Pension & Benefits News IRS updates safe harbor explanations that are provided to recipients of eligible rollover distributions
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Monday, October 8, 2018

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 2014-74 that may be provided to recipients of eligible rollover distributions from an employer plan. The updates reflect legislative changes and guidance since the IRS last updated these explanations in 2014.

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, as defined in Code Sec. 402(c)(8)(B). 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 the safe harbor explanations.  The updated safe harbor explanations reflect the following changes—

  • the extended rollover deadline for qualified plan loan offset amounts under the Tax Cuts and Jobs Act of 2017 (P.L. 115-97);
  • the exception to the 10% additional tax under Code Sec. 72(t) for phased retirement distributions to certain federal retirees under the Moving Ahead for Progress in the 21st Century Act (P.L. 112-141);
  • the expanded exception to the 10% additional tax under Code Sec. 72(t) for specified federal employees who have reached age 50 under the Defending Public Safety Employees’ Retirement Act (P.L. 114-26);
  • the self-certification procedures under Rev. Proc. 2016-47 for claiming eligibility for a waiver of the deadline for making rollovers.

Additional clarifications.  The safe harbor explanations also include other modifications that—

  • clarify that the 10% additional tax under Code Sec. 72(t) for early distributions applies only to amounts includable in income;
  • explain how the rollover rules apply to governmental code Sec. 457(b) plans that include designated Roth accounts;
  • recognize the possibility that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers; and
  • clarify that the general exception to the 10% additional tax under Code Sec. 72(t) for payments from a governmental plan made after a qualified public safety employee separates from service is not available for payments from IRAs.

Two appendices. The two updated model safe harbor explanations, containing modifications for certain legislative changes and guidance issued after December 8, 2014, are in Appendix A—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. Appendix B provides instructions on how to amend the safe harbor explanations contained in Notice 2014-74 to reflect the revisions included in the modified safe harbor explanations in Appendix A.

The IRS notes 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 September 18, 2018.

Source: IRS Notice 2018-74.

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