The Form 5310 Application for Determination for Terminating Plan instructions, updated in December 2013, added an odd and time-consuming new requirement, “Submit proof that any rollovers or asset transfers received [during the year of plan termination and five prior plan years] were from a qualified plan or IRA (for example, DL [determination letter] and timely interim amendments).”
The reason we find this instruction odd is that we are not aware of any requirement for a plan administrator to obtain and retain this proof. Treasury Regulation Section 1.401(a)(31)-1, Q&A-14 provides a safe harbor for the reasonable acceptance of a rollover that is later found to be invalid. Under this safe harbor, an invalid rollover would be treated as valid provided the administrator reasonably concluded the rollover was a valid rollover distribution, and distributes the amount with attributable earnings to the participant within a reasonable time of determining that the rollover was actually invalid. This protects the qualified status of the plan. The regulation set forth examples of how an administrator could make a reasonable determination. None of these examples required the administrator to prove the distribution was from a qualified plan or IRA, or to obtain a determination letter and timely interim amendments. So even if the administrator were attempting to rely on the safe harbor with respect to an invalid rollover, which is not what is happening when the employer requests a determination letter, the administrator would not have that type of documentation.
Subsequently, in Revenue Ruling 2014-9, the IRS set forth additional examples about how an administrator could comply with the safe harbor. In the first example, for a rollover from one qualified plan to another, the administrator simply went to the DOL website to check the most recently filed Form 5500 for the distributing plan. The administrator confirmed that Code 3C did not appear on Line 8a, as that would have indicated that the plan was not intended to be qualified. In the qualified plan and IRA rollover examples, the administrator receives a check that indicates the qualified plan or IRA distribution is for the benefit of the employee, and an “attached check stub” indicating the source of the funds. Further, the employee provides a certification regarding the taxable nature of the distribution. In the event the administrator later learns the rollover was invalid, it distributes the amount with attributable earnings to the participant within a reasonable time of such determination.
Keep in mind, these are just examples. The fact that the guidance does not address more modern day scenarios, like wire transfers, does not necessarily mean that an administrator should demand a check rather than a wire. Further, this guidance merely sets forth a safe harbor, not a requirement. Finally, we hope the IRS will strike the qualified plan or IRA “proof” requirement in the Form 5310 instructions, but no word on that yet. In any event, we advise plan administrators to establish solid practices for the acceptance of rollover contributions, to help protect the qualified status of their plans.