When the IRS announced that it would virtually eliminate the determination letter program for individually designed retirement plans, many practitioners moved through the classic Kübler-Ross five stages of grief (see the picture at the right). Some have yet to finish. In Announcement 2016-32, the IRS requested comments on how these plans can maintain compliance going forward since determination letters are no longer available.
As a general rule, the IRS used to deny plans the ability to incorporate tax code provisions by reference (rather than reciting them wholesale in the plan), except for a very short list available here. The IRS is asking if there are additional provisions that would also be appropriate to incorporate by reference. This would avoid the need to reproduce these provisions wholesale and run the risk of a minor foot fault if the language did not line up. It would also help avoid the need to update plans for law changes, in some cases.
Additionally, much to the anger of many practitioners, the IRS has historically sometimes required a plan to include provisions that were not applicable to the plan. For example, there are special diversification requirements for plans that hold publicly-traded employer stock, yet the IRS has required them even for private companies. One wonders if the IRS actually observed numerous situations where privately held corporations became public companies and then failed to amend those of their plans that held employer stock. What a scourge on the individually designed plan world this must have been! The IRS would like to know if there are other provisions that could possibly be avoided and the likelihood that the plan sponsor will actually amend the plan when the provision becomes applicable. While there may be a few of these provisions out there, there likely aren’t enough to make a significant difference in the length of individual designed plans or to stem the tide of faulty individually designed plans.
For those employers who still want the comfort of an IRS letter of some kind, they could bargain with a company that offers a pre-approved plan. However, there are challenges to switching to a pre-approved prototype or volume submitter plan, and the IRS wants to know about them. For example, employers with unique plan designs or multiple different benefit formulas may not be able to fit under a particular pre-approved form. Under the rules applicable to those plans, too much variation from the pre-approved form destroys the ability to rely on the letter and turns the plan into an individually designed plan (which can’t then get a determination letter).
What might depress practitioners most is that the above areas are the only ones the IRS came up with as possibilities. For example, it would make sense to let plans apply for a determination letter when there is a plan merger. The IRS has historically requested the documents of plans that were merged into a plan under determination letter review. Without allowing this, the IRS will end up not reviewing a plan until it is terminated. At that time, the Service may be asking for plans that were merged from 20 or more years ago. That level of recordkeeping would be prohibitive for some plan sponsors. Additionally, if the IRS found an error at that time, it could be extremely difficult to fix. Therefore, allowing a complete review of the plan when it is a party to a plan merger would be highly valuable. Additionally, since plans will be permitted to obtain a determination letter on initial adoption, a limited determination approval process might be available to review amendments to the already approved plan rather than the entire plan again.
The Service will accept comments in writing on or before December 15. Service employees responsible to draft the rules may also read this post, so feel free to leave your comments below.
As retirement plan professionals know, certain distributions from plans and IRAs to taxpayers can be rolled over to another plan or IRA within 60 days. Of course, sometimes 60 days is just not enough and the IRS recognizes that, having permitted a seemingly innumerable number of private letter rulings granting extensions. These often occur where a financial advisor gave bad advice or made some kind of mistake or where some tragedy worthy of a blues or country song (or worse) befell the taxpayer that made it impossible to complete the rollover in 60 days.
The IRS has had a small cottage industry the last decade or so of granting private letter rulings extending the 60-day period for these rollovers. But now, they’ve decided to let plans and IRAs just take the taxpayer’s word for it.
Under a new revenue procedure, taxpayers can now self-certify as to the reason that they need more time. Now, taxpayers can’t just certify for any reason. They have to have missed the 60-day period because of one or more of the following reasons:
- An error on the part of the financial institution receiving the rollover or making the distribution
- The distribution was made in the form of a check and the check was misplaced and never cashed (“I put the check where I knew I’d remember it. It was right next to my keys.”)
- The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was a retirement plan or IRA (“but this email said that it was an eligible plan and the money would also help the deposed prince of Nigeria…”)
- The taxpayer’s primary residence was severely damaged (but not a vacation home, it seems)
- A member of the taxpayer’s family died
- The taxpayer or a member of his or her family was seriously ill
- The taxpayer was incarcerated
- Restrictions were imposed by a foreign country (does not include mandates from the deposed prince of Nigeria)
- A postal error occurred (“I told them to address it to Santa Claus at the North Pole…”)
- The distribution was made on account of a tax levy, but the proceeds of the levy were returned
- The financial institution making the distribution delayed providing information that the receiving plan or IRA needed to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information (e.g., phone calls, emails, bad reviews on Yelp maybe?)
There are other conditions too. The taxpayer has to make the contribution as soon as practicable once the identified impediment is no longer holding up the process. A contribution within 30 days after the issue is resolved is treated as meeting this requirement.
The good news for plans and IRA custodians is that they can rely on the certification unless they have actual knowledge that the excuse is not real. So they don’t have to have the same lie detector skills as parents or teachers.
Of course, the IRS also reserves the right to verify this on audit. We are left to wonder how some of these will be verified. For example, how does the IRS plan to prove that the taxpayer didn’t misplace a check? Nonetheless, if the IRS finds that the self-certification was inappropriate, taxpayers will be subject to additional taxes and penalties.
It’s worth noting that some “explanations” still don’t fly, even under this broad relief. Ignorance of the law is still no excuse (“I didn’t know I only had 60 days.”). Also, an inability to count to 60 properly is not going to be enough to get someone off the hook.
The IRS plans to modify the Form 5498 (which reports IRA contributions) to report any contributions received after the 60-day deadline, which will help let the IRS know whom to audit.
For employers, this ruling may result in some questions from their third party administrators. Most rollovers to qualified plans are likely made in direct trustee-to-trustee transfers, which are not a part of this ruling. Because of that, the questions are likely to be few, but there could be some. For example, if an employee comes forward with a self-certification that does not clearly fit into the list, but is close, the TPA may request that the plan administrator (which may be the employer or someone there) make a decision about whether the certification is sufficient. Practically, however, certifications outside this specific list should not be accepted.
The IRS has provided other resources on this issue as well which are available at the links below:
– IRS Webpage – Accepting Late Rollover Contributions
As promised in Notice 2015-68, the IRS has proposed clarifications to the regulations under IRC Section 6055 relating to information reporting rules for minimal essential coverage providers. These rules affect employers sponsoring self-funded health plans or self-funded health reimbursement arrangements (HRAs) that coordinate with insured plans. These proposed regulations also address how employers and others solicit taxpayer identification numbers (TINs) to facilitate this reporting. These rules only impact employers and others who report on the B-series forms (1094-B and 1095-B). They do not change the reporting or solicitation rules for the C-series forms (1094-C and 1095-C).
Reporting Requirements for Employers Providing Multiple Types of Health Coverage
Information reporting is generally required of every person who provides minimum essential health coverage to an individual. However, in some cases, this reporting would be duplicative, such as where an individual is covered under a major medical plan and an HRA. Some employers and insurers complained that the existing rules preventing this duplication were confusing. The proposed regulations seek to clarify the rules on duplicate reporting.
One change is that an entity that covers an individual in more than one plan or program must only report for one of the plans or programs. Therefore, if an employer has both a self-funded health plan and an HRA that covers only the same people who are enrolled in the self-funded plan, then reporting is only required for the self-funded plan.
Additionally, if an employer offers an insured plan, but then also offers an HRA to employees enrolled in that insured plan, reporting on the HRA is not required. Here, the insurer would be required to report on the insured plan, so the IRS would already be notified that the employee has health coverage and the HRA reporting would be unnecessary.
On the other hand, if an employer offers an HRA to employees who are enrolled in their spouses’ employer’s plan, then the employer would have to report on employees covered by the HRA. These arrangements are not very common, but they do exist. This reporting still seems duplicative, but it seems that the IRS made this change to simplify the rules. Of course, this “simplification” just results in additional reporting for employers with these arrangements.
TIN Solicitation Rules
Under the reporting rules, coverage providers have to solicit TINs (which include social security numbers) if they are not provided by the employees. This is because the TINs appear on the reporting forms for every individual covered under the arrangement. There were preexisting rules for soliciting TINs that we wrote about previously. However, in response to concerns that the TIN solicitation rules were designed primarily to apply to financial relationships rather than Code Section 6055 information reporting, the proposed regulations provide specific TIN solicitation rules for Section 6055 reporting. These changes do not apply to the reporting on the C-series forms, so they will only apply to employers sponsoring self-funded plans and other coverage providers, but not to employers offering insured plans, for example. The existing rules timed the requests for TINs off of when an account is “open.” Under these rules, one solicitation generally occurs at the time the account is opened and then there are two annual solicitations after that if the TIN is not obtained.
These new rules include specifying the timing of when an account is considered “open” for purposes of Section 6055 reporting and when the two annual TIN solicitations must occur. The proposed regulations provide that, for the purpose of Section 6055 reporting, an account is considered “opened” on the date the filer receives a substantially complete application for new coverage or to add an individual to existing coverage. This could be before the coverage is actually effective or after (in the case of retroactive coverage, such as due to certain HIPAA special enrollment event). As such, health coverage providers may satisfy the requirement for initial solicitation by requesting enrollees’ TINs as part of the application for coverage.
The proposed regulations also specify the timing of the first and second annual TIN solicitations. Under these regulations, the first annual solicitation must be made no later than seventy-five days after the date on which the account was “opened” or, if coverage is retroactive, no later than the seventh-fifth day after the determination of retroactive coverage is made. Basically, this would be within 75 days after the application for coverage (or the time that application is approved, in the case of retroactive coverage). The second annual solicitation must be made by December 31 of the year following the year the account is “opened”.
To provide relief with respect to individuals already enrolled in coverage, if an individual was enrolled in coverage on any day before July 29, 2016, then the account is considered “opened” on July 29, 2016. Accordingly, employers have satisfied the initial solicitation requirement so long as TINs were requested as part of the application for coverage or at any other point prior to July 29, 2016. The deadlines for the first annual solicitation can then be made within 75 days after July 29 (or by October 12, 2016) and the second annual solicitation can be made by December 31, 2017.
Reliance and Proposed Applicable Date
These regulations are generally proposed to apply for taxable years ending after December 31, 2015. Employers may rely on these proposed regulations (and Notice 2015-68) until final regulations are published.