Employee Benefits-IRS Issues New 402(f) Safe Harbor Notices And Other Guidance On Rollovers

On September 5, 2009, the IRS issued Notice 2009-68, which contains long-awaited updated safe harbor notices that plan administrators may use to comply with the notice requirement of Section 402(f) of the Internal Revenue Code. That Section requires a plan administrator of an employer plan to provide a participant, who is about to receive an eligible rollover distribution from the plan, with a written explanation of the rollover and other tax treatment of the distribution. The IRS’s previously issued safe harbor notices- contained in IRS Notice 2002-3- had become badly out of date, due to the many changes in the rollover and tax rules since those notices had been issued.

According to the IRS’s Special Edition, September 2009, employee plans news, Notice 2009-68 contains two updated safe harbor model notices, which may be used to satisfy the Section 402(f) notice requirements. Plan administrators may use the first model notice for recipients of distributions which are not from a designated Roth account, and the second model for recipients of distributions from a designated Roth account. These updated model notices reflect changes in the law and simplify the presentation and description of a distribution recipient’s options. They also explain rules that apply in special situations, such as when the distribution is made to a surviving spouse or other beneficiary. Plan administrators may tailor each model notice to the specific terms and administrative procedures of their plans. They may immediately use these model notices, or continue to use the prior Section 402(f) safe harbor notices contained in IRS Notice 2002-3, as appropriately modified for law changes, on a transition basis through the end of 2009.

On September 8, 2009, the IRS issued Notice 2009-75, which provides guidance on rollovers from employer plans to Roth IRAs. According to the IRS’s Special Edition, September 2009, employee plans news, Notice 2009-75 describes the tax consequences of rolling over an eligible rollover distribution (an “ERD”) from qualified plans (such as 401(k) or profit-sharing), 403(a) annuity plans, 403(b) plans or 457(b) governmental plans to a Roth IRA. An employer plan may have a designated Roth account, from which an ERD may be made. The Notice explains that an individual must include in his or her gross income amounts, other than after-tax contributions, that are part of the ERD rolled over to a Roth IRA. However, when an individual rolls over an ERD from a designated Roth account, regardless of whether it is a “qualified distribution” (a distribution which meets certain requirements of the Code and may be received tax-free), this rollover is not includible in his or her gross income. Prior to January 1, 2010, only an individual meeting the income and filing status eligibility requirements (the individual’s modified AGI does not exceed $100,000 and he or she must file jointly if married) may roll over an ERD from an employer plan (other than from a designated Roth account in the plan) to a Roth IRA. Individuals who do not meet those eligibility requirements may roll over the ERD into a non-Roth IRA. The non-Roth IRA can then be converted to a Roth IRA in 2010, when the income and filing status eligibility requirements are eliminated.

Notice 2009-75 supplements the current IRS regulations under Section 408A of the Internal Revenue Code and the guidance provided in IRS Notice 2008-30. IRS Publication 590 has additional information on rollovers from employer plans to Roth IRAs.