Section 402(f) of the Internal Revenue Code (Code) requires that every recipient of a retirement plan distribution that is eligible for rollover to another plan or an IRA receive certain tax information about the distribution.
Last week, the Internal Revenue Service (IRS) issued Notice 2009-68, which contains two model safe harbor tax notices (Model Notices). These Model Notices may be provided to recipients of eligible rollover distributions from an employer-sponsored plan to satisfy the disclosure requirements of Code section 402(f).
Impact of the New Model Notices
The written tax notice requirements apply to retirement plans that are qualified under or covered by Code sections 401(a), 403(a) and 403(b). The requirements also apply to retirement plans that are covered by Code section 457(b) if they are sponsored by governmental employers. Thus, the new Model Notices generally affect all employers that sponsor retirement plans that pay out amounts as part of eligible rollover distributions.
As for the notices themselves:
- One of the Model Notices applies to distributions that do not include designated Roth contributions.
- The other Model Notice applies to distributions only from a designated Roth account.
- Both Model Notices will need to be provided where the distribution includes designated Roth contributions and non-Roth contributions.
The IRS last published a model safe harbor tax notice in 2002. However, that notice has become woefully outdated due to a large number of legislative and regulatory changes. As such, the new Model Notices tackle topics such as:
- Distributions of small amounts, including automatic rollovers.
- Rollovers to Roth IRAs.
- Rollovers by non-spouse designated beneficiaries to inherited IRAs.
- The waiver of the additional 10% income tax on early distributions (a) to qualified reservist distributions and (b) on certain distributions of automatic contribution arrangements.
Each retirement plan administrator must provide the required regulatory disclosure, but has a choice as to the form. The administrator may:
- Use the Model Notices “as-is”.
- Customize the Model Notices by omitting information that does not apply to the plan (e.g., guidance regarding distributions that include after-tax employee contributions or employer stock).
- Use other forms that are not based on the Model Notices.
Because the Model Notices are both lengthy and abstruse, plan administrators should seriously consider eliminating all inapplicable information from the Model Notices before providing them to participants and beneficiaries.
Obviously, using a notice that does not follow the applicable Model Notice may expose the administrator to liability for failing to provide satisfactory disclosure of the tax ramifications of the plan distribution. Thus, any customized changes should be made in coordination with counsel.
The new Model Notices may be used immediately. In addition, recognizing that some plans may need time to transition to the new models, the IRS permits the 2002 model notice to be used through December 31, 2009. However, any notice that a plan provides must be “appropriately modified to reflect statutory changes” since the 2002 model safe harbor notice was published.
In our experience, many plans continue to use the 2002 model safe harbor notice without any updates for subsequent statutory changes. As a result, administrators will likely need to transition to the new Model Notices or create fully compliant non-safe harbor notices as soon as possible.
The IRS uses Notice 2009-68 to advise employers that the new Model Notices reflect applicable law only through September 29, 2009. They will need to be updated periodically to reflect statutory changes occurring after that date.
Finally, Notice 2009-68 reminds administrators that Code section 402(f) notices, whether Model Notices or not, may be distributed up to 180 (but not less than 30) days prior to an applicable plan distribution date or annuity starting date.
- Copies of the Model Notices;
- Our assistance in amending the appropriate Model Notice to conform to the design of your company’s retirement plans; and
- More information regarding Notice 2009-68.