Pension & Benefits News IRS updates safe harbor explanations that are provided to recipients of eligible rollover distributions
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Wednesday, August 26, 2020

IRS updates safe harbor explanations that are provided to recipients of eligible rollover distributions

By Pension and Benefits Editorial Staff

The IRS has updated its safe harbor Code Sec. 402(f) notice explanations in IRS Notice 2018-74 that may be provided to recipients of eligible rollover distributions from an employer plan. The updates reflect legislative changes, including changes related to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was enacted as part of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94).

The administrator of a retirement plan under Code Sec. 401(a), Code Sec. 403(a), or Code Sec. 457(b) is required to give a written explanation to recipients of an eligible rollover distribution—that is, a payment that may be rolled over to an eligible retirement plan. The written explanation must describe the direct rollover rules, the mandatory income tax withholding rules for distributions not directly rolled over, the tax treatment of distributions not rolled over, and when distributions may be subject to different restrictions and tax consequences after being rolled over.

Changes in safe harbor explanations. The updated safe harbor explanations reflect the following SECURE Act changes—a new exception to the 10% additional tax under Code Sec. 72(t)(1) for qualified birth or adoption distributions and an amendment to Code Sec. 401(a)(9)(C)(i)(I) that increases the age for required minimum distributions to age 72.

Qualified birth or adoption distributions. Section 113 of the SECURE Act amended Code Sec. 72(t)(2) to add Code Sec. 72(t)(2)(H), which permits an individual to receive up to $5,000 for a qualified birth or adoption distribution from an applicable eligible retirement plan (defined in Code Sec. 72(t)(2)(H)(vi)(I) as an eligible retirement plan as defined in Code Sec. 402(c)(8)(B), other than a defined benefit plan). The distribution is not subject to the 10% additional tax under Code Sec. 72(t)(1) to the extent it meets the requirements of a qualified birth or adoption distribution.

Under Code Sec. 72(t)(2)(H)(v)(I), the individual may recontribute a qualified birth or adoption distribution to an applicable eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. However, Code Sec. 72(t)(2)(H)(vi)(II) provides that a qualified birth or adoption distribution is not treated as an eligible rollover distribution for purposes of the direct rollover rules of Code Sec. 401(a)(31), the notice requirement under Code Sec. 402(f), or the mandatory withholding rules under Code Sec. 3405. Thus, a plan administrator is not required to provide a Code Sec. 402(f) notice to a recipient of a qualified birth or adoption distribution under these circumstances.

New required distribution beginning date. Section 114 of the SECURE Act amended Code Sec. 401(a)(9) to change the required beginning date applicable to Code Sec. 401(a) plans and other eligible retirement plans described in Code Sec. 402(c)(8), including a Code Sec. 401(a) qualified plan, a Code Sec. 403(a) annuity plan, a Code Sec. 403(b) annuity contract, a Code Sec. 457(b) plan maintained by a governmental employer, and an individual retirement account or annuity (IRA) described in Code Sec. 408(a) or (b). The new required beginning date for an employee or an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 70½. This amendment is effective for distributions required to be made after December 31, 2019 for individuals who will attain age 70½ after that date.

Additional clarifications. The safe harbor explanations also include other minor modifications to improve their clarity, including adding that payments of certain premiums for health and accident insurance are not eligible rollover distributions, rearranging bullets for readability, and spelling out acronyms when first used.

Appendix. The two updated model safe harbor explanations are in the Appendix—one safe harbor explanation is for distributions that are not from a designated Roth account, and the other safe harbor explanation is for distributions from a designated Roth account. Both explanations should be provided to a participant if the participant is eligible to receive eligible rollover distributions from both a designated Roth account and an account other than a designated Roth account. The safe harbor explanations should be provided to a participant within a reasonable period of time before the distribution is made which is generally no less than 30 days (subject to waiver) and as many as 180 days before the date on which the distribution is made (or the annuity starting date).

The IRS cautions that the updated safe harbor explanations safe harbor explanations will not satisfy Code Sec. 402(f) to the extent the explanations are no longer accurate because of a change in the relevant law occurring after August 6, 2020.

Source: IRS Notice 2020-62.

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