Obligation to vet rollover recipient

[austin3515]

Former owner of my client terminated with said client and took another job at an unrelated company. He had some nontraditional assets in his account and I believe instead of rolling to an IRA he decided to set up a 401k plan for the sole purpose of accepting rollovers. I am suspicious that there is no business tied to this 401k plan, he just preferred this to the IRA platform because he would have more flexibility. So I am concerned that the plan is not qualified.

Now I could be ALL wrong about this. Remember, these are only suspicions. The amount involved happens to be quite substantial. What obligation does the plan sponsor have to vet this out? The sponsor "should know" enough to be suspicious because based on the Plan name on the rollover request it is clear that it is being sponsored by this individual and they do know he has not gone into business for himself. And he has been employed by them for "several years" so the existence of an old plan seems remote.

[Lou S.]

Which Plan Sponsor? The one rolling the money out or the one accepting the rollover?

As for the money going out if the participant elects elects a rollover to The Former Participant 401(k) Plan FBO Former Participant I don't think the "old" Sponsor has any duty to vet if the plan accepting a rollover is a qualified plan unless their procedures require a letter from "new" Sponsor that they will accept the rollover assets which should pretty much cover them.

As for "new" Sponsor who sets up a business; who is to say he doesn't have a sole proprietorship to sponsor the business? Now if it he doesn't or he never has any future contributions other than the rollover it is possible the IRS could disqualify that plan but that is a problem for "new" sponsor, not the old.

Which are you working with or are you working with both? I would at a minimum make "new" sponsor aware of the issues with the 401(k) Plan that could cause problems.

That said I fully understand him wanting to self-trustee a 401(k) plan to hold the nontraditional assets to save on IRA trustee fees for said assets which can run 1% to 2% annually.

[Peter Gulia]

If your client is the distributing plan or its administrator (and not the receiving plan), is your client's risk (beyond seeing to good transfer and delivery of the property) mostly about the tax-reporting of, and an absence of withholding from, the distribution?

If so, try to imagine what arguments the IRS could make for why the plan's administrator should have tax-reported the distribution as not a direct rollover. Then, think of how the administrator would explain that it had not known that the plan the distributee instructed the plan to deliver a distribution to was not an eligible retirement plan.

Another mode of analysis: If the administrator were to refuse the participant's instruction to deliver his distribution as a direct rollover to the plan he named, what proper explanation would the administrator give for not following the plan provision that allows a participant to instruct a direct rollover? If the administrator needed or wanted to put the explanation in the form of a claim-denial letter that meets all elements of the claims-procedure regulations under ERISA 503, how would the administrator describe its finding that the plan named as the recipient is not an eligible retirement plan?

Likewise, a good claims-denial letter describes what further information the claimant could furnish that would "perfect the claim" or persuade the decision-maker to change its analysis. What further information would persuade the distributing plan's administrator that the receiving plan is an eligible retirement plan?

[austin3515]

As for the money going out if the participant elects elects a rollover to The Former Participant 401(k) Plan FBO Former Participant I don't think the "old" Sponsor has any duty to vet if the plan accepting a rollover is a qualified plan unless their procedures require a letter from "new" Sponsor that they will accept the rollover assets which should pretty much cover them.

This is the my question, thanks. I am not involved in the Former Participant 401k Plan. Others agree?

[jpod]

Austin, look at Q&A-7 of the regulations at 31.3405©-1.

[austin3515]

This is great, thank you!

Q-7: Will the plan administrator be subject to liability for tax, interest, or penalties for failure to withhold 20 percent from an eligible rollover distribution that, because of erroneous information provided by a distributee, is not paid to an eligible retirement plan even though the distributee elected a direct rollover?

A-7: (a) General rule. If the plan administrator reasonably relied on adequate information provided by the distributee (as described in paragraph (b) of this Q&A), the plan administrator will not be subject to liability for taxes, interest, or penalties for failure to withhold income tax from an eligible rollover distribution solely because the distribution is paid to an account or plan that is not an eligible retirement plan (as defined, with respect to distributions from qualified plans, in section 402©(8)(B) and § 1.402©-2, Q&A-2 of this chapter and, with respect to a distributions from section 403(b) annuities, in § 1.403(b)-7(b) of this chapter.) Although the plan administrator is not required to verify independently the accuracy of information provided by the distributee, the plan administrator's reliance on the information furnished must be reasonable. For example, it is not reasonable for the plan administrator to rely on information that is clearly erroneous on its face.

(b) Adequate information. The plan administrator has obtained from the distributee adequate information on which to rely in making a direct rollover if the distributee furnishes to the plan administrator: the name of the eligible retirement plan; a representation that the recipient plan is an individual retirement plan, a qualified plan, or a section 403(b) annuity, as appropriate; and any other information that is necessary in order to permit the plan administrator to accomplish the direct rollover by the means it has selected. This information must include any information needed to comply with the specific requirements of § 1.401(a)(31)-1, Q&A-3 and Q&A-4 of this chapter. For example, if the direct rollover is to be made by mailing a check to the trustee of an individual retirement account, the plan administrator must obtain, in addition to the name of the individual retirement account and the representation described above, the name and address of the trustee of the individual retirement account.

[jpod]

I believe your client should take a lot of comfort in this regulation. If the participant sends a letter confirming that the plan is an eligible retirement plan (as defined in the Code) and provides either wire transfer instructions or information as to how to make out the distribution check, and if those instructions or check information do not appear to be fishy on their face, I think the plan administrator is protected.

[austin3515]

I totally agree!

[Peter Gulia]

Thank you for the citation and quotation of the tax-law rule for a distributing plan's administrator.

Under Rev. Rul. 2014-9, 2014-17 Internal Revenue Bulletin 975 (April 21, 2014), a receiving plan's administrator may presume a proposed rollover contribution is from an eligible retirement plan by looking up a recent Form 5500 report and observing an absence of code 3C on line 8a.