The IRS has issued two new safe harbor explanations to be given to participants receiving a distribution by qualified plans to satisfy the requirements of IRC §402(f). The new documents have been updated to take into account changes to the law made by the SECURE Act and the CARES Act related to qualified retirement plans in Notice 2020-40.[1] The new documents update the notices found in Notice 2018-74.

IRC §402(f) imposes the following requirements on qualified retirement plans:

(f) Written explanation to recipients of distributions eligible for rollover treatment

(1)In general

The plan administrator of any plan shall, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to the recipient—

(A) of the provisions under which the recipient may have the distribution directly transferred to an eligible retirement plan and that the automatic distribution by direct transfer applies to certain distributions in accordance with section 401(a)(31)(B),

(B) of the provision which requires the withholding of tax on the distribution if it is not directly transferred to an eligible retirement plan,

(C) of the provisions under which the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date on which the recipient received the distribution,

(D) if applicable, of the provisions of subsections (d) and (e) of this section, and

(E) of the provisions under which distributions from the eligible retirement plan receiving the distribution may be subject to restrictions and tax consequences which are different from those applicable to distributions from the plan making such distribution.

(2)Definitions

For purposes of this subsection—

(A)Eligible rollover distribution

The term “eligible rollover distribution” has the same meaning as when used in subsection (c) of this section, paragraph (4) of section 403(a), subparagraph (A) of section 403(b)(8), or subparagraph (A) of section 457(e)(16). Such term shall include any distribution to a designated beneficiary which would be treated as an eligible rollover distribution by reason of subsection (c)(11), or section 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B), if the requirements of subsection (c)(11) were satisfied.

(B)Eligible retirement plan

The term “eligible retirement plan” has the meaning given such term by subsection (c)(8)(B).

The IRS provides safe harbor notices that plans may use to fulfill the requirements, updating the notices from time to time to take into account law changes. The IRS last provided such updated notices in Notice 2018-74.

In this Notice the IRS provides a pair of notices:

One for distributions that are not from a designated Roth account, and
The other for distributions from a designated Roth account.[2]

The Notice describes three recent law changes taken into account in the revised notices.

Qualified Birth or Adoption Distributions

The SECURE Act created a new category of distributions from a plan, the qualified birth or adoption distribution. The Notice describes this new distribution as follows:

Section 72(t)(1) generally provides for a 10% additional tax on a distribution from a qualified retirement plan, unless the distribution qualifies for one of the exceptions in § 72(t)(2). Section 113 of the SECURE Act amended § 72(t)(2) of the Code to add § 72(t)(2)(H), which permits an individual to receive up to $5,000 for a qualified birth or adoption distribution from an applicable eligible retirement plan (defined in § 72(t)(2)(H)(vi)(I) as an eligible retirement plan as defined in § 402(c)(8)(B) other than a defined benefit plan). The distribution is not subject to the 10% additional tax under § 72(t)(1) to the extent it meets the requirements of a qualified birth or adoption distribution. A qualified birth or adoption distribution is defined in § 72(t)(2)(H)(iii)(I) as any distribution from an applicable eligible retirement plan to an individual if made during the 1- year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.

Section 72(t)(2)(H)(v)(I) provides that the individual may recontribute a qualified birth or adoption distribution (not to exceed the amount of the distribution) to an applicable eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. However, § 72(t)(2)(H)(vi)(II) provides that a qualified birth or adoption distribution is not treated as an eligible rollover distribution for purposes of the direct rollover rules of § 401(a)(31), the notice requirement under § 402(f), or the mandatory withholding rules under § 3405. Thus, although a qualified birth or adoption distribution generally may be recontributed to an applicable eligible retirement plan, a plan administrator is not required to provide a § 402(f) notice to a recipient of a qualified birth or adoption distribution.[3]

Required Minimum Distribution Required Beginning Date Revision in the SECURE Act

The SECURE Act revised the required beginning date rules related to requirement minimum distributions from retirement plans. The Notice describes this change as follows:

Section 114 of the SECURE Act amended § 401(a)(9) of the Code to change the required beginning date applicable to § 401(a) plans and other eligible retirement plans described in § 402(c)(8), including a § 401(a) qualified plan, a § 403(a) annuity plan, a § 403(b) annuity contract, a § 457(b) plan maintained by a governmental employer, and an individual retirement account or annuity (IRA) described in § 408(a) or (b). The new required beginning date for an employee or an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 70½. This amendment to § 401(a)(9) is effective for distributions required to be made after December 31, 2019, with respect to individuals who will attain age 70½ after that date. As a result of this change, employees and IRA owners who will attain age 70½ in 2020 will not have a required beginning date of April 1, 2021.[4]

CARES Act Coronavirus-Related Distributions

The CARES Act temporarily adds a new distribution category for retirement plans, the coronavirus-related distribution. The Notice describes this type of distribution as follows:

Section 2202(a) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136, 134 Stat. 281 (2020) (CARES Act) permits an individual to receive a coronavirus-related distribution from an eligible retirement plan (as defined in § 402(c)(8)(B)). Section 2202(a)(4)(A) of the CARES Act defines a coronavirus-related distribution as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a qualified individual. Section 2202(a)(2) of the CARES Act limits the amount of the aggregate distributions from all eligible retirement plans that can be treated as coronavirus-related distributions to no more than $100,000. A coronavirusrelated distribution under section 2202(a) of the CARES Act is not subject to the 10% additional tax under § 72(t)(1). In addition, the coronavirus-related distribution may be included in gross income ratably over the 3-year period beginning with the taxable year of the distribution.

Section 2202(a)(3) of the CARES Act provides that a qualified individual may recontribute a coronavirus-related distribution (not to exceed the amount of the distribution) to an applicable eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. However, a coronavirus-related distribution is not an eligible rollover distribution for purposes of the direct rollover rules of § 401(a)(31), the notice requirement under § 402(f), or the mandatory withholding rules under § 3405. Thus, although a coronavirus-related distribution generally may be recontributed to an applicable eligible retirement plan, a plan administrator is not required to provide a § 402(f) notice to a recipient of a coronavirus-related distribution. For more information relating to section 2202 of the CARES Act, see Notice 2020-50, 2020-28 I.R.B. 35.[5]

Revised Notices

The Notice describes the individual revised notices as follows:

The first safe harbor explanation reflects the rules relating to distributions not from a designated Roth account. Thus, the first safe harbor explanation should be used only for a distribution that is not from a designated Roth account. The second safe harbor explanation reflects the rules relating to distributions from a designated Roth account. Thus, the second safe harbor explanation should be used only for a distribution from a designated Roth account. Both explanations should be provided to a participant if the participant is eligible to receive eligible rollover distributions from both a designated Roth account and an account other than a designated Roth account.

The safe harbor explanation in this notice for distributions not from a designated Roth account meets the requirements of § 402(f) for an eligible rollover distribution that is not from a designated Roth account if provided to the recipient of the eligible rollover distribution within a reasonable period of time before the distribution is made. Similarly, the safe harbor explanation in this notice for distributions from a designated Roth account meets the requirements of § 402(f) for an eligible rollover distribution from a designated Roth account if provided to the recipient of the eligible rollover distribution within a reasonable period of time before the distribution is made.

Section 1.402(f)-1, Q&A-2, provides, in general, that a reasonable period of time for providing an explanation is no less than 30 days (subject to waiver) and no more than 90 days before the date on which the distribution is made. However, proposed § 1.402(f)-1, Q&A-2(a), pursuant to section 1102(a)(1)(B) of the Pension Protection Act of 2006, Pub. L. 109-280, 120 Stat. 780 (2006), provides that a notice required to be provided under § 402(f) may be provided to a participant as much as 180 days before the date on which the distribution is made (or the annuity starting date). These proposed regulations further provide that, with respect to the extended period for notices, plans may rely on the proposed regulations for notices provided during the period beginning on the first day of the first plan year beginning on or after January 1, 2007, and ending on the effective date of final regulations. Thus, the § 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date).[6]

The Notice reminds plan administrators that the documents do not have to be used verbatim—they may be appropriately modified:

A plan administrator or payor may customize a safe harbor explanation by omitting any information that does not apply to the plan. For example, if the plan does not hold after-tax employee contributions, it would be appropriate to eliminate the section “If your payment includes after-tax contributions” in the explanation for payments not from a designated Roth account. Similarly, if the plan does not provide for distributions of employer stock or other employer securities, it would be appropriate to eliminate the section “If your payment includes employer stock that you do not roll over.” Other information that may not be relevant to a particular plan includes, for example, the sections “If your payment is from a governmental section 457(b) plan” and “If you are an eligible retired public safety officer and your payment is used to pay for health coverage or qualified long-term care insurance.” In addition, the plan administrator or payor may provide additional information with a safe harbor explanation if the information is not inconsistent with § 402(f).[7]

As these are merely safe harbor notices, a plan administrator could decide to write a different notice not using the safe harbor notice as a starting point. The IRS warns that if the administrator does this, the notice must be easily understood:

Alternatively, a plan administrator or payor may satisfy § 402(f) by providing an explanation that is different from a safe harbor explanation. Any explanation must include the information required by § 402(f) and must be written in a manner designed to be easily understood.[8]

Administrators are also reminded that if Congress changes the underlying law (something Congress does from time to time), these notices will lose their safe harbor status if not corrected by the administrator to reflect any change in the law made after August 6, 2020:

The updated safe harbor explanations provided in this notice may be used by plan administrators and payors to satisfy § 402(f). However, the updated safe harbor explanations will not satisfy § 402(f) to the extent the explanations are no longer accurate because of a change in the relevant law occurring after August 6, 2020.[9]

The revised participant notices are found in the appendix found at the end of Notice 2020-62.[10]

[1] Notice 2020-62, August 6, 2020, https://www.irs.gov/pub/irs-drop/n-20-62.pdf (retrieved August 6, 2020)

[2] Notice 2020-62, Section I

[3] Notice 2020-62, Section II.B.1

[4] Notice 2020-62, Section II.B.2

[5] Notice 2020-62, Section II.B.3

[6] Notice 2020-62, Section III

[7] Notice 2020-62, Section III

[8] Notice 2020-62, Section III

[9] Notice 2020-62, Section III

[10] Notice 2020-62, Appendix