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Navigating the Transaction Trail

Retirement plan professionals may feel like spelunkers at times — maneuvering through tight openings, spanning yawning chasms, dodging the errant bat amid the primordial gloom. Susan Diehl shed some light on the path in a Jan. 24 session at the 2018 NTSA Summit in Houston.

Plan-to-plan transfers, she reminded attendees, simply involve exchanges between employers or between vendors if the plan permits it. Those vendors can be approved, or the transfer can be from a deselected vendor to an approved one. The advantages: No distributable event must occur for such a transfer to be allowed, and the plan need not report the transaction on a Form 1099-R. However, the vendor doing the distributing must indicate what the assets consist of, Diehl noted.

Rollovers, on the other hand, are not that simple. Diehl reminded attendees that for a rollover to take place, a distributable event must have occurred. In addition, they can only be made from a 403(b) to an IRA or Roth IRA, or another employer plan that accepts rollovers, and only when the participant is a current employee. And the rollover must be reported by the employer on 1099-R and by the participant on Form 1040.

One area where practitioners remain largely in the dark, Diehl said, is plan termination. “We really need the IRS to say that we can distribute these in a way similar to insurance contracts,” she said, but indicated that the gloom may be dispelled, noting that the “IRS appears willing to talk about abandoned plans.”

While they may be willing to shed light on abandoned plans, Diehl indicated that the IRS dimmed the lights a bit on hardship distributions. The IRS created something of a stir with information it conveyed in a newsletter and in a recent internal memo to its auditors, not in official definitive guidance.

The confusion, Diehl said, centers on whether self-certification is permitted. Generally it is not, but the information in the IRS newsletter and the auditors’ memo suggested that it is. For instance, the memo instructs auditors that when they examine a hardship distribution, one option is to receive from the employee a certification that provides information the IRS outlined as necessary for that purpose.

The IRS used a similarly nebulous approach regarding loans, Diehl said, issuing an internal memo to auditors but not official guidance. The memo says that after a hardship, a distribution cannot exceed $50,000 and that the employer’s loan policy should specify repayment requirements. The loan agreement must clearly identify the amount borrowed, the loan terms and the repayment schedule.