IRS Issues 2018 Indexed Amounts for HSAs

Posted by James M. Carlson
Apr 16 2017

IRS Issues 2018 Indexed Amounts for HSAs

The HSA contribution limits for 2018 are $50 higher for single HDHP coverage and $150 for family HDHP coverage. The Treasury Department and Internal Revenue Service issued new guidance on the maximum contribution levels for High Deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. The 2018 limits are set forth in Revenue Procedure 2017-37.

 

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Understanding What Forms Are Needed to Establish a SIMPLE IRA Plan And a SIMPLE IRA

Posted by James M. Carlson
Mar 06 2017

Understanding What Forms Are Needed to Establish a

SIMPLE IRA Plan And a SIMPLE IRA

In order to establish its SIMPLE IRA plan, a sponsoring employer must execute either the IRS Model Form 5304-SIMPLE or the Form 5305-SIMPLE.

Each eligible employee must establish his/her own SIMPLE IRA to receive elective deferrals and the employer’s matching or non-elective contribution. The IRS has two model forms for this - a Form 5305-S (trust) and a Form 5305-SA (custodial).

CWF Form 941 uses/incorporates Form 5305-S. CWF Forms 940 and 942 use/incorporates the custodial version, Form 5305-SA.

These two forms do not discuss or reference what form the employer completed in order to establish its SIMPLE IRA plan. These forms authorize the trustee or the custodian to accept contributions made on behalf of a participant under the employer’s SIMPLE IRA plan.

Some IRA representatives are confused because the IRS does not have a 5304 version for an individual to establish his/her SIMPLE IRA.

One can see a person thinking the IRS might have another 5304 SIMPLE IRA form to be used by the individual, but this form has not been written by the IRS as the IRS does not think it is needed.

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DOL/EBSA Proposes Extending Compliance/ Applicability Date For Fiduciary Rule and Related Exemptions From April 10, 2017 To June 9, 2017

Posted by James M. Carlson
Feb 20 2017

DOL/EBSA Proposes Extending Compliance/ Applicability

Date For Fiduciary Rule and Related Exemptions From April 10, 2017 To June 9, 2017

The Trump administration is going to review whether or not the Fiduciary rule as created by the Obama administration should go into effect. On February 3, 2017, the President issued a memorandum directing the DOL/EBSA to examine the Fiduciary rules and the new and revised prohibited transaction exemptions to determine if such changes are not cost effective and may actually result in Americans having reduced access to retirement information, financial advice and investments.

The new definition of fiduciary was to go into effect as of April 10, 2017, as were various prohibited transaction exemptions.

The DOL/EBSA has formally issued a notice that it is proposing that the fiduciary applicability date be changed to be June 9, 2017, rather than April 10, 2017. Other applicability dates are also extended. This proposal is being published in the Federal Register on March 2, 2017, in order to allow the "new" DOL/EBSA to collect additional information and review it before the new Fiduciary rules go into effect and decide if changes in the Obama rules are warranted.

Comments on the subject of the proposed extension must be submitted by March 17, 2017 (a Friday). This is 15 days following its publication.

Comments on the subjects raised in the presidential memorandum must be submitted by April 17, 2017 (a Monday). This is 46 days following its publication as the 45th day is a Sunday and so the deadline is the following Monday. Comment submissions must include the agency name (Department of Labor/Employee Benefits Security Administration) and the Regulatory Identification Number (RIN) of RIN 1210- AB79. Submitters are encouraged to use one of the electronic submission options rather than submitting a paper submission. These comments will be available to the public.

Comments may be submitted using one of the following methods.

1. Send an email to: EBSA.FiduciaryRule- Examination@dol.gov. In the subject line of your email include RIN 1210-AB79.

2. Go to the Federal eRulemaking portal and follow the instructions for submitting comments. The portal is located at: (http:/www.regulations.gov).

3. Mail your written comments to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, WASHINGTON, DC 20210, Attention: Fiduciary Rule Examination. The 15 day and 45 day submission deadlines will require an individual to act promptly. We expect there will be many comment submissions.

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President Trump, Congress and the Fiduciary Rule

Posted by James M. Carlson
Jan 08 2017

President Trump, Congress and the Fiduciary Rule

On Friday February 3, 2017 President Trump issued a presidential memorandum on the Fiduciary duty rule. This memorandum is directed to the Secretary of Labor. President Trump has nominated Andrew Puzder who is presently the CEO of the company that owns the Hardees and Carl's Jr. companies. His confirmation hearing was initially scheduled for this week, but it has been postponed until late February or early March.

The Secretary of Labor is to determine if the Fiduciary rules may adversely affect the ability of Americans to gain access to retirement information and financial advice. If so, then the DOL is to start the process of revising and possibly repealing the rule by publishing a new rule for notice and comment.

This Presidential memorandum does not immediately repeal or suspend the new fiduciary rule. Some of the new DOL rules are in effect now and the new definition of fiduciary goes into effect on April 10, 2017. The complete BICE rules do not go into effect until January 1, 2018. There is not stated a suspension period. Some TV, radio and web news accounts had mentioned a suspension of the rule for a 60-90 time per period. Link for Presidential Memorandum on Fiduciary Duty Rule

Unfortunately, financial institutions and financial representatives must comply with the new DOL rules until they are modified.

Although it appears Congress could have repealed this regulation by use of the Congressional Review Act, Congress chose not to do so. In an email furnished in January we at CWF had stated it was subject to being repealed. This was incorrect.

CWF's suggestion is, within the next 3- 9 months the Republican Congress should pass a new fiduciary law and President Trump should sign it. Congress and not the DOL should create new laws. The Fiduciary regulations are much too complicated and the costs far exceed the benefits. Your financial Institutions should communicate with your Congressional representatives.

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IRS Issues Guidance on the New Safe Harbor Exceptions Applying to Certain 2016 1099-R Forms

Posted by James M. Carlson
Dec 19 2016

IRS Issues Guidance on the New Safe Harbor Exceptions

Applying to Certain 2016 1099-R Forms

In June/July of 2015 a new tax law was enacted increasing the penalty for failing to prepare a required Form 1099-R or for preparing an incorrect Form 1 099-R (and many other reporting forms) from $100 per form to $250 per form. A $250 penalty is owed for an incorrect form furnished to the individual recipient and another $250 penalty if the IRS is furnished an incorrect Form 1 099-R. Such penalties are very costly.

There was a limited public outcry against the new $250 per form penalty as some new exceptions to the $250 penalty were enacted in December of 2015. The Protecting Americans from Tax Hikes Act of 2015 became law on December 18, 2015.

This law created new two new exceptions so an IRA custodian will not owe the $250 penalty (times two) even though a 1 099-R form has been prepared in error. For some time the law has contained what are called de minimis error exceptions and as long as there are only a very limited number of incorrect 1 099-R forms, the filer wil not owe the penalty amount. These other "older" exceptions are beyond the scope of this article.

There are two new exceptions. The IRS has issued Notice 2017-09 to issue temporary guidance until the IRS issues a regulation. The IRS probably would have preferred that these new exceptions had not become law, but they are a welcome change for IRA custodians.

First, the $250 penalty is not owed if the error relates to an incorrect dollar amount and the error differs from the correct amount by no more than $100. For example, Jane Doe's 1099-R form shows a distribution amount of $9,800 when the correct distribution amount was $9900 or alternatively it was $9700. In such case, the new general rule is that the IRA custodian is not required to prepare a corrected Form 1099-R for Jane Doe.

Second the $250 penalty is not owed if the error relates to an incorrect tax withheld amount and the error differs from the correct amount by no more than $40. For example, John Doe's 1099-R form shows a distribution with a withheld amount of $450 when the correct withheld amount was $490 or alternatively it was $410. In such case, the new general rule is that the IRA custodian is not required to prepare a corrected Form 1099-R for John Doe.

There is an exception to the exception. If Jane Doe or John Doe makes a certain election, then the IRA custodian/trustee will not be able to use this new de minimis exception and will owe the $250 penalty regardless that the error is within the $100 or the $40 range.

There is also an exception to the exception to the exception. If the IRA distributee has made the election and the IRA custodian within 30 days of the election prepares and files a corrected Form 1099-R, then the IRA custodian will not owe the $250 penalty as its error is deemed subject to the reasonable cause exception and is not willful neglect. If special rules create a longer time period, then such longer time periods will be available.

These new rules apply to 1099-R forms required to be filed with the IRS and furnished to individuals after December 31, 2016. That is, it applies to 2016 forms which must be furnished/filed in 2017.

An IRA distributee has the right to instruct (i.e. elect) the IRA custodian/trustee that it will not be able to use the de minimis exception and that it must prepare a corrected Form 1099-R. The IRA custodian has the right to create the method(s) the IRA distributee must use to notify the IRA custodian that it will not be able to use the de minimis exception and that it must prepare a corrected Form 1099-R. Such method(s) must be reasonable. It can be required that the election be in writing, it can be required that the instruction be made by making a telephone call or it can be made on-line. The IRA custodian only needs to establish one method. If so, the IRA distributee must use this method and the individual can't use another method even if his/her method is reasonable. Exception, if the IRA custodian establishes an on-line method, the individual must be allowed to use another method of his or her election.

The IRA custodian does not have the right to limit in any way the IRA distributee's right to request a corrected Form 1099-R such as imposing a time limit or any preconditions.

The IRA custodian must inform an IRA distribution of the election procedures before a person makes his or her election. If an IRA custodian fails to establish an election method, then the IRA distributee may furnish his or her written election to the IRA custodian's address as set forth on the incorrect Form 1099-R or as directed by the IRA custodian after he or she has inquired. An IRA distributee in his or her election must furnish the following information -

(1) that he or she is making the election;

(2) his or her name, address and TIN;

(3) that a Form 1099-R was prepared with an error with applicable account number, if applicable; and

(4) the year or years the IRA distributee wants the election to apply to. It might be the current year or the current year and certain future years.

An IRA custodian is ineligible to use this de minimis error safe harbor rule if it has failed to file or furnish a correct Form 1099-R or if it has intentionally misreported an incorrect dollar amount. This is true even for distributions less than $100 or withheld amounts less than $25.

The IRA custodian must retain records of an IRA distributee's election or a revocation of an election for as long as that information may be relevant to the administration of any tax law.

The IRS will be writing regulations discussing these new rules and procedures for use of the de minimis errors safe harbor rules. It is expected that an IRA custodian will be required to notify an IRA distributee of the new safe harbor and that he or she may request to be furnished a corrected Form 1099-R and that the IRA custodian will not have the right to not prepare a corrected Form 1099-R as is possible under the new safe harbor. A good way to meet this requirement will be to discuss these new rules in the IRA plan agreement and disclosure statement booklet. An explanation could also be furnished along with the Form 1099-R. The IRS most likely will add a discussion to the instructions furnished to the IRA distributee.

As under pre-2016 laws, an IRA custodian may still choose to always prepare corrected Forms 1099-R when one has been prepared incorrectly even though the law no longer requires it and if the IRA distributee has not required it. This is obviously what the IRS prefers.

Although this article has discussed the new rules applying to the Form 1099-R, in fact these new rules apply to many IRS reporting forms as set forth in Code 6724. However, these new rules do not apply to Form 5498, IRA FMV statements, RMD Notices, Form 1099-SA and Form 5498-SA.

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New IRS Procedures For Reporting Late Rollover Contributions

Posted by James M. Carlson
Nov 14 2016

New IRS Procedures For Reporting Late Rollover Contributions

In the August Pension Digest we discussed the IRS’ new alternative procedure for waiver of the 60 day rollover rule. The IRS stated that it would be modifying the Form 5498 so that an IRA custodian which accepts a rollover contribution because the individual has furnished a self-certification rollover form will complete this individual’s Form 5498 to report that the rollover contribution was accepted/ made after the 60 day deadline. From these 5498’s the IRS will be able to develop a list of all those individuals who made their rollover contribution after the 60 day limit and the IRS can then decide to audit some or all of these taxpayers.

The 2017 form 5498 is set forth below. Note, the IRS did not change the title/caption of any box to mention late rollover contributions. reporting late rollovers will be done by completing certain Postponed contribution boxes. Boxes 13a and 13c will need to be completed. Taxpayers will find this confusing.

The IRS is relying that the IRA issuers and the IRA accountholders will read (and understand) the IRS instructions. For any IRS reporting from the IRS has instructions for the Issuer of the form (the IRA custodian or trustee) and also has instructions for the individual.

The IRS was certainly under severe time pressures to come up with a procedure allowing an IRA custodian to inform the IRS that an individual had made his or her rollover contribution after the 60 day time period as permitted by Revenue Procedure 2016-47

Hopefully, the IRS will improve the procedures for reporting late rollover contributions for 2018.

 

The IRS instructions for boxes 13a, 13b and 13c are set forth below. These are the instructions for the IRA custodian.

Box 13a. Postponed Contribution

Report the amount of any postponed contribution made in 2017 for a prior year. If contributions were made for more than 1 prior year, each prior year’s postponed contribution must be reported on a separate form. Report the amount of a late rollover contribution made during 2017 and certified by the participant. See Rev. Proc. 2016-47 is available at www.irs.gov/irb/2016-37_IRB/ar09.html. If the participant also has a postponed contribution, use a separate Form 5498 to report a late rollover.

CWF Discussion. Report the amount of a late 2017 rollover contribution if the individual furnished the IRA custodian with his/her self-certification. A separate Form 5498 with box 13a is to be completed if their person also made a postponed contribution. The instructions do not discuss the possibility of two late rollovers. We believe the IRS instructions do discuss that two separate 5498 forms should be filed. The IRS instructions do discuss that there must be separate 5498 forms filed if there were postponed contributions for more than one prior year.

Box 13b. Year

Enter the year for which the postponed contribution in box 13a was made. Leave this box blank for late rollover contributions. CWF Discussion. This box is left blank if the contribution being reported in Box 13a is a late rollover contribution.

Box 13c. Code

Enter the reason the participant made the postponed contribution. For participants’ service in a combat zone, hazardous duty area, or direct support area, enter the appropriate executive order or public law as defined under Special reporting for U.S. Armed Forces in designated combat zones, earlier.

For participants who are “affected taxpayers,” as described in an IRS News Release relating to a federally designated disaster area, enter FD.

For participants who have certified that the rollover contribution is late because of an error on the part of a financial institution, death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, or other circumstance listed in Section 3.02(2) of Rev. Proc. 2016-47 or other event beyond the reasonable control of the participant, enter C.

CWF Discussion. A “C” is to be inserted in this box if the individual has self-certified that his or her rollover was rolled over after the 60 day limit for one of the events set forth in Revenue Procedure 2016-47.

The IRS also furnishes “instructions” to the individual on the reverse side of Copy A of Form 5498. Set forth below are the instructions for boxes 13a, 13b and 13c.

Box 13a.

Shows the amount of a late rollover contribution made in 2017 and certified by the participant, or a postponed contribution made in 2017 for a prior year.

Box 13b.

Shows the year to which the postponed contribution in box 13a was credited. If a late rollover contribution is shown in box 13a, this box will be blank.

Box 13c.

For participants who made a postponed contribution due to an extension of the of the contribution due date because of a federally designated disaster, shows the code FD.

For participants who serviced in designated combat zones, qualified hazardous duty areas, or in direct support areas, shows the appropriate code. The codes are: EO13239 for Afghanistan and associated direct support areas, EO12744 for the Arabian Peninsula areas, and EO13119 (or PL106-21) for the Yugoslavia operations areas. For additional information, including a list of locations within the designated combat zones, qualified hazardous duty areas, or direct support areas, see Pub. 3. For updates to the list of locations, go to www.irs.gov/form 5498.

For a participant who has used the self-certification procedure for a late rollover contribution, shows the code SC.

CWF Discussion: These instructions inform the indvidual that he or she made his or her rollover after the 60 day deadline, but the IRA custodian accepted the rollover contribution because he or she self-certified that one of the exceptions as listed Revenue-Procedure 2016-47 was met. The individual will want to consider if he or she should furnish additional information at the time the return is filed explaining why equity and fairnesss means he or she qualified for a new rollover period or if he or she should wait for the IRS to contact him/her and furnish additional information at that point in time. The instructions for lines 15a and 15b should be reviewed for additional IRS guidance on the proper reporting of a rollover contribution.

Admittedly the IRS’ announcement in August of its new self-certification rollover procedure left the IRS little time to create a procedure for an IRA custodian to report that an IRA account holder who had self-certified his or her 2017 rollover because he or she missed the 60 day deadline for one of the reasons set forth in Revenue Procedure 2016-47. Note that this special procedure only applies with respect to missed rollovers into an IRA on account of missing the 60 day limit. It does not apply to missed rollovers on account of the 60 day limit. It does not apply to missed rollovers on account of the 60 day rule into a qualified plan.

Also note, there is no discussion of how an IRA custodian and/or the IRA account holder is to report a late 2016 IRA rollover which the individual self-certified. CWF’s recommendation is that the tax payer should attach a copy of his/her self-certification as furnished to the IRA custodian with a note of explanation.

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IRA Contribution Limits for 2017 – Unchanged at $5,500 and $6,500; 401(k) Limits Unchanged Also

Posted by James M. Carlson
Oct 31 2016

Inflation was approximately .3% for the fiscal quarter ending September 30, 2016, so many of the IRA and pension limits as adjusted by the cost of living factor have not changed or the changes have been quite small.

The maximum IRA contribution limits for 2017 for traditional and Roth IRAs did not change – $5,500/$6,500.

The 2017 maximum contribution limit for SEP-IRAs is increased to $54,000 (or,25% of compensation, if lesser) up from $53,000. The minimum SEP contribution limit used to determine if an employer must make a contribution for a part-time employee remains the same at $600.

The 2017 maximum contribution limits for SIMPLE-IRAs is unchanged at $12,500 if the individual is under age 50 and$15,500 if age 50 or older.

The 2017 maximum elective deferral limit for 401(k) participants is unchanged at $18,000 for participants under age 50 and $24,000 for participants age 50 and older.

  

 

 

Categories: Pension Alerts, Roth IRAs, SIMPLE IRAs, Traditional IRAs

Financial Institution Must Notify DOL It Will Use BICE And Must Comply With Record Keeping Requirements

Posted by James M. Carlson
Sep 28 2016

In order to use the BICE a financial institution must notify the DOL by providing an email to e-bice@dol.gov that it will to use the BICE. The notice can be generic. That is, it need not mention any specific IRA or any specific plan. If the notice requirement has been met, then the financial may receive compensation. The notice remains in effect until it would be revoked by the financial institution.

The financial institution must maintain for six years the records necessary for certain persons to determine whether the conditions of the BICE have been met with respect to each specific transaction. Upon request the following individuals must have the right to exam these records during normal business hours:

  1. Any authorized employee or representative of the IRS
  2. Any plan fiduciary which has participated in an investment transaction pursuant to the BICE
  3. Any authorized employee or representative of a plan fiduciary which has participated in an investment transaction pursuant to the BICE
  4. Any contributing employer and any employee organization whose employees or members are covered by the plan
  5. Any authorized employee or representative of a contributing employer and any employee organization which has participated in an investment transaction pursuant to the BICE

Any IRA owner or plan participant or inheriting beneficiary or an authorized representative of such persons.

None of the non-IRS individuals are authorized to examine records regarding a recommended transaction of another retirement investor, privileged trade secrets or privileged commercial or financial information of the financial institution or information identifying other information.

When a financial institution refuses to furnish requested information for a reason state above, it has 30 days in which to inform the requester of the reasons for denying the request and that the DOL if requested could request such information.

If the required records are not maintained, there is a loss of the exemption only for that transaction or transactions for which the records are missing or have not been maintained. Other transactions will still qualify for the BICE if those records are maintained. If the records are lost or destroyed, due to circumstances beyond the control of the financial institutions, then no prohibited transaction will be considered to have occurred solely on the basis of the unavailability of those records.

The financial institution is the party who is responsible to pay the ERISA civil penalty under section 502 or the taxes under section 502 or the taxes under section 4975 if the required records are not maintained

Categories: Pension Alerts, Traditional IRAs

Election Day November 8th, 2016 and the Politics of IRAs.

Posted by James M. Carlson
Sep 21 2016

You and other voters will go the voting booth on November 8th, 2016.

IRAs are political because they are created by the federal income tax laws. IRA owners receive tax preferences for making various types of IRA contributions or because the IRA has received a direct rollover or rollover contribution from a 401(k) plan or another employer sponsored retirement plan.

The federal deficit is a political issue waiting to be addressed. More and more politicians are starting to seriously look at IRAs and 401(k) plans as sources of tax revenues. Money in traditional, SEP and SIMPLE IRAs is tax deferred, it is not tax-free. When distributed or withdrawn, the distribution amount must be included in the recipient's income and tax paid at the person's applicable marginal income tax rate.

There is approximately 7.2 trillion dollars in traditional IRAs. Assuming an average marginal tax rate of 20% the federal government is looking to collect 1.4 trillion dollars from future IRA distributions. There is approximately 6.8 trillion dollars in 401(k) and other defined contribution plans. Assuming an average marginal tax rate of 20% the federal government is looking to collect 1.3 trillion dollars from future 401(k) distributions. The federal debt is estimated to be 19.5 trillion dollars as of September 30, 2016. IRAs and 401(k) plans cover 13.8% of the federal debt.

The question is, when will these tax revenues be collected?

Some politicians are starting to suggest the IRA rules need to be changed so the federal government starts to collect tax revenues sooner than under existing law.

Senator Ron Wyden represents the State of Oregon. He is a Democrat. There is a 50% chance he will become the chairman of the Senate Finance Committee in 2017 after the November 8th elections. He recently communicated that he and other Democrats will be pursuing the following IRA law changes.

  1. With respect to inherited IRAs, the 5-year rule would apply once an IRA owner dies. This would be a monumental change. A traditional IRA beneficiary would have 5-6 years to take distributions, include such amounts in income and pay tax. The ability to stretch out distributions over the beneficiary's life expectancy would be repealed. A Roth IRA beneficiary would lose the right to have the Roth IRA earn tax-free income for a period equal to his or her life expectancy. The beneficiary would be given only 5-6 years of tax-free income
  2. It is unclear if everyone would lose the right to make Roth IRA conversion contributions or if a person with traditional IRA funds could make a conversion contribution but only to the extent the IRA funds are taxable. That is, a person with basis in his/her IRA or pension plan could not convert any basis. The Obama administration has previously proposed not allowing basis within an IRA to be converted. A total repeal of the right to make a Roth IRA conversion contribution would be radical.

    At least on a short term basis, the federal government likes it when individuals make Roth IRA conversion contributions as tax revenues are collected.

  3. There would be a new tax rule stipulating that the maximum value of a person's Roth IRAs would be limited to $5,000,000 and if this limit was exceeded then the excess would have to be withdrawn. This also would be a radical change.
  4. A non-IRA change would be to change the law governing 401(k) plans. Somehow a person making student loan payments would be given credit under their 401(k)plan so that the loan payments would be treated as an elective deferral contributions so that an employer would have to make a matching contribution.

In summary, IRAs are political. As with other political subjects, each person will need to make their own voting decisions. Taking away IRA tax preferences is in essence a tax increase and individuals will need to decide the degree it will influence how they will vote. We at CWF believe switching to the 5-year rule for an inherited IRA beneficiary should be unacceptable.

Categories: Pension Alerts, Traditional IRAs

IRS Issues Additional Procedure For Waiver of 60-Day Rollover Requirement and Additional Self-Certification Procedure

Posted by James M. Carlson
Aug 15 2016

The IRS issued Revenue Procedure 2016-47 on August 24, 2016. It modifies Revenue Procedure 2003-16. The IRS now in the course of a examining a taxpayer’s individual tax return may determine that the person qualifies for a waiver of the 60-dayrollover requirement.

The IRS has created a third waiver method. The new waiver method is effective on August 24, 2016. The first waiver method set forth in Revenue Procedure 2003-16 requires the taxpayer to file an application requesting a waiver of the 60-day rule and the IRS must grant the waiver. The second waiver method authorizes an automatic waiver of the 60-day rule if four requirements are met.

Why this new IRS procedure?
In January of 2016 the IRS changed the filing fees that a taxpayer must pay when submitting his or her waiver application. In 2015, the filing fee was $500 if the purported rollover was less than $50,000, $1,500 if the rollover amount was less than $100,000 but equal to or more than $50,000 and $3,000 if the rollover amount was $100,000 or more.

The IRS increased the fee to $10,000 for all such waiver applications. Apparently the IRS concluded that it no longer could afford to assign the personnel it had assigned to process these waiver requests. Presumably, many taxpayers and tax professionals have expressed their dissatisfaction to the IRS. The $10,000 filing fee means many taxpayers are no longer able to have the IRS process their application and receive a concrete ruling that they were or were not entitled to a waiver of the 60-day rule. The application process provided a taxpayer with tax certainty.

In Revenue Procedure 2016-47 the IRS authorizes a self-certification procedure that a taxpayer may use to request the waiver of the 60-day requirement rather than using the application procedure.The IRS tentatively grants the waiver upon the making of the self-certification and the taxpayer is permitted to prepare his or her tax return to reflect that he or she made a complying rollover so the distribution amount is not required to be included in his or her taxable income. However, the IRS retains the right to examine the individual’s tax return for such year (i.e. Audit) and determine if the requirements for a waiver of the 60-day rule were or were not met. If the IRS determines the individual was not entitled to a waiver of the 60-day rule, the individual will have to include such distribution in his or her income and will have an excess IRA contribution situation needing to be corrected. The IRS explanation gives a limited discussion of the adverse consequences. If the IRS does not grant the waiver then the person may be subject to income and excise taxes, interest and penalties. One of the penalties which might apply would be the 25% tax for understating one’s income.

This self-certification procedure applies to distributions from any type of IRA and also from a 401(k) plan or other qualified plan and certain 403(b) and 457 plans.

The IRS has stated that it will be modifying the Form 5498 so that an IRA custodian which accepts a rollover contribution pursuant to this self-certification procedure after the 60-day deadline will complete such person’s Form 5498 to report that the rollover contribution was accepted after the 60-day deadline. The IRS will then be able to examine the tax returns of these taxpayers and the purported rollovers.

How does this self-certification procedure work?
The IRA owner will furnish the IRA custodian/trustee with a written certification meeting the following requirements. The IRA owner may use the IRS’ model letter set forth in the appendix of Revenue Procedure 2016-47 on a word-for-word basis or by using a form or letter that is substantially similar in all material respects.

The requirements:

  1. The IRS must not have previously denied a waiver with respect to a rollover of all or part of the distribution involved in the late rollover
  2. The IRA owner must make his or her rollover contribution as soon as practicable once the reason(s) for missing the 60-day deadline no longer apply. This requirement is deemed satisfied if the rollover contribution is made within 30 days after the reason or reasons no longer prevent the IRA owner from making the rollover contribution.
  3. The taxpayer must have missed the 60-day deadline for one or more of the following reasons:
  • An error was committed by the financial institution making the distribution or receiving the contribution
  • The distribution was in the form of a check and the check was misplaced and never cashed
  • The distribution was deposited into and remained in an account that you mistakenly thought was a retirement plan or IRA
  • Your principal residence was severely damaged
  • One of your family members died
  • You or one of your family members were seriously injure
  • You were incarcerated
  • Restrictions were imposed by a foreign country
  • A postal error occurred
  • The distribution was made on account of an IRS levy and the proceeds of the levy have been returned to you
  • The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite my reasonable efforts to obtain the information.

A person whose reason for missing the 60-day requirement is not included in the list of reasons is unable to use this self-certification procedure. The IRA custodian is authorized to rely on the IRA owner’s self-certification for purposes of accepting the rollover and reporting it unless it has actual knowledge contrary to the self-certification.

The IRS has created this self-certification method because it had to have some alternative procedure to allow taxpayers to seek a waiver of the 60-day rule as discussed in Revenue Procedure 2003-16 as the increased filing fee meant most taxpayers no longer would be using the application process.

This new procedure will help some taxpayers, but it would not have been needed if the IRS would not have imposed the $10,000 filing fee. One can hope the IRS will see reason and will reduce the fees for 2017. Most likely the IRS will not. Although the 11 reasons the IRS lists as warranting the waiver of the 60-day rule are certainly welcomed by taxpayers, there are certainly other reasons for which the IRS should grant relief

Categories: Pension Alerts, Traditional IRAs