Insights

The IRS has made it a lot easier for retirement plan participants (and IRA owners) to avoid penalties when they botch a rollover. Although many plan sponsors encourage 401(k) plan participants to request a direct trustee-to-trustee transfer or direct rollover, participants sometimes get impatient and ask to have their account balances distributed directly to them (which is subject to a 20% mandatory tax withholding).

A participant has 60 days from the date he or she receives an IRA or retirement plan distribution to roll it over to another plan or IRA. Otherwise, the participant may have to pay a 10% tax penalty on top of being taxed on the distribution’s full amount.

Previously, account holders faced an arduous process to convince the IRS that they’d made an honest mistake. New IRS Revenue Procedure 2016-47 allows participants to “self-certify” valid reasons to the receiving financial institution. The guidance also furnishes a model letter for taxpayers and describes various scenarios in which participants can avoid the penalty, including the following:

• The financial institution receiving the contribution or making the distribution to which the contribution relates committed an error.
• The distribution was made in the form of a check, which the taxpayer misplaced and never cashed.
• The taxpayer deposited the distribution into an account that he or she mistakenly thought was an eligible retirement plan.
• The taxpayer’s principal residence was severely damaged.
• A member of the taxpayer’s family died, or the taxpayer or a member of the taxpayer’s family was seriously ill.
• The taxpayer was incarcerated.
• A foreign country imposed restrictions.
• The post office committed an error.
• The distribution was made because of a levy and the proceeds were returned to the taxpayer.

Finally, the taxpayer can certify that, despite his or her reasonable efforts to obtain the information, the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA needed to complete the rollover.

BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Employee Benefits team consists of professionals with extensive knowledge of ERISA guidelines and deep expertise performing employee benefit plan audits. We can help you craft a smooth-running plan that serves your employees while mitigating associated risk. For more information or for a free expert consultation, contact Jenise Gaskin at (925) 296-1016, Michelle Ausburn at (707) 524-6588, or visit us at www.bpmcpa.com/ebp.