pension plan

One-IRA-Rollover-Per-Year Rule Doesn’t Always Apply

IRS Announcement 2014-32 applies to distributions from qualified plan accounts.

In Bobrow v. Commissioner,1 the Tax Court held that only one rollover per year can be made for any of several individual retirement account distributions, even though proposed regulations and Internal Revenue Service Publication 590 both said otherwise.

But, what about rollovers from qualified employer plans to an IRA? When an individual receives several distributions from an employer-sponsored tax-deferred retirement account described in Internal Revenue Code Section 401(a) within a 12-month period, can all of those distributions be rolled over to an IRA within 60 days of receipt, notwithstanding the Bobrow rule?

For example, say that Robert, age 53, participates in the profit-sharing plan of Blue Sky Industries. He also has a profit-sharing account maintained by his former employer, Green Valley Wineries. Robert withdraws $20,000 from his Blue Sky Industries account on March 14, 2017. He has until May 13, 2017 to make a rollover to an IRA.

On June 5, 2017, Robert withdraws $5,000 from his Green Valley Wineries profit-sharing account. If he can roll over that distribution to an IRA, he would have to do so by Aug. 14, 2017. Because that rollover would necessarily occur within one year of March 14, 2017 (the day he received the Blue Sky Industries account distribution), Robert needs to know if he’s barred from making a rollover under the one-rollover-per-year rule.

IRS Announcement 2014-32

Robert isn’t so barred and may make the second rollover. IRS Announcement 2014-322 says the one-rollover-per-year limitation doesn’t apply to a rollover to or from a qualified plan (and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers).

But, that Announcement doesn’t explain the basis for its conclusion. One lesson from Bobrow is that IRS pronouncements aren’t necessarily trustworthy.

Here’s a technical analysis detailing why the IRS appears to be correct.

Tax Rules

Internal Revenue Code Section 402(c) provides rules relating to rollovers from any employee’s trust described in Section 401(a) that are exempt from tax under IRC Section 501(a).

IRC Section 402(c)(1) provides, in relevant part, that a distribution from an employer plan account may be rolled over, when:

  1. 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,
  2. The distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and
  3. In the case of a distribution of property other than money, the amount so transferred consists of the property distributed.

When all of those conditions are met, the distribution isn’t includible in gross income for the taxable year in which the distribution occurred.

Such a rollover may be made to an IRA. Section 402(c)(5) provides that, for purposes of the IRC, a transfer to an IRA described in IRC Section 408(a), or to an individual retirement annuity described in Section 408(b) (other than an endowment contract), resulting in any portion of a distribution being excluded from gross income under paragraph (1), shall be treated as a rollover contribution described in Section 408(d)(3).

Section 408(d)(1) generally provides that, except as otherwise provided in Section 408(d), any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under IRC Section 72.

But, Section 408(d)(3)(A)(i) provides that section 408(d)(1) won’t apply if a distribution from an IRA (including money and any other property) is paid into an IRA or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which s/he receives the payment or distribution.

Section 408(d)(3)(B) imposes the one-rollover-per-year rule to “to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity” other than a distribution that wasn’t includible in the taxpayer’s gross income. There’s no similar rule for distributions from an employer plan.

Applying the Rules

The IRA rollover rules of IRC Section 408(d)(3) apply to a rollover of benefits distributed from a IRC Section 401 plan account because Section 402(c)(5) treats a distribution from a Section 401 plan account as if it were an IRA distribution that may be rolled over under Section 408(d)(3). But, that treatment doesn’t go so far as to say that the Section 401 plan account is also treated for any other purpose as if it were an IRA. It’s merely meant to allow a rollover of a Section 401 plan account distribution to an IRA.

The one-rollover-per-year rule of Section 408(d)(3)(B) applies only to distributions from an IRA or individual retirement annuity. Since a Section 401 plan account is neither an IRA nor an individual retirement annuity, the one-year limitation can’t apply to distributions from a Section 401 plan account. Thus, it appears that Announcement 2014-32 is correct.

Endnotes

1. Bobrow v. Commissioner, T.C. Memo. 2014-21, No. 7022-11 (2014).

2. 2014-46 I.R.B. 907 (Nov. 24, 2014).

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