Unlike the baby boomer generation, most employees no longer stay with one employer for their entire career. Also, less and less employers are offering pensions—instead preferring 401k plans and other employee-directed retirement savings plans.
After leaving one job, an employee often wants to take their retirement funds with them to their new job or move the funds into an IRA (Individual Retirement Account). Many times, those distribution checks are issued to the employee in their name. The employee then has 60 days to deposit the check into the new retirement account. If the check is not deposited within 60 days, the employee would be subject to tax at their normal rate on the distribution plus a 10% early distribution penalty, if under 59 ½ years old.
Prior to August of this year, the only way to make a late rollover was via a PLR (Private Letter Ruling) which is quite expensive ($10,000 IRS fee) plus professional fees (upwards of another $10,000). The employee would also have to wait approximately six to nine months to receive notice of the ruling. If an employee did not seek out a PLR, the distribution was treated as a normal distribution subject to tax at the employee’s normal rate.
However, in August of 2016, the IRS relaxed rules related to late distributions. The new process for late distributions will be free of charge if one of 11 IRS-approved “excuses” is to blame for not completing a timely rollover. These 11 reasons are:
- Financial institution error
- Employee misplaced rollover check and it was never cashed
- Employee deposited distribution into an account thought to be a retirement account and it remained there until late rollover completed
- Employee’s principal residence was severely damaged
- There was a death in employee’s family
- Employee or one of employee’s family members was seriously ill
- Employee was incarcerated
- Restrictions were imposed upon employee by a foreign country
- A postal error occurred
- Employee’s distribution was made on account of an IRS levy and the proceeds of the levy have been returned
- Despite reasonable efforts to obtain information, the distributing company did not provide information required by the receiving company
If the employee meets one of these reasons for late distribution, the employee must still meet the following conditions for self-certification:
- There can be no prior denial by the IRS for a waiver
- The funds must be redeposited in an IRA account as soon as practicable “after the reason or reasons no longer prevent the taxpayer from making the contribution.” The “as soon as practicable” guideline has a 30 day safe-harbor window.
The best way to avoid a late distribution is to request that the distribution check be made out to the financial institution of the new plan or to have the distribution funds sent directly to the new plan without ever being in possession of the employee.
Please contact the tax team at Crosslin with any questions regarding the rollover of a retirement account or other tax matters. We appreciate your business.