You might be surprised about what does and does not meet the IRS' standards.
Welcome to the 10th anniversary edition of this column. My first MorningstarAdvisor.com column was in August 2002!
2002 was also the first year the IRS was permitted to grant "hardship waivers" of the 60-day rollover deadline, so this is a good occasion to review its hundreds of rulings and see what does (and does not) constitute a "hardship" in the eyes of the IRS.
A case that sounds tragic and heartrending to you and me might not meet the IRS' standards, and yet they might give a waiver to someone else whose story doesn't exactly bring tears to your eyes.
Although the legislative history indicates that Congress wanted the IRS to issue "objective standards" for granting hardship waivers of the 60-day rollover deadline, the IRS says only that it will consider "all relevant facts and circumstances," such as "death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;...the use of the amount distributed (for example...whether the check was cashed); and...the time elapsed since the distribution occurred."
More than half of the deadline waivers are granted to individuals who missed the deadline because their financial advisor or financial institution made a mistake. The most typical example: A participant sends money to an IRA provider. The money is supposed to be a rollover contribution to the participant's IRA, but by mistake the IRA provider puts the money in a taxable account, and the account holder doesn't notice the mistake until more than 60 days have elapsed since the original distribution. Or the participant's financial advisor tells her she has 90 days to roll the money over when in fact the deadline is only 60 days, causing her to miss the deadline.
The good news is that the IRS always grants the hardship waiver when the deadline was missed due to a mistake by a financial institution or professional advisor--provided the participant has evidence that there was such a mistake. Merely stating that the financial advisor gave erroneous advice is not sufficient to justify a deadline waiver. The participant must have documentation, such as a written admission of error by the financial institution.
The flip side of this is that the IRS will deny a waiver if the participant himself made the error that caused the deadline to be missed--for example, because he filled in the wrong account number on the application form. It may appear to you and me to be just as much of a hardship to miss the deadline because of your own stupid clerical error as because of the bank's stupid clerical error, but to the IRS if the process was "within your control" (and you didn't seek professional help) there's no waiver.
Other rulings have been equally surprising. For example, does the following scenario sound like a hardship situation to you? It didn't to the IRS! Mother had Alzheimer's disease, and her home and living conditions deteriorated. Good daughter stepped in and got mother moved to an assisted-living facility. But the facility required a big deposit, and mother's only cash was in an IRA, so daughter used her power of attorney to take the money from the IRA and give it to the nursing home. Daughter planned to sell mother's house and use the proceeds to replace the IRA withdrawal. Unfortunately, the house was so deteriorated (mother's illness had prevented her from maintaining it properly) that extensive work was required to make it salable, and by the time daughter received the sale proceeds, the 60-day deadline had passed.
Result? No hardship waiver; the IRA distribution was taxable. You see, the IRS is looking for a hardship that prevented you (even though you had the money) from completing the rollover, not a hardship that caused the withdrawal in the first place, or that prevented you from getting replacement funds on time. The IRS stated that daughter "knowingly" took the risk of missing that 60-day deadline when she withdraw the funds from mother's IRA.
In another PLR, a participant received a large distribution of employer stock from his employer's profit-sharing plan, and (timely) rolled over the portion of the distribution the company had told him was currently taxable. Months later, the company revised that "taxable portion" upward, stating that the original amount they had given him was erroneous. The participant asked for and received a waiver of the 60-day deadline, allowing him to roll over the additional taxable portion of the distribution! The IRS said that receiving erroneous information from the plan was a "hardship."
Contrast that with another recent ruling in which the participant lost his job, and as a result had to take money out of his IRA to pay living expenses and also had to sell his house. He was planning to use the house sale proceeds to replace the money withdrawn from the IRA, but the house burned down before the closing, so he missed the 60-day deadline. Sorry pal, no hardship waiver for you! Lost your job? House burned down? Where's the hardship?
See, the IRS just doesn't care about what hardship may have caused you to withdraw money from your IRA in the first place. And if you've spent the money that was distributed to you, they don't care about what hardship may have prevented you from collecting replacement funds to complete the rollover. They will grant you a hardship waiver only if you have the money in your hand, ready to roll it over, and some external factor (such as a natural disaster, illness, or third-party mistake) prevents you from completing the rollover on time.
The IRS has granted hardship waivers of the 60-day rollover deadline in several cases where the deadline fell on a weekend or other "bank holiday." See PLRs 2006-06055, 2009-30052, 2009-51044, 2009-52066, and 2010-39041. Apparently the people in these rulings waited until the last minute and then realized, too late, that banks are closed on weekends. I wouldn't call that a "hardship"; I'd call it stupidity and procrastination. But to the IRS, that's a hardship!
Resources: Statutory authority for hardship waivers is in Sections 402(c)(3)(B) and 408(d)(3)(I) of the Internal Revenue Code, effective for distributions after 2001. IRS guidance for obtaining such a waiver is in Rev. Proc. 2003-16, 2003-1 C.B. 359. For full discussion of the rules and standards for these waivers, see ¶ 2.6.07 of Natalie Choate's book Life and Death Planning for Retirement Benefits (www.ataxplan.com). For detail on recent PLRs discussed here, see the "Recent Developments" outline posted at www.ataxplan.com.
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