Co-authored by dvlasek.
Retirement plan administrators for qualified retirement plans are required to provide participants with a special tax notice when the participants receive distributions from the plan which are eligible to be rolled over into another qualified retirement vehicle. On November 24, 2014, the IRS released Notice 2014-74 which provides for amended safe-harbor explanations that employer plans may use to satisfy these notification requirements. These amendments reflect changes in the law which have occurred since the previous safe harbor explanation (found in IRS Notice 2009-68, 2009-3 CB 423) was issued 5 years ago.
Most notably these changes in law have concerned automatic enrollment, the allocation of pre-tax and after-tax amounts, and in-plan Roth rollovers. The Notice 2014-74 also includes amended model notices, which employers can use verbatim to satisfy their notification requirement for plan distribution recipients. There are two such model notices, one for distributions occurring from a Roth account and one for distributions occurring from a non-Roth account. The amended notices include revisions to account for:
- The rollover of automatic 401(k) deferral contributions that are withdrawn upon the request of the employee within 90 days of enrollment;
- A tax penalty-free distribution for amounts rolled over to an IRA to pay for certain health insurance premiums;
- Updates to the summary of the tax treatment of rolled-over after-tax contributions:
- For distributions from a non-Roth account: where part of a distribution is taxable and part is not (reflecting some after-tax contributions), the taxable portion of a distribution is now first included in the amount rolled-over with any excess then being allocated to the amount paid out to the participant, as opposed to the old treatment which proportionately allocated the taxable portion between the rolled-over amount and the amount paid out to participant;
- For distributions from a Roth account: where any plan earnings will be taxable if paid out to the participant, the earnings now will be first included in the amount rolled-over with any excess then being allocated to the amount paid out to the participant, as opposed to the old treatment of proportionately allocating the taxable earnings portion between the rolled-over amount and the amount paid out to the participant;
- Updates to the summary of the tax treatment of rollovers to in-plan Roth IRAs.
The amendments discussed above must be incorporated into employer retirement plan tax notices starting on January 1, 2015. While these changes are relatively minor, they are nonetheless important. Employer retirement plan administrators should be ready to change their plan procedures accordingly and be prepared to give their plan participants accurate information in response to any questions they may have about the new rollover rules.
Click here to see the IRS’s model notices.