Missing rollover notice supports waiver for taxable plan amount

Plain-English summary

A retiree received a lump-sum distribution containing both after-tax and taxable plan amounts. She intended to roll over the taxable portion but miscalculated it because the plan did not provide the rollover notice required by IRC § 402(f). After receiving a later statement, she learned that an additional amount should have been rolled over. The IRS waived the 60-day deadline and gave her 60 days to contribute the missed amount to an IRA.

Ruling snapshot

• Question: May the retiree receive a waiver for the taxable amount she failed to roll over after the plan omitted its required notice?
• Outcome: Approved, with 60 days from the ruling letter to contribute the additional amount to an IRA
• Key authorities: IRC §§ 401(a)(31), 402(c) and (f); Treas. Reg. §§ 1.401(a)(31)-1 and 1.402(f)-1; Notice 2009-68; 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

201446032

AUG 19 2014

SE:T:EP:RA:T1

Uniform Issue List: 402.08-00

Legend:

Taxpayer A =
Employer B =
Plan X =
Amount 1 =
Amount 2 =
Amount 3 =
Amount 4 =
Amount 5 =

Dear :

This is in response to your request dated April 10, 2014, as supplemented by
correspondence dated June 9, 2014, from your authorized representative, in which you

Page 2

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 penalties of
perjury in support of the ruling requested.

Taxpayer A represents that she received a distribution from Plan X totaling
Amount 1. Taxpayer A represents that she timely rolled over Amount 2 from the
distribution, but could have rolled over Amount 3 in addition to Amount 2. 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 Plan X’s failure to provide the
required rollover notice under section 402(f) (“402(f) notice”). Taxpayer A asserts that
since she did not have the 402(f) notice information, she miscalculated the taxable
portion of Amount 1 and therefore failed to roll over Amount 3. Taxpayer A further
represents that Amount 3 has not been used for other purposes.

Taxpayer A represents that she retired from employment with Employer B at the
end of February 2013, with a monthly annuity under Plan X. Taxpayer A elected the
option to be paid a one-third lump sum distribution of her Plan X retirement benefit, and
on July 17, 2013, received Amount 1 as the one-third lump sum. Taxpayer A submitted,
as part of her ruling request, a Plan X publication that describes the plan and its
retirement benefit provisions. The publication states that Plan X is a qualified plan
under section 401(a) of the Code. Taxpayer A represents that she did not receive a
written notice to recipients of distributions eligible for rollover treatment, as required
under section 402(f) of the Code.

Taxpayer A represents that her Plan X benefit included both her own and
Employer B’s contributions and thus included some after-tax contributions. Taxpayer A
intended to make a rollover contribution of the taxable portion of Amount 1. Taxpayer A
received a letter dated July 16, 2013, from Plan X informing her that her own
contributions to Plan X amounted to Amount 4. Taxpayer A subtracted Amount 4 from
Amount 1 to determine what she thought was the taxable portion of the distribution.
She represents that she rolled over a total of Amount 2 to two separate Individual
Retirement Accounts (“IRAs”) within the 60-day rollover period.

On February 3, 2014, Taxpayer A received a “2013 Statement of Taxable
Earnings” listing Amount 5 (the sum of Amount 2 and Amount 3) as the taxable portion
of her distribution. Taxpayer A contacted Plan X and learned that her calculation of the
taxable portion of the distribution had been in error and that she had not rolled over all
of the taxable portion of the Amount 1 as she had intended.

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.

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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 means
any distribution to an employee of all or any portion of the balance to the credit of the
employee in a qualified trust, but shall not include: any distribution which is one of a
series of substantially equal payments (not less frequently than annually) based on the
life or life expectancy of the employee or the joint lives or life expectancies of the
employee and beneficiary, or for a specified period of 10 years or more; a distribution
required under section 401(a)(9) of the Code; or a hardship distribution.

Section 402(c)(2) of the Code provides that, in the case of any eligible rollover
distribution, the amount transferred may include the portion of such a distribution which
is not includible in gross income (determined without regard to a rollover under section
402(c)(1)) to the extent:

(A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified
trust or to an annuity contract described in section 403(b) of the Code and such trust or
contract provides for separate accounting for amounts so transferred (and earnings
thereon), including separately accounting for the portion of such distribution which is
includible in gross income and the portion of such distribution which is not so includible,
or

(B) such portion is transferred to an eligible retirement plan described in clause (i) or
(ii) of section 402(c)(8)(B), which includes an IRA.

In the case of a transfer described in section 402(c)(2)(A) or (B), the amount transferred
shall be treated as consisting first of the portion of such distribution that is includible in
gross income (determined without regard to section 402(c)(1)).

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 402(f) of the Code provides for a written explanation to recipients of
distributions eligible for rollover treatment. Section 402(f)(1) provides, in pertinent part,
that the plan administrator of any plan shall, within a reasonable period of time before
making an eligible rollover distribution, provide a written explanation to the recipient of

Page 4 201446032

the provisions under which the recipient may have the distribution directly transferred to
an eligible retirement plan and of the provisions under which the distribution will not be
subject to tax if transferred to an eligible retirement plan within 60 days after the date on
which the recipient received the distribution.

Section 1.402(f)-1, Q&A-1 of the Regulations provides, in part, that the section
402(f) notice must explain the rules under which the distributee may elect that the
distribution be paid in the form of a direct rollover to an eligible retirement plan; the rules
that require the withholding of tax on the distribution if it is not paid in a direct rollover;
the rules under which the distributee may defer tax on the distribution if it is contributed
in a rollover to an eligible retirement plan within 60 days of the distribution; and if
applicable, certain special rules regarding the taxation of the distribution as described in
section 402(d) (averaging with respect to lump sum distributions) and (e) (other rules
including treatment of net unrealized appreciation).

Notice 2009-68, 2009-39 I.R.B. 423 (September 5, 2009) provided a safe harbor
402(f) notice which, in part, would notify employees about allocating after-tax
contributions in the event of a partial distribution.

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).

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 are
consistent with her assertion that her failure to accomplish a timely rollover was caused
by Plan X’s failure to provide notice as required by section 402(f) of the Code.
Taxpayer A represents that she intended to roll over only a portion of the eligible
rollover distribution to an IRA as allowed under section 402(c)(4) of the Code, and that
the amount intended to be rolled over was the taxable portion of the distribution. Under
section 402(c)(2), such a partial rollover is treated as consisting first of the portion of
such distribution that is includible in gross income. Taxpayer A asserts that the taxable
amount was Amount 5 (the sum of Amount 2 and Amount 3), but she did not roll over
Amount 3 because Plan X did not issue her a 402(f) notice alerting her to the method for
determining the taxable portion of Amount 1 during the 60-day rollover period. As a

Page 5 201446032

result, she miscalculated the taxable portion and failed to roll over the full taxable
amount as she intended.

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 an 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,
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 representative.

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: