The IRS released Notice 2018-74 to modify and update the safe harbor explanations that may be used to satisfy the notice requirements of Code Section 402(f). This article describes the key provisions of the notice.
Background
Section 402(f) requires the plan administrator of a qualified of a qualified plan to provide a written explanation to any recipient of an eligible rollover distribution (the “402(f) notice”).[1]An eligible rollover distribution is described in Section 402(c)(4).[2]The specific contents of the required notice are set out in Section 402(f)(1). Section 1.402(f)-1, Q&A-1(a), provides that the plan administrator of a qualified plan is required to provide the 402(f) notice within a reasonable period of time before making an eligible rollover distribution.
In order to facilitate compliance with the requirements of Section 402(f), the IRS has published two model explanations that are considered to satisfy the notice requirements (which is why they are safe harbor explanations). One explanation is for use with a distribution that is not from a designated Roth account. The other explanation is for use with a distribution from a distribution from a designated Roth account. This article will focus upon changes in the notice for distributions that are not from a Roth account.
Prior to the issuance of Notice 2018-74, Notice 2014-74 had provided the safe harbor explanations. Since the publication of Notice 2014-74, there had been changes in the law and in IRS guidance that affected the content of the explanations. The most recent change in law was the Tax Cuts and Jobs Act of 2017 (TCJA). Section 1613 of the TCJA modified the rollover deadline for a qualified plan loan offset to allow a rollover into an eligible retirement plan by the individual’s tax filing date (including extensions) for the taxable year in which the offset occurs.
Notice 2018-74
Notice 2018-74 updates the safe harbor explanations to reflect legislative changes and guidance issued after Dec. 8, 2014. The changes reflected include:
1. The extended rollover deadline for qualified plan loan offset amounts under TCJA.
2. The exception to the 10% additional tax under Section 72(t) for phased retirement distributions to certain federal employees under MAP-21.
3. The expanded exception to the 10% additional tax under § 72(t) for specified federal employees who have reached age 50 under the Defending Public Safety Employees’ Retirement Act (DPSERA).
4. The self-certification procedures under Revenue Procedure 2016-47 for claiming eligibility for a waiver of the 60-day deadline for rollovers.
In addition to updating the explanations for changes law and guidance, the IRS also made other clarifying modifications. The clarifying modifications include clarifying that the 10% additional tax under Section 72(t) only applies to amounts includable in income, and recognizing the possibility that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.
Appendix A contains both safe harbor explanations. The first explanation is for distributions that are not from a designated Roth account. The second explanation is for distributions from a designated Roth account. The updated explanations may be used by plan administrators and payors. However, the IRS states that the explanations will not satisfy Section 402(f) to the extent that the explanations are not accurate because of a change in law occurring after Sept. 18, 2018.
The IRS reiterates that a plan administrator or payor may customize a safe harbor explanation by omitting any information that does not apply to the plan. For example, a plan that does not provide for employee contributions could omit the section with the heading: “If your payment includes after-tax contributions.”
Appendix B provides detailed instructions on how to amend the explanations that are Notice 2014-74 to reflect the changes that are reflected in the updated explanations in Appendix A. This allows plan administrators to review the specific changes and make modifications to their existing explanations rather than simply adopt the revised explanations. Part 1 of Appendix B lists the amendments for distributions that are not from a designated Roth account, and Part 2 lists the amendments for distributions from a designated Roth account. There are 17 amendments listed in Part 1 and 15 amendments listed in Part 2.[3]
Some of the amendments to the existing explanations are to headings, while others make relatively minor wording changes. For non-federal employees, the most substantive amendments appear to be the expanded deadlines for rollovers for situations that are described earlier in this article. Accordingly, a plan administrator or payor that is using a customized notice may want to review the amendments in Appendix B and make any changes to their existing notice rather than using the new explanations in Appendix A.
Conclusion
The updated explanations are helpful to plan administrators and payors. The new explanations can be used right away, or existing notices can be modified. However, no matter what action plan administrators and payors take, they will need to watch for further changes in law. As Congress returns after the November elections there may well be changes made in the “lame duck”session that affect the Section 402(f) notice.
Footnotes
[1]The requirement to provide a notice also applies to 403(a) plans, 457(b) plans and 403(b) annuities.
[2]The article will assume sufficient knowledge of what is an eligible rollover distribution.
[3]For sake of brevity, this article will not list each modification to the existing explanations.
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