Bobrow ruling raises many questions with few answers

The U.S. Tax Court ruling earlier this year in Bobrow v. Commissioner— challenging the taxpayer’s application of the one-per-12-month rollover rule—sent shock waves through the world  of IRA administrators.

In Bobrow v. Commissioner, the Tax Court ruled that a taxpayer is limited to one IRA distribution eligible for rollover per year, regardless of the number of IRAs the taxpayer owns. The aftershocks from the ruling continued the following month when the IRS issued Announcement 2014-15, reversing the IRS’ previous position that a taxpayer is permitted to roll over one IRA distribution per 12-month period for every IRA that he or she owns. The Tax Court’s ruling raised many questions for IRA administrators, but Announcement 2014-15 provides few answers.

This should come as no surprise, given that the U.S. Tax Court’s ruling ran counter to the position held by the IRS for more than three decades. The ruling conflicts with very detailed examples of the application of the one-per-12-month rule in Publication 590, Individual Retirement Arrangements (IRAs), and a 1981 proposed regulation. Publication 590 clearly states that each IRA owned by a taxpayer (other than an inherited IRA) is entitled to one rollover-eligible distribution per 12-month period. The IRS confirmed in Announcement 2014-15 that it intends to withdraw the 1981 proposed regulation and issue a new proposed regulation that will follow the U.S. Tax Court’s ruling, thereby limiting IRA-to-IRA rollovers to one per taxpayer per 12-month period. The IRS will not apply the new interpretation to any distributions taken before January 1, 2015.

IRA trustees and custodians are now asking themselves how this change will affect their IRA programs. Will changes need to be made to agreements, disclosure statements, and operating forms? What about member marketing materials? Are any data processing system changes required? The answer to all of these questions is likely yes, but before drafting new disclosure statements or ordering them from a vendor, IRA trustees and custodians would be well-advised to wait for further IRS guidance.

Announcement 2014-15 makes it clear that IRA-to-IRA rollovers are limited to one per taxpayer per 12-month period, but the application of the rule change raises many questions that remain unanswered. For example, does this limit apply separately to Traditional IRAs and Roth IRAs? In April the IRS stated in a posting on its web site that the limit does apply separately, but later that statement was removed and has not since been restored. What about a spouse who chooses to treat an IRA as her own through a rollover? Does this rollover limit the spouse for the next 12 months, even when the account was not initially the spouse’s own IRA? Does a change of a Coverdell education savings account (ESA) designated beneficiary give the new designated beneficiary his or her own rollover rights if the ESA had a rollover within the previous 12 months, but before the change of designated beneficiary? Will HSA rollover rules follow the new IRA rollover limitations?

These are just a few of the questions that remain unanswered. We anticipate that the IRS will issue further guidance in the coming months. In the interim, the current interpretation remains in place. For the remainder of 2014, an IRA owner is allowed to roll over one distribution for each Traditional, Roth, or SIMPLE IRA owned during any 12-month period. As such, existing IRA agreements and disclosure statements can continue to be used, as they likely reflect the current interpretation of the one-per-12-month rollover rule.

In anticipation of future guidance, IRA trustees and custodians should identify the changes required by the new interpretation, budget for those changes in terms of staff time and money, and create detailed implementation plans. As with any change, members likely will be confused, so staff training on the new interpretation is essential.

Ascensus is the nation’s largest independent retirement and college savings services provider, helping over 6 million Americans save for the future. The firm partners with financial institutions to provide tailored solutions for financial professionals, employers, and individuals. In total, Ascensus supports over 43,000 retirement plans and 3 million 529 college savings accounts and administers more than 1.5 million IRAs and health savings accounts.