Incorrect rollover instructions support waiver for withheld taxes

Plain-English summary

A former employee tried to roll her entire qualified-plan balance into a new employer's retirement plan by following the old plan administrator's online instructions. The administrator issued a check for the net amount after withholding federal and state taxes, and she timely deposited that check into the new plan. She did not notice that the withheld amount had not been rolled over until her father later reviewed Form 1099-R while preparing her tax return. The IRS treated the failure as resulting from incorrect financial institution advice, waived the 60-day deadline, and gave her 60 days to contribute up to the withheld amount to an eligible plan or rollover IRA.

Ruling snapshot

• Question: Could the taxpayer late-roll over taxes withheld from a qualified-plan distribution after relying on incorrect administrator instructions?
• Outcome: Approved
• Key authorities: IRC § 402(c)(3)(B); 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

JUN 18 2015

201537031

Uniform Issue List: 402.00-00

SE:TEP:RA:TJ

Legend:
Taxpayer A =
Company B =

Plan C =

Financial Institution D =
Company E =
Plan F =
Financial Institution G =
Amount 1 =
Amount 2 =

Amount 3 =

Dear

This letter is in response to your correspondence, dated April 8, 2015, in which
you request a waiver of the 60-day rollover requirement contained in section
402(c)(3)(B) of the Internal Revenue Code ("Code"), regarding the distribution
of Amount 3 from Plan C.

2
201537031

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 of Amount 3 from Plan C.
Taxpayers A asserts that her failure to accomplish a rollover of Amount 3, within
the 60-day period prescribed by section 402(c)(3) was due to incorrect advice
provided by Financial Institution D. Taxpayer A further represents that Amount 3
has not been used for any purpose.

Taxpayer A was employed by Company B and participated in its qualified
retirement plan (Plan C). The custodian and administrator of Plan C was
Financial Institution D. Taxpayer A resigned from Company B, on February 11,
2013, and went to work for Company E. After completing the service
requirement, Taxpayer A began participating In Company E’s retirement plan
(Plan F). In April, 2014, Taxpayer A decided to roll over her account balance
(Amount 1) in Plan C to Plan F. She discussed the intended transaction with a
representative of Financial Institution D who informed her she was required to
use online procedures. She asserts that she, to the best of her understanding
and ability, followed his instructions in performing the rollover online. She
received a check dated April 28, 2015, for Amount 2 (Amount 1 less federal and
states taxes of Amount 3). On May 5, 2014, she mailed the check for Amount 2
to Financial Institution G, the administrator of Plan F. Amount 2 was reflected as
a proper rollover contribution in Taxpayer A’s May 31, 2014 monthly statement
for Plan F.

Taxpayer A intended to roll over her full account balance (Amount 1) in Plan C.
She felt she would accomplish this if she followed the instructions provided by
the representative of Financial Institution D. Taxpayer A represents that she, in
good faith, relied on what he told her and assumed the full account balance
(Account 1) would be rolled over. However, she was distracted by the demands
of her new job and never noticed that federal and state taxes (Amount 3) had
been withheld from the check for Amount 2. The mistake was not discovered
until 2015, when Taxpayer A’s father, while preparing her 20__ tax returns,
determined from Form 1099-R that the federal and state taxes totaling Amount 3
had not been rolled over to Plan F.

Based on the above facts and representations, you request that the Internal
Revenue Service (“Service”) waive the 60-day rollover requirement contained in
section 402(c)(3)(A) 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

3
201537031

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)(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 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.

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 408(d)(3)(I) and 402(c)(3)(B) 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 by Taxpayer A
is consistent with her assertion that her failure to accomplish a timely rollover
of Amount 3 was due to their reliance on the incorrect advice by Financial
Institution D.

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 C. Taxpayer A is granted a period of 60 days from the issuance of
this letter ruling to contribute no more than Amount 3 into an eligible retirement
plan or 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,
the contribution 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
herein under the provisions of any other section of either the Code or regulations
which may be applicable thereto.

4
201537031

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.

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

); , at ( )

Sincerely yours,

Carlton A. Watkins

Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of this Letter
Notice of Intention to Disclose, Notice 437