Qualified Retirement Plan Safe Harbor Explanations for Recipients Updated by the IRS

The IRS has revised the safe harbor notices for notices to qualified retirement plan participants who receive an eligible rollover distribution in Notice 2018-74, modifying and updating Notice 2014-74. The Notice was issued to update those documents for the following issues per the IRS explanation:

The safe harbor explanations as modified by this notice take into consideration certain legislative changes and recent guidance, including changes related to qualified plan loan offsets (as defined in section 13613 of the Tax Cuts and Jobs Act of 2017 (“TCJA”), P.L. 115-97) and guidance issued on self-certification of eligibility for a waiver of the deadline for completing a rollover (described in Rev. Proc. 2016-47, 2016-37 I.R.B. 346), and include other clarifying changes.

Two model safe harbor explanations are contained in Appendix A of the Notice. One is meant for distributions from a designated Roth account, while the other deals with distributions that are not from a Roth account. Appendix B contains information on amending the prior safe harbor notices found in Notice 2014-74 to reflect these changes.

Some of the changes incorporated in these explanations include:

  • The ability to roll over amounts related to a qualified plan loan offset amount through the tax filing due date (including extensions) of the participant’s tax return for the year of the distribution.

  • Changes made by the Moving Ahead for Progress in the 21st Century Act and Defending Public Safety Employees’ Retirement Act to situations when the 10% tax found at IRC §72(t) apply to certain distributions to public employees.

  • Revenue Procedure 2016-47’s self-certification process for late rollovers to IRA accounts

The Norice also contains the following additional modifications to the explanations:

The safe harbor explanations also include other clarifying modifications, such as modifications clarifying that the 10% additional tax under § 72(t) for early distributions applies only to amounts includable in income, explaining how the rollover rules apply to governmental § 457(b) plans that include designated Roth accounts, clarifying that the general exception to the 10% additional tax under § 72(t) for payments from a governmental plan made after a qualified public safety employee separates from service (if the employee will be at least age 50 in the year of the separation) is not available for payments from IRAs, and recognizing the possibility that taxpayers affected by federally declared disasters and other events may have an extended deadline for making rollovers.

The Notice reminds administrator of the requirements related to providing explanations to participants receiving a distribution that is eligible for rollover treatment:

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, § 1.402(f)-1, Q&A-2(a), of the Proposed Income Tax Regulations, pursuant to section 1102(a)(1)(B) of the Pension Protection Act of 2006, P.L. 109-280, 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 much as 180 days before the date on which the distribution is made (or the annuity starting date).

The Notice also reminds administrators that the model safe harbor explanations are just that: model explanations and that they can be modified as appropriate or even totally different language can be used so long as it meets the requirements of the law and regulations:

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).

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 contain the information required by § 402(f) and must be written in a manner designed to be easily understood.

Those involved with administering qualified retirement plans and handling distributions should download this Notice and consider the need to update plan notices if the plan wishes to claim the protection of using the example safe harbor explanations.