Relief From Disqualification for
Plans Accepting Rollovers

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 31 [TD 8880] RIN 1545-
AU46

TITLE: Relief From Disqualification for Plans Accepting Rollovers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section
401(a)(31) of the Internal Revenue Code. These final regulations
provide specific rules that grant relief from disqualification to an
eligible retirement plan that inadvertently accepts an invalid
rollover contribution. The final regulations also clarify that it is
not necessary for a distributing plan to have a favorable IRS
determination letter in order for a plan administrator of a
receiving plan to reach a reasonable conclusion that a contribution
is a valid rollover contribution.

DATES: These regulations are effective on April 21, 2000.

FOR FURTHER INFORMATION CONTACT: Pamela R. Kinard, (202) 622-6030
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On September 22, 1995, the Treasury Department and the IRS published
in the Federal Register (60 FR 49199) Final Income Tax Regulations
(TD 8619) under sections 401(a)(31) and 402(c). The final
regulations provide guidance for complying with the Unemployment
Compensation Amendments of 1992 (UCA). A proposed amendment to the
regulations (REG-245562-96) under section 401(a)(31) was published
in the Federal Register (61 FR 49279) on September 19, 1996. The
1996 proposed regulations under sections 401(a)(31) and 402(c)
expand and clarify the guidance previously issued in the Final
Income Tax Regulations. On December 17, 1998, an amendment to the
proposed regulations (REG-245562-96) under section 401(a)(31) was
published in the Federal Register (63 FR 69584). This amendment to
the proposed regulations was issued in response to the congressional
directive in section 1509 of Taxpayer Relief Act of 1997 (TRA '97),
which directs the IRS to issue guidance clarifying that it is not
necessary for a distributing plan to have a favorable IRS
determination letter in order for a plan administrator of a
receiving plan to reasonably conclude that a contribution is a valid
rollover contribution. Written comments responding to the 1996
proposed regulations were received. There were no written comments
responding to the 1998 amendment to the proposed regulations. No
public hearing was requested or held. After consideration of the
comments, the amended proposed regulations under section 401(a)(31)
are adopted by this Treasury decision.

Explanation of Provisions and Summary of Comments

A. Relief From Disqualification The final regulations under section
401(a)(31) of the Internal Revenue Code provide that an eligible
retirement plan which 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 plan administrator of the receiving
plan reasonably concluded that the distributing plan was qualified
under section 401(a) or 403(a).

The proposed regulations clarify and expand upon this relief. Under
the proposed regulations, an eligible retirement plan that accepts
an invalid rollover contribution, whether as a direct rollover or as
a rollover contribution other than a direct rollover, will be
treated, for purposes of section 401(a) or 403(a), as accepting a
valid rollover contribution, if the plan administrator of the
receiving plan satisfies two conditions. First, when accepting the
rollover contribution, the plan administrator of the receiving plan
must reasonably conclude that the rollover contribution is a valid
rollover contribution. Second, if the plan administrator of the
receiving plan later determines that the rollover contribution was
an invalid rollover contribution, the plan must distribute the
amount of the invalid rollover contribution, plus earnings
attributable thereto, to the employee within a reasonable period of
time.

B. Documentation Offered as Evidence to Support a Reasonable
Conclusion 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
contribution is a valid rollover contribution. The 1996 proposed
regulations contain a series of examples to illustrate the types of
documentation and procedures that would be sufficient to support a
reasonable conclusion. In each example, the employee making the
rollover contribution provides the plan administrator of the
receiving plan 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).

Several commentators stated that the examples in the 1996 proposed
regulations appear to imply that the acknowledgment of the receipt
of a favorable IRS determination letter by a distributing plan is a
prerequisite to a plan administrator of a receiving plan reaching a
reasonable conclusion that a rollover contribution is a valid
rollover contribution. Commentators argued that the public policy
goal of pension portability would be impeded if an eligible
retirement plan is subject to complex administrative procedures when
accepting rollover contributions. These concerns were addressed in
the 1998 amendment to the proposed regulations implementing the
congressional directive in section 1509 of TRA '97. That amendment
clarifies that it is not necessary for a distributing plan to have a
favorable IRS determination letter in order for a plan administrator
of a receiving plan to reach a reasonable conclusion that a
contribution is a valid rollover contribution. In addition, an
example was added to the proposed regulations in which an employee
does not provide a statement from the distributing plan
administrator that the distributing plan has received a favorable
IRS determination letter, but instead the employee provides a
statement from the distributing plan administrator relating to the
qualification of the distributing plan. In the preamble to the 1998
amendment to the proposed regulations, it is stressed that none of
the examples in the proposed regulations are intended to describe
the only types of information that a plan administrator can find to
be sufficient and 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 with expertise in plan qualification requirements.

C. Miscellaneous Comments

One commentator stated that both Examples 1 and 3 in the proposed
regulations, which provide that Employee A will not have attained
age 70 1/2 by the end of the year in which the rollover contribution
will occur, imply that if an employee were age 70 1/2 or older, a
rollover option would be unavailable. This implication was not
intended. The fact was included merely to illustrate the more common
scenario of an employee who is under age 70 1/2 and rolls over a
retirement plan distribution. Some commentators proposed that
guidance is needed regarding the procedures for correcting invalid
rollover contributions. One commentator suggested that relief,
similar to that provided to plans receiving invalid rollover
contributions, should also be afforded to plans receiving assets and
liability transfers in the event that a transferor's plan does not
satisfy the qualification requirements under the Code. These
comments will be taken into account in developing future guidance
priorities.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 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 these regulations do not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations
was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.

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

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements. Adoption
of Amendments to the Regulations.

Accordingly, 26 CFR parts 1 and 31 are 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 is amended as follows:

1. Under the heading "List of Questions," redesignating Q-14 through
Q-18 as Q-15 through Q-19, respectively, and adding new Q-14.

2. Under the heading "Questions and Answers," removing the paragraph
designation (a) and the paragraph heading, and removing paragraph
(b) from A-13.

3. Under the heading "Questions and Answers," redesignating Q&A-14
through Q&A-18 as Q&A-15 through Q&A-19, respectively, and adding
new Q&A-14.

4. Under the heading "Questions and Answers," removing the language
"Q&A-15" in the fourth sentence of the newly designated A-16 and
adding "Q&A-16" in its place.

5. Under the heading "Questions and Answers," removing the language
"Q&A-17" in the first sentence of the newly designated A-18 and
adding "Q&A-18" in its place.

The additions read as follows:

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

* * * * *

List of Questions

* * * * *

Q-14. If a plan accepts an invalid rollover contribution, whether or
not as a direct rollover, how will the contribution be treated for
purposes of applying the qualification requirements of section
401(a) or 403(a) to the plan?

* * * * *

Questions and Answers

* * * * *

Q-14. If a plan accepts an invalid rollover contribution, whether or
not as a direct rollover, how will the contribution be treated for
purposes of applying the qualification requirements of section
401(a) or 403(a) to the plan?

A-14. (a) Acceptance of invalid rollover contribution. If a plan
accepts an invalid rollover contribution, the contribution will be
treated, for purposes of applying the qualification requirements of
section 401(a) or 403(a) to the receiving plan, as if it were a
valid rollover contribution, if the following two conditions are
satisfied. First, when accepting the amount from the employee as a
rollover contribution, the plan administrator of the receiving plan
reasonably concludes that the contribution is a valid 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.
Second, if the plan administrator of the receiving plan later
determines that the contribution was an invalid rollover
contribution, the amount of the invalid rollover contribution, plus
any earnings attributable thereto, is distributed to the employee
within a reasonable time after such determination.

(b) Definitions. For purposes of this Q&A-14:

(1) An invalid rollover contribution is an amount that is accepted
by a plan as a rollover within the meaning of �1.402(c)-2, Q&A-1 (or
as a rollover contribution within the meaning of section 408(d)(3)
(A)(ii)) but that is not an eligible rollover distribution from a
qualified plan (or an amount described in section 408(d)(3)(A)(ii))
or that does not satisfy the other requirements of section 401(a)
(31), 402(c), or 408(d)(3) for treatment as a rollover or a rollover
contribution.

(2) A valid rollover contribution is a contribution that is accepted
by a plan as a rollover within the meaning of �1.402(c)-2, Q&A-1 or
as a rollover contribution within the meaning of section 408(d)(3)
and that satisfies the requirements of section 401(a)(31), 402(c),
or 408(d)(3) for treatment as a rollover or a rollover contribution.
(c) Examples. The provisions of paragraph (a) of this Q&A-14 are
illustrated by the following examples:

Example 1. (i) Employer X maintains for its employees Plan M, a
profit sharing plan qualified under section 401(a). Plan M provides
that any employee of Employer X may make a rollover contribution to
Plan M. Employee A is an employee of Employer X, will not have
attained age 70 1/2 by the end of the year, and has a vested account
balance in Plan O (a plan maintained by Employee A's prior
employer).

Employee A elects a single sum distribution from Plan O and elects
that it be paid to Plan M in a direct rollover.

(ii) Employee A provides the plan administrator of Plan M with a
letter from the plan administrator of Plan O stating that Plan O has
received a determination letter from the Commissioner indicating
that Plan O is qualified.

(iii) 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.

Example 2. (i) The facts are the same as Example 1, except that,
instead of the letter provided in paragraph (ii) 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).

(ii) 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. Example 3. (i) Same facts as Example 1, except that
Employee A elects to receive the distribution from Plan O and wishes
to make a rollover contribution described in section 402 rather than
a direct rollover.

(ii) When making the rollover contribution, Employee A certifies
that, to the best of Employee A's knowledge, Employee A is entitled
to the distribution as an employee and not as a beneficiary, the
distribution from Plan O to be contributed to Plan M is not one of a
series of periodic payments, the distribution from Plan O was
received by Employee A not more than 60 days before the date of the
rollover contribution, and the entire amount of the rollover
contribution would be includible in gross income if it were not
being rolled over.

(iii) As support for these certifications, Employee A provides the
plan administrator of Plan M with two statements from Plan O. The
first is a letter from the plan administrator of Plan O, as
described in Example 1, stating that Plan O has received a
determination letter from the Commissioner indicating that Plan O is
qualified. The second is the distribution statement that accompanied
the distribution check. The distribution statement indicates that
the distribution is being made by Plan O to Employee A, indicates
the gross amount of the distribution, and indicates the amount
withheld as Federal income tax. The amount withheld as Federal
income tax is 20 percent of the gross amount of the distribution.
Employee A contributes to Plan M an amount not greater than the
gross amount of the distribution stated in the letter from Plan O
and the contribution is made within 60 days of the date of the
distribution statement from Plan O.

(iv) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the
distribution otherwise satisfies the requirements of section 402(c)
for treatment as a rollover contribution. Example 4. (i) The facts
are the same as in Example 3, except that, rather than contributing
the distribution from Plan O to Plan M, Employee A contributes the
distribution from Plan O to IRA P, an individual retirement account
described in section 408(a). After the contribution of the
distribution from Plan O to IRA P, but before the year in which
Employee A attains age 70 1/2, Employee A requests a distribution
from IRA P and decides to contribute it to Plan M as a rollover
contribution. To make the rollover contribution, Employee A endorses
the check received from IRA P as payable to Plan M.

(ii) In addition to providing the certifications described in
Example 3 with respect to the distribution from Plan O, Employee A
certifies that, to the best of Employee A's knowledge, the
contribution to IRA P was not made more than 60 days after the date
Employee A received the distribution from Plan O, no amount other
than the distribution from Plan O has been contributed to IRA P, and
the distribution from IRA P was received not more than 60 days
earlier than the rollover contribution to Plan M.

(iii) As support for these certifications, in addition to the two
statements from Plan O described in Example 3, Employee A provides
copies of statements from IRA P. The statements indicate that the
account is identified as an IRA, the account was established within
60 days of the date of the letter from Plan O informing Employee A
that an amount had been distributed, and the opening balance in the
IRA does not exceed the amount of the distribution described in the
letter from Plan O. There is no indication in the statements that
any additional contributions have been made to IRA P since the
account was opened. The date on the check from IRA P is less than 60
days before the date that Employee A makes the contribution to Plan
M.

(iv) Based on the certifications and documentation provided by
Employee A, absent facts to the contrary, a plan administrator may
reasonably conclude that Plan O is qualified and that the
contribution by Employee A is a rollover contribution described in
section 408(d)(3)(A)(ii) that satisfies the other requirements of
section 408(d)(3) for treatment as a rollover contribution.

* * * * *

Par. 3. Section 1.402(c)-2 is amended as follows: 1. Section
1.402(c)-2 is amended by adding a sentence to the end of A-11.

2. Under the heading "List of Questions," removing the language
"�1.401(a)(31)-1, Q&A-17" in Q-15 and adding "�1.401(a)(31)-1,
Q&A-18" in its place.

3. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-15" in the third sentence of A-9(a) and adding
"�1.401(a)(31)-1, Q&A-16" in its place.

4. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-15" in the introductory text of A-9(c) and
adding "�1.401(a)(31)-1, Q&A-16" in its place.

5. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-15" in the last sentence of Example 1(b) of
A-9(c) and adding "�1.401(a)(31)-1, Q&A-16" in its place.

6. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-16" in the last sentence of A-10(b) and adding
"�1.401(a)(31)-1, Q&A-17" in its place. 

7. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-17" in the last sentence of A-14 and adding
"�1.401(a)(31)-1, Q&A-18" in its place.

8. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-17" in Q-15 and adding "�1.401(a)(31)-1,
Q&A-18" in its place.

9. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-17" in the third sentence of A-15 and adding
"�1.401(a)(31)-1, Q&A-18" in its place. The addition reads as
follows: �1.402(c)-2 Eligible rollover distributions; questions and
answers.

* * * * *

A-11. * * * See �1.401(a)(31)-1, Q&A-14, for guidance concerning the
qualification of a plan that accepts a rollover contribution.

* * * * *

�1.403(b)-2 [Amended ] Par. 4. Section 1.403(b)-2 is amended as
follows:

1. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-14" in the next to last sentence of A-2(a) and
adding "�1.401(a)(31)-1, Q&A-15" in its place.

2. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-18" in the second sentence of A-4(a)(1) and
adding "�1.401(a)(31)-1, Q&A-19" in its place.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Par. 5. The authority citation for part 31 continues to read in part
as follows: Authority: 26 U.S.C. 7805 * * *

�31.3405(c)-1 [Amended ] Par. 6. Section 31.3405(c)-1 is amended as
follows:

1. Under the heading "Questions and Answers," removing the language
"Q&A-17 of �1.401(a)(31)-1" in the next to last sentence of A-10(a)
and adding "Section

1.401(a)(31)-1, Q&A-18" in its place.

2. Under the heading "Questions and Answers," removing the language
"�1.401(a)(31)-1, Q&A-16" in the third sentence of A-13 and adding
"�1.401(a)(31)-1, Q&A-17" in its place.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue.
Approved: 4/16/00
Jonathan Talisman
Acting Assistant Secretary of the Treasury (Tax Policy)

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