxes withheld on
both the distribution from Plan B and the distribution from IRA E that Taxpayer A
anticipated receiving when he filed his tax return for 20 .

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 (IRA) constitutes one form of eligible retirement plan.

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 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).

Section 1.402(c)-2, Q&A-11, of the Income Tax Regulations (“Regulations”) allows
an employee to roll over an amount equal to the 20 percent withholding of federal
income taxes within the 60-day period if the employee has other funds to do the
rollover.

Specifically, the Regulation provides that:

if an eligible rollover distribution is paid to an employee, and the employee
contributes all or part of the eligible rollover distribution to an eligible retirement

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plan within 60 days, the amount contributed is not currently includible in gross
income, provided that it is contributed to the eligible retirement plan no later than
the 60th day following the day on which the employee received the distribution. If
more than one distribution is received by an employee from a qualified plan during
a taxable year, the 60-day rule applies separately to each distribution. Because the
amount withheld as income tax under section 3405(c) is considered an amount
distributed under section 402(c), an amount equal to all or any portion of the
amount withheld can be contributed as a rollover to an eligible retirement plan
within the 60-day period, in addition to the net amount of the eligible rollover
distribution actually received by the employee. However, if all or any portion of an
amount equal to the amount withheld is not contributed as a rollover, it is included
in the employee's gross income to the extent required under section 402(a), and
also may be subject to the 10-percent additional income tax under section 72(t).

Section 408(d)(1) of the Code provides that, except as otherwise provided in
section 408(d) of the Code, any amount paid or distributed out of an IRA shall be
included in gross income by the payee or distributee, as the case may be, in the
manner provided under section 72 of the Code.

Section 408(d)(3) of the Code provides the rules applicable to IRA rollovers.

Section 408(d)(3)(A) of the Code provides that section 408(d)(1) of the Code does
not apply to any amount paid or distributed out of an IRA to the individual for
whose benefit the IRA is maintained if -

(i) the entire amount received (including money and any other property) is
paid into an IRA for the benefit of such individual not later than the 60th day after
the day on which the individual receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is
paid into an eligible retirement plan (other than an IRA) for the benefit of such
individual not later than the 60th day after the date on which the payment or
distribution is received, except that the maximum amount which may be paid into
such plan may not exceed the portion of the amount received which is includible in
gross income (determined without regard to section 408(d)(3) of the Code).

Section 408(d)(3)(B) of the Code provides that section 408(d)(3) of the Code

does not apply to any amount described in section 408(d)(3)(A)(i) of the Code
received by an individual from an IRA if at any time during the 1-year period ending
on the day of such receipt such individual received any other amount described in
section 408(d)(3)(A)(i) of the Code from an IRA which was not includible in gross
income because of the application of section 408(d)(3) of

the Code.

Section 408(d)(3)(D) of the Code provides a similar 60-day rollover period for
partial rollovers.

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Section 408(d)(3)(E) of the Code provides that the rollover provisions of section
408(d) do not apply to any amount required to be distributed under section
408(a)(6).

Section 408(d)(3)(I) of the Code provides that the Secretary may waive the
60-day requirement under sections 408(d)(3)(A) and 408(d)(3)(D) 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
408(d)(3)(I) of the Code.

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 sections 402(c)(3)(B) and 408(d)(3)(I) 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 the documentation submitted in this case indicates
that Taxpayer A withdrew Amount 1 from Plan B and Amount 6 from IRA E with the
stated intent of covering his living and alimony expenses while he looked for new
employment. From the distributions of Amounts 1 and 6, Amounts 2 and 7,
respectively, were remitted to the Service for income tax withholding purposes.
Taxpayer A asserts that had he known how the income tax withholding rules can
affect the amount of the Plan B or IRA E distributions that can be rolled over, he
would have chosen to withhold less so that he could have transferred a greater
amount of the distributions to IRA G.

The Service has the authority to waive the 60-day rollover requirement for a
distribution from an IRA where the individual failed to complete a rollover to
another qualified plan or IRA within the 60-day rollover period but was prevented
from doing so because of one of the factors enumerated in Revenue Procedure
2003-16, for example errors committed by a financial institution, death,
hospitalization, postal error, incarceration, and/or disability. In this instance,
Taxpayer A has not presented any evidence to the Service as to how any of
the factors outlined in Rev. Proc. 2003-16 affected his ability to timely roll over an
amount equal to the Amount 2 withholdings on the Plan B distribution of Amount 1.

Twenty percent (Amount 2) of the distribution of Amount 1 from Plan B was subject
to mandatory income tax withholding. Section 1.402(c)-2, Q&A-11, of the
Regulations provides that an amount equal to all or any portion of the amount
withheld can be contributed as a rollover to an eligible retirement plan within the
60-day period, in addition to the net amount of the eligible rollover distribution
actually received by the employee. While Taxpayer A was permitted to use funds
equal to Amount 2 from other sources for deposit into IRA G during the 60-day
rollover period, he had no funds available from any source. The information
presented indicates that the failure to roll over funds equal to the amount withheld
(Amount 2) on the distribution of Amount 1 into another qualified plan or IRA within
the 60-day rollover period was because Taxpayer A had no other funds which
could be used for this purpose. Under these circumstances, the Service has no
authority to extend the 60-day rollover period contained in section 1.402(c)-2,
Q&A-11 of the Regulations, with respect to any refund of taxes withheld
mandatorily on the distribution of Amount 1 from Plan B.

Regarding the distribution of Amount 6 from IRA E, a portion (Amount 7) of this
distribution was remitted to the Service for income tax withholding purposes.

The portion remitted to the Service (Amount 7) equaled [illegible] percent of Amount 6. It
should be noted that Taxpayer A elected this withholding. Section 3405(b) of the
Code provides that nonperiodic distributions from IRAs are subject to [illegible] percent
withholding. However, a taxpayer may elect out of the [illegible] percent withholding
requirement. The information presented indicates that the failure to roll over funds
equal to the amount remitted to the Service (Amount 7) for income tax withholding
purposes (Amount 7) on the distribution of Amount 6 into another qualified plan or
IRA within the 60-day rollover period was, at all times, within the reasonable
control of Taxpayer A. Taxpayer A could have elected to roll over Amount 7,
instead of having it withheld and remitted to the Service, by checking the “Do not
withhold Federal income tax from my IRA distribution” box provided for on the
distribution form for IRA E.

Under the circumstances presented in this case, the Service hereby declines to
waive the 60-day rollover requirement contained in sections 402(c)(3) and
408(d)(3) of the Code with respect to the amount of the taxes withheld on
distributions from Plan B and IRA E.

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.

A copy of this letter ruling has been sent to your authorized representative
pursuant to a power of attorney on file in this office.

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CC:

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If you wish to inquire about this ruling, please contact (I.D. # ):
, at ( )

Sincerely yours,

Carlton A. Watkins

Manager
Employee Plans Technical Group 1