60-day rollover rules

[Brenda Wren]

I have a client who accepted a rollover check on 6/24/00. The check (which was dated 4/27/00) was drawn from another qualified plan and was made payable to the trustees of the new plan. The Plan Administrator proceeded to obtain investment instructions, etc. Today is 7/5/00 and the check is now ready to be deposited to the trust. Do I have a problem with the 60-day rollover rule?

[MWeddell]

No, you don't have a problem. The 60-day deadline applies to the old indirect method of rollovers where the distribution check is made payable to the participant. It does not apply to direct rollovers where the check is made payable to the trustee of the recipient plan.

[Wessex]

MWeddell -- Would you please expand on your answer giving a citation if possible. You are probably absolutely right, but I can't seem to get there from the Code and the Regulations. I have not found anything that explicitly provides that the 60-day requirement does not apply to direct rollovers.

Section 402©(3) provides that the exclusion from income where a rollover is made does not apply to a transfer that is made after the 60th day on which the distributee received the property distributed. I don't see anything in Section 402© that would distinguish between a direct rollover or an "indirect" rollover.

Section 401(a)(31) provides that if a direct rollover is elected, distribution will be in the form of a direct trustee-to-trustee transfer. Q&A4 of Section 1.401(a)(31)-1 clearly indicates that the distributee is the participant. Q&A14 provide that a direct rollover is a distribution and rollover not a transfer of assets.

As a policy matter, why should there be a difference in tax treatment for the participant if an IRA custodian sits on the check for six months for a direct rollover in contrast to the same type of custodian error for a rollover made by the participant?

[pjkoehler]

Wessex, the underlying policy rationale for not subjecting "direct rollovers" to the 60-day rule (for determining the timing of the inclusion of the amount of the distribution in gross income) that applies to other "eligible rollover distributions" is that the exempt trust assets, which comprise the "direct rollover" never leave "eligible retirement plan" solution.

While this is an attribute that "direct rollovers" share with "trust-to-trust transfers," as Reg. Sec. 1.401(a)(31)-1, Q&A-14 points out, "direct rollovers" are treated as distributions (not trust-to-trust transfers) for purposes of the benefit notice and consent requirements and the determination of protected benefits under Code Sec. 411(d)(6).

The 60-day rule described in Code Sec. 402©(1), is an income timing rule. It's not intended to protect the distributee from mishandling of the rollover funds by the plan fiduciaries handling the funds. In the context of an ERISA Title I plan, a plan fiduciary that exercises discretion in the handling of "direct rollover" funds will be exposed to fiduciary liability for acts or failures to act that fall below the applicable standard: (1) exclusive purpose, (2) prudent expert, (3) diversification and (4) plan document.