Relief from Disqualification for Plans Accepting Rollovers

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-245562-96] RIN 1545-AU46

TITLE: Relief from Disqualification for Plans Accepting Rollovers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Proposed regulations; amendment.

SUMMARY: This document contains an amendment to the proposed
regulations that implements section 1509 of the Taxpayer Relief Act
of 1997 (TRA '97). The proposed regulations provide guidance on the
qualification of retirement plans which accept rollover
contributions from employees. This amendment to the proposed
regulations clarifies that it is not necessary for the distributing
plan to have a favorable IRS determination letter in order for the
receiving plan administrator to reach a reasonable conclusion that a
contribution is a valid rollover contribution. This amendment
applies to any qualified retirement plan receiving or distributing
eligible rollover distributions.

DATES: Written comments must be received by March 17, 1999.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-245562-96), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered Monday through Friday between the hours of 8 a.m. and 5
p.m. to CC:DOM:CORP:R (REG-245562-96), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Marjorie Hoffman, (202) 622-6030
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On September 22, 1995, Final Income Tax Regulations (TD 8619) under
sections 401(a)(31) and 402(c) were published in the Federal
Register (60 FR 49199).

The final regulations provide guidance for complying with the
Unemployment Compensation Amendments of 1992 (UCA). A proposed
amendment to the regulations under section 401(a)(31) was published
in the Federal Register on September 19, 1996 (REG-245562-96) (61 FR
49279).

UCA expanded the types of distributions from a qualified plan that
are eligible to be rolled over to an individual retirement account
or individual retirement annuity, or to another qualified plan that
accepts rollovers (collectively referred to as eligible retirement
plans). Such distributions are referred to as eligible rollover
distributions.

UCA also added a new qualification provision under section 401(a)
(31) that requires qualified plans to provide employees with a
direct rollover option. Under a direct rollover option, an employee
may elect to have an eligible rollover distribution paid directly to
an eligible retirement plan. The direct rollover option is provided
in addition to the pre-existing rollover provisions under section
402. Thus, an employee who receives an eligible rollover
distribution but who does not elect a direct rollover still has the
option to roll over the distribution to an eligible retirement plan
within 60 days of receipt.

The final regulations under section 401(a)(31) provide that a plan
that accepts a direct rollover from another plan will not fail to
satisfy section 401(a) or 403(a) merely because the plan making the
distribution is, in fact, not qualified under section 401(a) or
403(a) at the time of the distribution if, prior to accepting the
rollover, the receiving plan reasonably concluded that the
distributing plan was qualified under section 401(a) or 403(a). The
regulations provide, by way of example, that the receiving plan may
reasonably conclude that the distributing plan was qualified under
section 401(a) or 403(a) where, before the receiving plan accepted
the rollover, the plan administrator of the distributing plan
provided the receiving plan with a statement that the distributing
plan had received an IRS determination letter indicating that the
plan was qualified.

The relief provided in the 1996 proposed regulations under section
401(a)(31) would expand and clarify the guidance previously issued
in the Final Income Tax Regulations under sections 401(a)(31) and
402(c). First, the proposed regulations would clarify and expand the
relief from disqualification currently provided for plans that
accept direct rollovers. The protection would be expanded to be
available not only if the plan administrator reasonably concludes
the distributing plan is qualified under section 401(a) or 403(a)
(even if later it is determined that the distributing plan is not a
qualified plan), but also if the plan administrator reasonably
concludes that a distribution meets the other requirements to be an
eligible rollover distribution (but later it is determined that this
conclusion was incorrect). Second, the regulations would extend this
expanded relief from disqualification to plans that accept rollover
contributions other than direct rollover contributions.

The 1996 proposed regulations do not mandate any particular
documentation or procedures that a plan administrator must use in
order to reach a reasonable conclusion that a rollover is valid. The
1996 proposed regulations contain a series of examples to illustrate
the types of documentation and procedures that would be sufficient
to support this conclusion. In each example, the employee making the
rollover contribution provides the plan administrator with a letter
from the plan administrator of the distributing plan stating that
the distributing plan has received an IRS determination letter
indicating that the distributing plan is qualified under section
401(a). In response to concerns that the examples might be read to
imply that only a distribution from a plan with a favorable IRS
determination letter could support a reasonable conclusion that a
rollover was valid, section 1509 of TRA '97 directs the IRS to issue
guidance clarifying that it is not necessary for the distributing
plan to have a favorable IRS determination letter in order for the
plan administrator of the receiving plan to reasonably conclude that
a contribution is a valid rollover contribution.

Explanation of Provisions

This amendment to the 1996 proposed regulations is being issued in
response to the congressional directive in section 1509 of TRA '97
to clarify that it is not necessary for a distributing plan to have
a favorable IRS determination letter in order for the receiving plan
administrator to reasonably conclude that a contribution is a valid
rollover contribution. Accordingly, the proposed regulations have
been amended to provide explicitly that it is not necessary for the
distributing plan to have a favorable IRS determination letter in
order for the plan administrator of the receiving plan to reach a
reasonable conclusion that a contribution is a valid rollover
contribution. In addition, an example has been added in which an
employee does not provide a statement from the plan administrator of
the distributing plan that the distributing plan has received a
favorable IRS determination letter, but provides a statement from
the distributing plan administrator relating to the qualification of
the distributing plan. Of course, this example and the other
examples in the 1996 proposed regulations are not intended to
describe the only types of information that a plan administrator can
find to be sufficient and, thus, the examples are not intended to
preclude reliance on other types of information, such as opinions or
statements regarding the plan's qualification provided by
appropriate professionals expert in plan qualification requirements.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulation does not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed
original and eight (8) copies) or comments transmitted via Internet
that are submitted timely to the IRS. All comments will be available
for public inspection and copying.

A public hearing may be scheduled if requested in writing by a
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the hearing will
be published in the Federal Register.

Drafting Information

The principal author of these regulations is Pamela R. Kinard,
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS.

However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.401(a)(31)-1 as proposed on September 19, 1996, at
61 FR 49279, is amended as follows:

1. Under Q&A-14, paragraph (a) is amended by adding a sentence
immediately after the second sentence.

2. Under Q&A-14, paragraph (c) is amended by redesignating Example 2
and Example 3 as Example 3 and Example 4 respectively, and adding a
new Example 2.

The additions read as follows:

§1.401(a)(31)-1 Requirement to offer direct rollover of eligible
rollover distributions; questions and answers.

* * * * *

A-14: (a) Acceptance of Invalid Rollover Contribution. * * * While
evidence that the distributing plan is the subject of a
determination letter from the Commissioner indicating that the
distributing plan is qualified would be useful to the receiving plan
administrator in reasonably concluding that the contribution is a
valid rollover contribution, it is not necessary for the
distributing plan to have such a determination letter in order for
the receiving plan administrator to reach that conclusion. * * *

* * * * *

(c) Examples. * * *

Example 2. (a) The facts are the same as Example 1, except that,
instead of the letter provided in paragraph (c) of Example 1,
Employee A provides the plan administrator of Plan M with a letter
from the plan administrator of Plan O representing that Plan O
satisfies the requirements of section 401(a) (or representing that
Plan O is intended to satisfy the requirements of section 401(a) and
that the administrator of Plan O is not aware of any Plan O
provision or operation that would result in the disqualification of
Plan O).

(b) Based upon such a letter, absent facts to the contrary, a plan
administrator may reasonably conclude that Plan O is qualified and
that the amount paid as a direct rollover is an eligible rollover
distribution.

* * * * *

John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue

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