Eligible Rollover Distributions
By Tricia Held, QKA, CISP, CIP
What is an eligible rollover distribution?
An eligible rollover distribution (ERD) is a distribution from a qualified retirement plan (QRP), 403(a) or (b) plan, or certain governmental plans that may be directly or indirectly rolled over to an eligible retirement plan described in Internal Revenue Code Section (IRC Sec.) 402(c)(8)(B). Eligible retirement plans include IRAs, QRPs under IRC Sec. 401(a) and 403(a), 403(b) plans, and eligible governmental 457(b) plans.
Are all distributions eligible rollover distributions?
No. As described in IRC Sec. 402(c)(4) and Treasury Regulation 1.402(c)-2 Q&A 3(b) and Q&A 4, there are several distribution types that are not eligible to be rolled over. These include required minimum distributions (RMDs), hardship distributions, permissive withdrawals from plans that have an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA), substantially equal periodic payments (commonly referred to as “72(t) payments”), plan loan amounts that are treated as distributions because of default or because they do not meet the requirements of IRC Sec. 72(p), premiums paid by the plan for the cost of life or other insurance protection for participants, dividends paid on employer securities as described in IRC Sec. 404(k), and refunds of excess deferrals, excess contributions, and excess aggregate contributions. Generally, all other types of distributions are considered eligible to be rolled over.
What are the tax consequences if an eligible rollover distribution is rolled over?
An ERD that is paid directly to an eligible retirement plan account on behalf of the participant is known as a “direct rollover.” Direct rollovers are not subject to withholding, are not included in gross income, and are not subject to the additional 10 percent early distribution penalty tax.
All ERDs that are indirectly rolled over are subject to federal income tax withholding of 20 percent of the taxable amount (IRC Sec. 3405(c)(1)(B)). An indirect rollover, also known as a “60-day rollover,” is a distribution paid directly to the participant who then rolls all or part of the distribution into an eligible retirement plan within 60 days from the day after the date of receipt. The participant may make up and pay the amount withheld, along with the amount distributed to him, into the eligible retirement plan. Any distributed amount that is not deposited into the eligible retirement plan account within the 60-day window is—with certain exceptions—no longer eligible for rollover, and the taxable portion generally is subject to income tax and an additional 10 percent early distribution penalty tax under IRC Sec. 72(t) if no penalty exception applies.
A waiver of the 60-day requirement may be possible if the rollover amount was not deposited timely because of the financial organization’s error or because of casualty, disaster, or other events beyond the reasonable control of the participant (IRC Sec. 402(c)(3)(B)). This waiver is subject to the determination of the Secretary of the Treasury but may be automatic in certain circumstances. Revenue Procedure (Rev. Proc.) 2003-16 offers details on this automatic waiver, as well as direction on how to petition the IRS for relief for rollovers not timely completed.
Plan participants may also have the option to self-certify that they qualify for relief from the 60-day rollover rule in certain situations. To qualify, the IRS must not have previously denied a waiver related to the rollover and the plan participant must have missed the 60-day deadline because of one or more of the reasons outlined in Rev. Proc. 2016-47 (later modified by Rev. Proc. 2020-46). A private letter ruling, subject to IRS fees, may be required in cases where the automatic waiver or waiver by self-certification do not apply.
Are there any eligible rollover distributions that may be rolled over beyond the 60-day window?
Yes, a qualified plan loan offset (QPLO) may be rolled over beyond the 60-day window. A QPLO is a loan offset that occurs only upon plan termination or severance from employment. A loan offset is when a participant's balance may be offset by an outstanding loan amount when the participant incurs a distribution "triggering" event. The amount of the offset is treated as an actual distribution from the plan and generally is an ERD. If certain conditions are met, participants and spousal beneficiaries have until their tax filing deadline (including extensions) for the year when treated as distributed to indirectly roll the loan offset amount over to another eligible retirement plan or IRA.
