Taxpayer receives 60 days to roll over tax withheld from a plan distribution

Plain-English summary

An alternate payee received a retirement-plan distribution under a qualified domestic relations order. She timely rolled over the 80 percent paid by check, but she did not replace and roll over the 20 percent withheld for federal income tax. She had not elected a direct rollover because severe physical and mental conditions impaired her ability to manage financial matters and respond to the plan's notices. The IRS found that those conditions were the main cause of the missed rollover for the withheld amount. It waived the 60-day deadline and granted another 60 days to contribute that amount to an IRA or another qualified plan.

Ruling snapshot

• Question: May the taxpayer receive a waiver of the 60-day rollover deadline for the portion of a plan distribution withheld for federal income tax?
• Outcome: Approved
• Key authorities: IRC §§ 401(a)(31), 402(c)(3), and 3405(c); Rev. Proc. 2003-16

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

201442070

JUL 21 2014

SE:T:EP:RA:T1

Uniform Issue List: 402.08-00

Legend:

Taxpayer A =
Individual B =
Plan X =
Amount 1 =
Amount 2 =
Amount 3 =
Company C =
Financial Advisor D =
Law Firm E =
Company F =

Dear

Page 2 201442070

This is in response to your request dated November 18, 2013, as supplemented
by correspondence dated December 13, April 29, and May 21, 2013, from 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 (the “Code”).

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

Taxpayer A represents that she, as an alternate payee, received a distribution
from Plan X totaling Amount 1. Taxpayer A represents that she timely rolled over
Amount 2, 80% of Amount 1, but did not roll over Amount 3, 20% of Amount 1, which
was withheld for federal income tax. Taxpayer A asserts that her failure to accomplish a
rollover of Amount 3 within the 60-day period prescribed by section 402(c)(3) of the
Code, was due to Taxpayer A’s lack of funds and Taxpayer A’s physical and mental
condition, which impaired her ability to handle financial matters. Taxpayer A further
represents that Amount 3 has been withheld for federal income tax purposes.

Taxpayer A represents that, pursuant to a Qualified Domestic Relations Order
(“QDRO”) under the Retirement Equity Act, she was an alternate payee assigned
monies from her ex-spouse Individual B’s account in Plan X. Prior to the Plan X
distribution, Taxpayer A received two letters from Company C addressing Plan X’s pre-
distribution 60-day direct rollover election period and withholding on distributions.

Taxpayer A received a letter dated April 15, 2013, from Company C providing her
60 days (until June 14, 2013) to make and submit an affirmative distribution election
with respect to her QDRO monies in Plan X. The letter and distribution election form
allowed Taxpayer A to elect a lump sum distribution, or a direct rollover into a qualified
individual retirement account (“IRA”) or tax-qualified plan. The letter explained that an
automatic lump sum distribution with 20 percent withholding would be made if she failed
to return the election form by the due date. The letter included a tax information
document entitled “Your Rollover Options,” which explained that if a direct rollover is not
done, an indirect rollover of the full distribution can be done within 60 days after receipt
of the payment. The document further noted that in an indirect rollover, due to the 20%
withholding requirements, an individual wishing to roll over the full amount must use
other funds to make up for the amount withheld. Taxpayer A represents that she failed
to open the letter and failed to return the election form due to her documented severe
physical and mental condition which impaired her ability to manage her financial affairs.

Taxpayer A received a second letter from Company C sent on June 18, 2013,
notifying her that the automatic Plan X distribution would be made. Although Taxpayer
A opened this letter, Taxpayer A represents that she failed to understand the
significance of its contents due to her worsening physical and mental condition.

Taxpayer A then received the July 2, 2013, distribution of Amount 1 from Plan X.
A portion of the distribution was paid to her in the form of a distribution check dated July
2, 2013, in the amount of Amount 2. Amount 3 was withheld for federal income taxes.

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Taxpayer A’s father helped Taxpayer A hire a financial planning firm, Financial Advisor
D, to address what to do with the distribution check. On August 7, 2013, Taxpayer A
and her father met with Financial Advisor D and left the check and the letters from
Company C for review by Financial Advisor D. On August 22, 2013, after reviewing the
check and letters, Financial Advisor D explained to Taxpayer A that Company C’s
letters included information about the June 14, 2013, election deadline and that since
Taxpayer A did not respond by the deadline, she received the automatic distribution
with 20% withholding.

To address the situation, Taxpayer A completed an IRA account application at
Financial Advisor D to open a traditional Rollover IRA with Company F and gave her
consent for Financial Advisor D to contact an attorney on her behalf. On August 23,
2013, Taxpayer A retained the services of Law Firm E, to assist her with filing her
request for a private letter ruling at the suggestion of Financial Advisor D.

Taxpayer A represents that, on August 29, 2013, Financial Advisor D cashed the
July 2, 2013, distribution check for Amount 2 and, within the 60-day rollover period,
deposited it into Taxpayer A’s new IRA. Taxpayer A did not deposit Amount 3 into the
IRA because she did not have access to funds to replace the withheld amounts.
Taxpayer A represents that she now has Amount 3 available to deposit into an IRA.

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

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) states that such rollover must be
accomplished within 60 days following the day on which the distributee received the
property. An IRA 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) 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).

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Section 3405(c) of the Code provides that the payor of an eligible rollover
distribution shall withhold from the distribution an amount equal to 20 percent of the
distribution unless the distributee elects under section 401(a)(31)(A) to have the
distribution paid directly to an eligible retirement plan.

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

Section 1.401(a)(31)-1, Q&A-15 of the Income Tax Regulations (“Regulations”),
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.

Section 1.402(c)-2, Q&A-12 of the Regulations provides that the eligible rollover
distribution rules apply to distributions to a spousal distributee (such as a former spouse
who is an alternate payee under a qualified domestic relations order).

Section 1.402(c)-2, Q&A-11 of the Regulations provides that because the amount
withheld as income tax under section 3405(c) of the Code is considered an amount
distributed under section 402(c) of the Code, 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. 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) 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
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.

Taxpayer A asserts that she did not roll over Amount 3 because she did not have
the funds available during the 60-day rollover period. However, Taxpayer A also
asserts that, although she was able to roll over Amount 2 within the 60-day rollover
period, her severe mental and physical condition prevented her from electing a direct
rollover prior to the 60-day rollover period. Taxpayer A asserts that, but for her severe
mental and physical condition, she would have made a direct rollover and would have
had the funds available to rollover.

The information presented and documentation submitted by Taxpayer A is
consistent with her assertion that her failure to accomplish a timely rollover of Amount 3

Page 5 201442070

was mainly due to her severe mental and physical condition which prevented her from
returning her withholding election form.

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 3 from
Plan X. Taxpayer A is granted a period of 60 days from the issuance of this ruling letter
to contribute Amount 3 into a IRA/another qualified plan. Provided all other
requirements of section 402(c)(3) of the Code, except the 60-day requirement, are met
with respect to such contribution, the contribution of Amount 3 will be considered a
rollover contribution within the meaning of section 402(c)(3) of the Code.

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

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

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.

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

If you wish to inquire about this ruling, please contact (ID
) at ( ) - . Please address all correspondence to
SE:T:EP:RA:T1.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose

cc: