IRS Provides Updated Model 402(f) Notices – For SECURE Act Changes That Do Not Necessitate a 402(f) Notice (!)

By Anne Tyler Hall and Keely Collins, Hall Benefits Law 

On August 6, 2020, the IRS released Notice 2020-62 (the “IRS Notice”) providing updated safe harbor explanations for rollover distributions ( “402(f) Notices”) to accommodate changes made under the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). Specifically, the new 402(f) Notices – one for distributions from a non- designated Roth account and one for distributions from a designated Roth account – update the two safe harbor explanations provided by the IRS in 2018, as set forth in IRS Notice 2018-74, to reflect the following changes: 

  • The new exception to the 10 percent early withdrawal tax for in-service qualified birth or adoption distributions; and 
  • The increase in age (from age 701⁄2 to 72) for required minimum distributions for employees born after June 30, 1949. 

Although the IRS Notice contemplates coronavirus-related distributions, the 402(f) Notices do not reflect any changes in connection with those distributions. 

The IRS Notice clarifies that the distributions related to qualified birth or adoption, required minimum distributions, coronavirus-related distributions, as well as certain premiums for health and accident insurance, are not eligible rollover distributions. Therefore, a 402(f) Notice is not required for these distributions. 

Background 

Generally, the Code requires that tax-qualified retirement plans (including 401(k) plans, 403(b) plans, and 457(b) plans) provide a written explanation to any recipient of an eligible rollover distribution. Examples of eligible rollover distributions include, to name a few, a lump sum distribution after leaving employment, death benefits to a surviving spouse, or payments made to a former spouse. 

The plan administrator is required, within a reasonable period before making an eligible rollover distribution, to provide the recipient with a 402(f) Notice setting forth important details related to the rollover distribution. These details include overviews of tax implications if amounts are not rolled over, eligible retirement accounts into which funds may be rolled over, and the types of payments eligible for rollover. The IRS Notice does not expand the definition of an eligible rollover distribution or the obligation to distribute a 402(f) Notice. 

Qualified Birth or Adoption Distributions 

Code Section 72(t) generally provides for a 10 percent early withdrawal tax on distributions from a retirement plan unless such distribution qualifies for an exception (including distributions made on or after an individual attains age 591⁄2). The SECURE Act expands the early withdrawal tax exceptions to include distributions to an individual of up to $5,000 for a qualified birth or adoption. A birth or adoption distribution qualifies for the early withdrawal tax exception if the 

distribution is made to a participant during a 1-year period beginning on the date on which the child of the individual is born or which the legal adoption of an eligible adoptee is finalized. 

The revised Code Section 72(t) provides that the participant may recontribute a qualified birth or adoption distribution to an eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover is allowed. However, the distribution is not treated as an eligible rollover distribution for purposes of the direct rollover rules, the 402(f) Notice requirement, and the mandatory withholding rules. Therefore, while a qualified birth or adoption distribution may be recontributed to an applicable eligible retirement plan, the plan administrator is not required to provide a 402(f) Notice to a participant recipient of a qualified birth or adoption distribution. 

Required Minimum Distributions 

The SECURE Act amended Code Section 401(a)(9) to increase the required beginning date for minimum qualified plan distributions from April 1 of the calendar year following the calendar year in which the individual attains age 701⁄2 to April 1 of the calendar year following the calendar year in which the individual attains age 72. This change is effective for distributions required to be made to individuals who attain age 70 1/2 after December 31, 2019. The increased required minimum distribution age impacts tax-qualified retirement plans, including 401(k) plans, 403(b) plans, IRAs, governmental 457(b) plans. Employees and IRA owners who attain age 701⁄2 in 2020 will therefore not have a required beginning date of April 1, 2021. 

Coronavirus-Related Distributions 

Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act), qualified individuals receive favorable tax treatment for coronavirus-related distributions, capped at $100,000, from eligible retirement plans. “Coronavirus-related distribution” is defined as any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual. Under the CARES Act, coronavirus-related distributions are not subject to the 10% early withdrawal tax under Code Section 72(t) and are generally includible in income over a three-year period. To the extent that the distribution is eligible for tax-free rollover treatment and is contributed to an eligible retirement plan within a three-year period, a coronavirus-related distribution is not includible in income. 

Although a coronavirus-related distribution generally may be recontributed to a retirement plan, the distribution is not treated as an eligible rollover distribution. The IRS Notice, therefore, clarifies that a plan administrator is not required to provide a Section 402(f) Notice to the recipient of the coronavirus-related distribution. 

Plan Sponsor Considerations 

Provision of the 402(f) Notice is the ultimate responsibility of the plan sponsor. Employers should verify that the recordkeepers and service providers responsible for sending the 402(f) Notices are using the updated safe harbor explanations as provided in the IRS Notice. 

Plan sponsors can access copies of the new model 402(f) Notice safe harbors at: https://www.irs.gov/pub/irs-drop/n-20-62.pdf

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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