Rollover of Airline Payments to Traditional IRAs -- 04-APR-2012

Airline Payments

On February 14, 2012, the FAA Modernization and Reform Act was signed into law. This new law allows qualified airline employees to roll over up to 90% of all airline payments received to a traditional IRA. It would also allow qualified airline employees who previously rolled over any airline payments to a Roth IRA to transfer a portion of the rollover contribution (including any allocable income or (loss)) as a rollover contribution to a traditional IRA, limited to 90% of all airline payments received. Any rollover contribution (including a transfer from a Roth IRA)of an airline payment to a traditional IRA may be excluded from gross income in the tax year in which the airline payment was paid. Generally, the rollover contribution to the traditional IRA must be made within 180 days from the date you received the airline payment, or before August 14, 2012, whichever is later. These provisions do not apply to covered executives of an airline carrier. For Definitions and Special Rules, see below.

Definitions

Qualified airline employee. A current or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006. These provisions also apply to surviving spouses of qualified airline employees.

Covered executives. A current or former principal executive officer (PEO) or one of the three highest compensated officers (other than the PEO and principal financial officer (PFO)). The term covered executives generally does not include the PFO. These provisions also do not apply to surviving spouses of covered executives.

Airline payment. An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. The payment also must be made both:

• Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and
• In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount.

Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits.

TIP  For more information regarding any airline payments you may have received, see Form 8935, Airline Payment Report. This form would have been sent to you within 90 days following an airline payment, or by March 23, 2009, whichever was later. The form shows the amount of airline payments you received that would have been eligible to be rolled over to a Roth IRA. You can now use this form to determine the amount of any airline payments you would like rolled over to a traditional IRA as well as the tax year(s) you may need to amend to exclude up to 90% of airline payments from income.

Special Rules

Rollover of airline payments to a traditional IRA. If you are a qualified airline employee, you can roll over any portion of an airline payment you received to a traditional IRA. Any rollover must be done within 180 days from the date you received the airline payment, or before August 14, 2012, whichever is later. The maximum amount of airline payments that can be rolled over is limited to 90% of all airline payments received. Any rollover contribution of an airline payment to a traditional IRA may be excluded from gross income in the tax year in which the airline payment was paid. To determine the amount of airline payments you received as well as what years they were received in, see Form 8935, Airline Payments Report, which you should have received after 2008.

Amending a return. If you are excluding airline payments from gross income, you will need to file Form 1040-X, Amended U.S. Individual Income Tax Return, for the tax year(s) in which the airline payments were received and included in your gross income. You generally must file your amended return by the later of: 1) 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later, or 2) April 15, 2013. For more details on filing Form 1040-X to exclude airline payments from gross income, go to www.irs.gov/form1040x.

Example. John Birch, a qualified airline employee, received $40,000 in total airline payments for the years 2004 and 2005. John would now like to roll over a portion of the airline payments received to a traditional IRA. The most that John can roll over is $36,000 ($40,000 x 90% (.90)). John chooses to roll over $30,000 to a traditional IRA and to exclude the $30,000 from gross income. John refers to the Form 8935 he received in 2009 that shows $40,000 in total airline payments received, with $20,000 received in 2004 and $20,000 received in 2005. John chooses to exclude $15,000 from income for 2004 and $15,000 from income for 2005. John must file Form 1040-X by April 15, 2013, to receive any refund of taxes paid for 2004 and 2005.

Transfer of a Roth IRA rollover contribution. If you are a qualified airline employee and you previously made a rollover contribution of an airline payment to a Roth IRA, you may be able to transfer a portion of that rollover contribution as a rollover contribution to a traditional IRA (also called a recharacterization). The maximum amount that can be transferred is limited to 90% of all airline payments received. The transaction must be a trustee-to-trustee transfer and the contribution will include any allocable income or (loss). The transfer must be done before August 14, 2012. Any transfer to a traditional IRA may be excluded from gross income in the tax year in which the airline payment was paid. The amount of any airline payment transferred (along with any income or (loss)) is deemed to have been contributed to the traditional IRA at the time of the initial rollover contribution to the Roth IRA. Any airline payment you rolled over to a Roth IRA would have been reported to you in box 2 of Form 5498 for the year of the rollover.

Amending a return. If you are excluding airline payments from gross income, you will need to file Form 1040-X, Amended U.S. Individual Income Tax Return, for the tax year(s) in which the airline payments were received and included in your gross income. You generally must file your amended return by the later of: 1) 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later, or 2) April 15, 2013. Refer to your Form 8935 to see what year(s) you received airline payments. For more details on filing Form 1040-X to exclude airline payments from gross income, go to www.irs.gov/form1040x.

Example. Jack Maple, a qualified airline employee received $30,000 in total airline payments for the years 2005 and 2006. On April 10, 2009, Jack made a rollover contribution of $20,000 in airline payments to a Roth IRA. Jack would now like to transfer the $20,000 rollover contribution to the Roth IRA as a rollover contribution to a traditional IRA. Jack can transfer the entire $20,000 since it is less than $27,000($30,000 x 90%), the most that can be transferred to a traditional IRA. Also, since Jack has $10,000 in airline payments that were not rolled over to a Roth IRA, he can roll over up to $7,000 ($27,000 - $20,000) to a traditional IRA. Jack must contact the trustee of his Roth IRA to initiate the transfer of $20,000 to a traditional IRA along with any allocable income or (loss). The Roth IRA account at the time of the transfer was valued at $25,000. The amount transferred to the traditional IRA is $25,000 ($20,000 + $5,000 in allocable income). This will all be done by the trustee. Jack would also like to exclude the $20,000 from his gross income. Jack refers to the Form 8935 he received in 2009 that shows $30,000 in total airline payments received, with $15,000 received in 2005 and $15,000 received in 2006. Jack chooses to exclude $15,000 from income for 2005 and $5,000 from income in 2006. Jack must file Form 1040-X by April 15, 2013, to receive any refund of taxes paid for 2005 and 2006