• IRS Releases New Tax Notices Regarding Eligible Rollover Distributions from Retirement Plans
  • October 1, 2009 | Author: James C. Bruinsma
  • Law Firm: Miller Johnson - Grand Rapids Office
  • The IRS published new “safe harbor” tax notices regarding “eligible rollover distributions” (generally, lump sum distributions) from qualified retirement plans, 403(b) plans and 457(b) plans. The new tax notices replace the prior safe harbor tax notice that the IRS published during 2002, which has been out of date for several years because of subsequent law changes.

    Two tax notices were published. One applies to distributions from Roth-style accounts. The other applies to all other lump sum distributions.

    Background
    Section 402(f) of the Internal Revenue Code requires a plan administrator to provide a written notice to a participant who receives an eligible rollover distribution from a retirement plan. This written notice must describe the tax rules that apply to eligible rollover distributions, including the rules regarding direct rollovers and the 20% withholding requirement that applies if a direct rollover is not elected.

    A plan administrator is considered to satisfy the written notice requirement if the plan administrator provides a notice that is consistent with the “safe harbor” tax notices that were recently published. If a participant in a defined contribution plan has both a Roth-style account and other accounts, the plan administrator will need to provide both tax notices to the participant.

    Timing of Tax Notices
    The tax notices must be provided at least 30 days but no more than 180 days before the participant receives an eligible rollover distribution. However, a participant is permitted to waive the 30 day notice requirement and receive a distribution at any time after receiving the tax notice.

    The New Notices
    The two model tax notices are downloadable on the right. The IRS stated that the model tax notices can be modified to eliminate provisions that do not apply to distributions from a particular plan. For example, if a plan does not permit after-tax employee contributions or investments in employer stock, the provisions regarding after-tax employee contributions and employer stock may be eliminated from the tax notices.

    When the New Notices Must Be Used
    The IRS stated that the new notices must be used after December 31, 2009. However, because many employers are currently using tax notices from 2002 that are out of date, we recommend that the new tax notices be used as soon as administratively feasible.