Timing Restrictions Do Not Apply to Distributions of Rollover Contributions

Under a recent ruling, eligible retirement plans can distribute an individuals rollover contributions, at any time, pursuant to his or her request, if the plan separately accounts for such contributions.

Background

The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Job Creation and Worker Assistance Act of 2002 substantially increased the rollover opportunities available to individuals, by expanding the types of plans eligible to accept rollovers and funds that can be rolled over. The following provisions contain rules applicable to rollovers (including the new portability rules):

• Sec. 402(c): An eligible rollover distribution from a qualified trust that is rolled over to an eligible retirement plan is not includible in gross income for the tax year paid. Similar rules apply to Sec. 403(a) annuity plans, Sec. 403(b) tax-sheltered annuities, Sec. 457 eligible governmental plans and IRAs.

• Sec. 402(c)(2): The portion of an eligible rollover distribution not otherwise includible in gross income cannot be rolled over, unless such previously taxed amounts are transferred to an IRA or a qualified defined contribution plan that agrees to separately account for such amounts in a direct trustee-to-trustee transfer.

• Sec. 401(a)(31): A qualified trust must provide for a direct trustee-to-trustee transfer (a direct rollover) of eligible rollover distributions. For previously taxed amounts, the limits described in the preceding paragraph apply. Similar rules apply to Secs. 403(a) annuity plans, 403(b) tax-sheltered annuities and 457 eligible governmental plans.

• Sec. 408(d)(3)(A): IRA distributions of previously taxed amounts may be rolled over only to another IRA.

• Sec. 402(c)(10): A Sec. 457 eligible governmental plan may not accept a rollover from another type of eligible retirement plan, unless it separately accounts for such rollover. A distribution from such separate account is subject to the Sec. 72(t) 10% additional tax, as if the distribution were from a Sec. 401(a) plan; see Sec. 72(t)(9).

• Sec. 402(f): A recipient of an eligible rollover distribution must be apprised of the fact that, if the distribution is rolled over to an eligible retirement plan, distributions from that plan may be subject to restrictions and tax consequences that differ from those applicable to distributions from the plan making the eligible rollover distribution; see Sec. 402(f)(1)(E).

Distribution of Rollover Contributions

In many cases, the Code, regulations or other guidance, provides explicitly for the treatment of rollover contributions. For example, the survivor annuity requirements of Secs. 401(a)(11) and 417 apply to all benefits provided under a plan, including benefits attributable to rollover contributions (Regs. Sec. 1.401(a)-20, Q&A-11). Similarly, under Sec. 411(a)(11)(D), in determining whether an employees accrued benefit exceeds $5,000 (and, thus, may not be immediately distributed without the employees consent), a plan may provide that rollover contributions (and attributable earnings) are disregarded.

In other instances, rollovers are implicitly included. For example, Sec. 72(t) imposes a 10% additional tax on a taxpayer who receives any amount from a qualified retirement plan;  the reference to any amount, and the lack of an exception for amounts attributable to rollover contributions, indicate that Sec. 72(t) applies without regard to whether the amounts distributed are attributable to rollover contributions.

Rules restricting the timing of distributions, other than those relating to re-quired minimum distributions (RMDs) under Sec. 401(a)(9), generally apply only to employer contributions made to the plan or annuity (e.g., see Secs. 401(k)(2)(B) and 403(b)(11)).

Rev. Rul. 69-277 provides that a pension plan may permit distribution of the employees after-tax contributions before employment termination. Un-der Rev. Rul. 94-76, a profit-sharing plan may permit the immediate distribution of amounts attributable to a rollover.

Holding

Based on the foregoing, eligible retirement plans that separately account for amounts attributable to rollover contributions can distribute amounts attributable to an individuals rollover, at any time, pursuant to the individuals request (with spousal consent, if applicable to the plan). Timing-distribution restrictions applicable to other amounts in the plan do not apply to rollover contribution funds.

Thus, for example, if a receiving plan is a money purchase pension plan, and it separately accounts for amounts attributable to rollover contributions, a plan provision permitting an in-service distribution of those amounts will not cause the plan to fail to satisfy Regs. Sec. 1.401-1(b)(1)(i). Similarly, if the receiving plan is a Sec. 457 eligible governmental plan or a tax-sheltered annuity described in Sec. 403(b)(7) or (11), amounts attributable to rollovers that are maintained in separate accounts could be distributed at any time, even though distribution of other amounts under the plan or contract would be restricted under Sec. 457(d)(1)(A) and Sec. 403(b)(7) or (11), respectively.

However, a distribution of amounts attributable to a rollover contribution would be subject to the survivor annuity requirements of Secs. 401(a)(11) and 417, the Sec. 401(a)(9) RMD rules and the Sec. 72(t) additional income tax on premature distributions, as applicable to the receiving plan. Thus, for example, if a distribution from an IRA is rolled over into a Sec. 401(a) plan, any distribution of the rollover from that plan would be subject to the Sec. 72(t) tax exceptions that apply to Sec. 401(a) plans, not the exceptions that apply to IRAs.

This holding does not apply to a merger, consolidation or transfer of plan assets under Sec. 414(l), or plan-to-plan transfers otherwise permitted between Sec. 403(b) tax-sheltered annuities and between Sec. 457 eligible governmental plans.

Rev. Rul. 2004-12, IRB 2004-7, 478