Why is this Topic Important to Wealth Managers? In this edition we present a discussion of the 60 day rollover provisions for retirement accounts. Sometimes the transaction does not always go as planned. Thus wealth managers should be aware of unique situations that apply to traditional planning circumstances.

Can a widow rollover, past the 60 day statutory window, distributions from an employee trust to an IRA on behalf of a husband who passed away mid-transaction? The IRS has recently said no. [1]

In a private letter ruling issued last week the Service determined that since the widow had funds in a joint account with her husband who later passed away that she was precluded from rolling over that amount to a tax advantaged arrangement in her name.

Widow’s husband received a distribution from an Employee Retirement Plan totaling Amount X. The Widow asserts that the failure to accomplish a rollover within the 60-day period prescribed by section 402(c)(3) was due to the fact that her husband entered the hospital and passed away during the 60-day period.

The husband had ended his employment earlier in the year. Unbeknownst to him, the plan had a “cash out” provision that mandated complete distribution of plan assets upon the participant’s attainment of 65 years of age. The husband then received a check, and initiated arrangements to move the funds to an individual retirement account in order to maintain the funds in a tax free vehicle. In the meantime, the husband had deposited the funds into a joint account with his wife. Between the time of the distribution from the plan and his scheduled rollover, the husband became ill and passed away. The widow sought to complete the rollover intended by her husband.

Generally, if any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution, and the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, then such distribution (to the extent transferred) shall not be includible in gross income for the taxable year in which paid. [2]

The Code states that such rollover must be accomplished within 60 days following the day on which the distributee received the property. An individual retirement account (IRA) constitutes one form of eligible retirement plan. [3]

The Code however allows a waiver by the Secretary where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.[4]

Moreover, the Code provides that if any distribution attributable to an employee is paid to the spouse of the employee after the employee’s death, the preceding provisions of this subsection will apply as if the spouse was the employee. [5]

In addition, when determining whether to grant a waiver of the 60-day rollover requirement pursuant to section 402(c)(3) of the Code, the Service will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error, (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.[6]

The Service held in summary that because the husband is now deceased, it is impossible for him to complete the proposed transaction. Since the amount was received by the husband from the retirement plan prior to his death, his wife (widow) was precluded from rolling the funds over into a tax-deferred account in her name under section 402(c)(9) of the Code.

Tomorrow’s blogticle will discuss tax and market issues relating to wealth management.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Private Letter Ruling 201123048.

[2] IRC Section 402(c).

[3] IRC Section 402(c)(3)(A).

[4] IRC Section 402(c)(3)(B).

[5] IRC Section 402(c)(9).

[6] See Rev. Proc. 2003-16, 2003-4 I.R.B. 359, (January 27, 2003).

Tags: 401(k), Business, Employment, Individual Retirement Account, Internal Revenue Service, Investing, Pension, Retirement

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