The Internal Revenue Service (IRS) recently issued Notice 2026-13, which provides updated safe harbor explanations for plan administrators to satisfy the requirements of Internal Revenue Code (IRC) Section 402(f). This notice is a response to significant legislative modifications introduced by the SECURE 2.0 Act of 2022 and recommendations from the U.S. Government Accountability Office (GAO) regarding participant comprehension of distribution options. For tax professionals, understanding these revisions is essential to ensuring plan compliance and providing accurate guidance on the taxability of distributions from exempt employees’ trusts.

Statutory and Regulatory Framework for Section 402(f) Disclosures

Under the strict statutory construction of IRC Section 402(f)(1), 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". The statute mandates that this explanation cover the direct rollover provisions, the mandatory 20% withholding on distributions not directly rolled over, the 60-day rollover period, and, if applicable, special rules regarding net unrealized appreciation (NUA).

The regulatory standards provided in Treas. Reg. Section 1.402(f)-1 further clarify that the notice "must be designed to be easily understood". Regarding timing, a "reasonable period" is generally defined as no less than 30 days and no more than 90 days before the distribution. However, as the IRS analysis in the current notice highlights, plan administrators may rely on proposed regulations that extend the maximum window to 180 days before the distribution date or the annuity starting date. The IRS emphasizes that "the posting of the section 402(f) notice will not be considered provision of the notice"; it must be provided individually to each distributee.

Legislative Impetus and the Impact of the SECURE 2.0 Act

The primary reason for the issuance of Notice 2026-13 was the need to align the safe harbor explanations with the SECURE 2.0 Act of 2022. The IRS’s analysis focuses on several critical changes to IRC Section 72(t), which generally imposes a "10% additional tax on the portion of a distribution from a qualified retirement plan... that is includible in gross income" unless an exception applies.

The revised safe harbor notices now reflect new exceptions to this 10% tax, including:

Emergency Personal Expenses: Section 115 of the SECURE 2.0 Act added Section 72(t)(2)(I) for unforeseeable or immediate financial needs.
Domestic Abuse Victims: Section 314 added Section 72(t)(2)(K), allowing victims to receive distributions without the 10% penalty.
Terminally Ill Individuals: Section 326 added Section 72(t)(2)(L) for employees certified by a physician as having a terminal illness.
Qualified Disaster Recovery Distributions: Section 331 added Section 72(t)(2)(M) and Section 72(t)(11), allowing up to $22,000 for losses in a qualified disaster area.

Notably, the IRS rules that while many of these new categories are exempt from the 10% penalty, several—such as emergency personal expense distributions and domestic abuse victim distributions—are not treated as eligible rollover distributions. Consequently, they are not subject to the Section 402(f) notice requirements or mandatory withholding under Section 3405.

Required Minimum Distribution and Mandatory Distribution Adjustments

Notice 2026-13 also incorporates modifications to IRC Section 401(a)(9) regarding required minimum distributions (RMDs). The SECURE 2.0 Act increased the "applicable age" at which RMDs must begin to 73 for individuals attaining age 72 after December 31, 2022, and eventually to 75 for those attaining age 74 after December 31, 2032.

Furthermore, the IRS analysis highlights that "neither required minimum distributions under section 401(a)(9)(A) nor the incidental death benefit requirements of section 401(a) apply to any designated Roth account in a plan". For surviving spouses, the notice reflects the new election under Section 401(a)(9)(B)(iv) to be treated as the employee for RMD purposes, potentially allowing for a longer distribution period based on the spouse’s remaining life expectancy.

Another technical update involves the increase in the mandatory distribution threshold. Under IRC Section 411(a)(11) and Section 401(a)(31)(B), the dollar threshold for "immediate distribution of a separating participant’s benefit without such participant’s consent" was increased from $5,000 to $7,000.

GAO Recommendations and Enhanced Participant Options

The GAO Report (GAO-24-107167) played a significant role in the structure of the revised notices. The GAO recommended that the Section 402(f) notices provide "clearer and more concise information" about four specific distribution options. In the IRS’s ruling on the notice’s content, they have included a paragraph detailing these options:

Leaving savings in the former employer’s plan.
Rolling over to a new employer’s plan.
Rolling over into an IRA.
Taking a lump-sum distribution.

The Treasury Department and the IRS specifically "encourage plan administrators to consider implementing the GAO Report’s recommendation to provide the section 402(f) notice in connection with a participant’s separation from service". This ensures participants receive information when facing critical decisions, even though there is no statutory mandate to provide the notice specifically at the point of separation.

Structure of the Safe Harbor Appendix Explanations

The IRS provides two distinct safe harbor explanations: one for distributions not from a designated Roth account and one for distributions from a designated Roth account. If a participant is eligible for distributions from both, both notices must be provided.

The core sections of the safe harbor notices, as detailed in the Appendices of Notice 2026-13, include the following:

General Information About Rollovers This section describes the "rollover rules that apply to payments from the Plan". It explicitly states that "if you do a rollover, you won’t have to pay tax until you receive payments later". It distinguishes between a direct rollover, where the plan pays the IRA or new plan directly, and a 60-day rollover, where the participant receives the funds and must deposit them into an eligible retirement plan within 60 days. The notice warns that if a 60-day rollover is chosen, "the Plan is required to withhold 20% of the payment for federal income taxes," necessitating the use of other funds to roll over the full 100% of the distribution.

Exceptions to the 10% Additional Tax The notices provide an exhaustive list of exceptions for participants under age 59½. Key quotes from the text state that the tax "doesn’t apply to...payments made after you separate from service if you are at least age 55 in the year of the separation". For public safety employees, this age is reduced to 50, or after 25 years of service.

Special Rules and Options This section addresses complex scenarios, such as:

After-tax Contributions: "After-tax contributions included in a payment aren’t taxed". The notice explains that if a partial distribution is rolled over, the "portion rolled over consists first of the amount that would be taxable if not rolled over".
Plan Loan Offsets: "The offset amount is treated as a distribution to you at the time of the offset, even though you will not receive the offset amount". Qualified plan loan offsets resulting from severance or plan termination have a longer rollover window—until the tax return due date.
Net Unrealized Appreciation (NUA): "Under the special rule, the net unrealized appreciation on the stock won’t be taxed when distributed from the Plan and will be taxed at capital gain rates when you sell the stock".

Customization and Compliance

The IRS permits plan administrators to "customize a safe harbor explanation by omitting any information that does not apply to the plan". For example, if a plan does not offer employer stock, the NUA section should be eliminated. While administrators may draft their own explanations, using the provided safe harbor ensures that the notice "meets the requirements of section 402(f)". Tax professionals must note that Notice 2026-13 supersedes Notice 2020-62 and will remain accurate only until future changes in law occur after January 15, 2026.

Prepared with assistance from NotebookLM.