60-Day Waiver from IRS Can Save a Rollover
broker/dealer and agent use only
When you have indirect rollover, the company sends a check to the participant (and, if it’s from a QP, taxes are withheld). The participant has 60 days from receipt of the funds to roll it into an IRA or the distribution (including any withheld taxes) will be taxed and subject to the 10% penalty.
Sometimes the 60-day deadline is harsh. Participants can miss it due to errors of the financial company (remember my story of the brokerage firm clerk who dropped my rollover into a cabinet and forgot about it?) or extenuating circumstances like illness, natural disaster, ect.
The IRS and Congress agreed to cut some slack. Last years Rev. Proc. 2003-16 allowed the IRS to waive the 60-day deadline in circumstances where failure to waive “would be against equity or good conscience, including casualty, disaster or other events beyond reasonable control” of the participant. The funds must still be transferred into the IRA to avoid tax on the distribution, but the IRS will allow it to happen after 60 days.
The Procedure said that you can get automatic waiver of the 60 day rollover (no PLR needed) if the delay was the fault of the financial institution. The client must make the deposit to the financial institution within 60 days and do everything else required to complete a rollover (e.g., fill out the correct IRA application). If the financial goofs and doesn’t deposit into an IRA within the 60 days, the waiver will save the rollover provided that the situation is corrected within a year.
If failure to meet the 60-day deadline was the client’s fault, the client must get the IRS to grant the waiver through a PLR. Relying on another person’s PLR won’t do, even if the situations are identical. The IRS gave these examples of rollovers which might be saved by the 60-day waiver: “inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error.” The IRS will also consider whether the participant cashed the check (did they used funds during the delay?) and how long they took to finish the rollover.
The IRS has published numerous PLRs granting the 60-day waiver. Even though they are not precedent for anyone else to rely on, they show what the IRS thinks is a reasonable excuse for failing to meet the 60-day deadline. The PLRs published so far grant waivers in situations where:
? The client didn’t understand that the funds were from an IRA and so didn’t roll over in time
? Health or mental problems interfered with the client’s understanding or ability to complete the rollover in time
? The client’s financial planner or financial institution erred
There are costs involved in getting a PLR, from the filing fee to the attorney fees. It won’t be cheap.
Moral of the story: to avoid the 60-day program and to avoid the liquidity crunch of withheld taxes, do direct rollovers. Qualified plans must allow direct rollovers.
This material reflects Integrity Life Insurance Company’s understanding of the current federal tax laws and contains information of a general nature. The information provided is not intended to be legal or tax advice. Integrity suggests you or your clients consult a tax advisor or attorney as the applicability of this material or a specific situation.
For more detail on Integrity Life Annuities please contract the Integrity Life Sales desk at 800-900-6460 to obtain a prospectus. Products are issued by integrity Life Insurance Company, Cincinnati, Ohio. Products sold in New York, Vermont and New Hampshire are issued by National Integrity Life Insurance Company, Goshen, NY. All products distributed by Touchstone Securities, Inc. Cincinnati, OH member NASD/SIPC.
By: Margaret A. Kruse, Product Tax Counsel, The Integrity Companies.
Last Updated: 3/11/2005 4:40:00 PM