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Tuesday, November 4, 2014

Tax Law: IRA Rollover Final Regulations on Eligible Rollover Distributions

By Martin A. Spigner, Esq. and Kenneth Vercammen, Esq.
The Unemployment Compensation Amendments of 1992 (UCA) provided for significant changes to the treatment of distributions from qualified plan and Code section 403 (b) annuities. The new law requires an employer to withhold 20 percent of any lump-sum distribution unless the entire amount that would ordinarily be included in gross income is directly transferred to another qualified plan or an IRA (referred to as a "trustee to trustee" transfer).
In accordance with IRC section 401 (a) (31), a qualified plan must contain provisions which allow plan participants to elect to have an eligible rollover distribution directly transferred (i.e. trustee to trustee) to another qualified plan that accepts such distributions, or to an IRA.
This provisions applies to distributions made after December 31, 1992. In conjunction with this requirement, IRC section 402 (f) requires a written explanation before receiving distributions eligible for rollover treatment. This explanation and/or notification must be provided within a "reasonable time period," in order for the election to be valid. Revenue Procedure 93-12 outlines the qualification requirements of section 401 (a) (31), which were added to the Code by UCA 92.
Previously, the Service provided guidance under UCA 92 by issuing proposed and temporary regulations under Notices 92-48, 93-3 and 93-26. The notices solicited public comments concerning the guidance. After consideration of all the comments, the temporary and proposed regulations were replaced by final regulations, which were adopted and issued on September 15, 1995.
The following is a brief outline of some of the key areas that are addressed:
I. Final Regulations Under IRC Section 401 (a) (31)
A. Distributing Plan:
1. Any "eligible retirement plan," as defined in IRC section 402 (c) (8) (B). 2. May require a statement from recipient plan stating that the 3. rollover will be accepted and that the recipient plan is an "eligible retirement plan." 4. Direct rollover requirements with outstanding plan loans.
B. Receiving Plan:
1. Eligible retirement plan not required to receive direct rollover distributions. 2. Eligible retirement plan may limit circumstances under which it will accept direct rollovers.
II. Final Regulations Under IRC section 401 (c)
A. Assets not eligible for Rollover Distribution:
1. IRC section 401 (a) (9) minimum distributions. 2. Portion not includible in gross income. 3. Loans deemed as distributions under IRC section 72(p). 4. IRC section 401 (k) corrective distributions.

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