Accepted Rollover Return to Qualified Retirement Plan can Facilitate Annuity Purchase

The IRS's conclusion, expressed in a recent private letter ruling, allowed a taxpayer who had previously rolled over a distribution from his qualified retirement plan into an IRA to roll those funds back into the same qualified retirement plan. After the initial rollover, the qualified retirement plan was amended to permit receipt of funds from IRAs and other qualified plans.

The taxpayer, whom we will label Mr. Green, worked for a company that had a defined contribution plan for its employees which accepts employee contributions on an after-tax basis. At the time of the letter ruling request, the plan was about to be amended to provide that a participant, even if not currently eligible to participate in the plan, could roll over a distribution from a qualified retirement plan or an IRA back into the company's plan, provided certain conditions were met. (If the distribution was coming from an IRA, the IRA must contain only funds rolled over from a qualified retirement plan.)

In effect, this plan amendment would permit participants like Mr. Green who received distributions at an earlier date and rolled the distributions into a conduit IRA to transfer the funds back into the employer's plan. (The term "conduit IRA" typically refers to an IRA used to receive only funds from a plan distribution which may be moved into another qualified plan at some point in future.) In view of the fact that even participants no longer eligible to participate in the plan could make such a rollover, former employees could take advantage of this opportunity. In reaching its conclusion, the Internal Revenue Service noted that nothing in the Code or the regulations prevents this rollover from a conduit IRA to the same qualified retirement plan from which the funds were originally distributed. The Service also stated that the term "employee" for purposes of Code section 402 and the term "individual" for purposes of Code section 408(d)(3) include a retired employee.

Thus, in this private letter ruling the Service concluded that a former plan participant like Mr. Green who received a distribution from the plan and properly rolled over the distribution to a conduit IRA may roll over all or part of the funds in the IRA to the same qualified retirement plan. One condition of making this rollover back to the qualified plan is that the participant may not have made any contributions to the conduit IRA other than the funds rolled over from the plan.

Let. Rul. 9505023. ASRS: Sec 62, 920.6. Tax Facts 1 (1994,1995): Qs 344,351. Taken from Taxline, April, 1995 Volume 95, No.4.