IRS Issues Updated Safe Harbor Notices for Eligible Rollover Distributions

The IRS has updated its safe harbor explanations for eligible rollover distributions from qualified retirement plans, including 401(k) plans. As background, Code § 402(f) requires retirement plan administrators to provide recipients of eligible rollover distributions with a written explanation of their rollover options and the tax consequences of their distributions within a reasonable time before those distributions are made. To satisfy this requirement, the IRS has provided two safe harbor rollover explanations: one for distributions from a Roth account and another for all other eligible rollover distributions. The IRS last issued safe harbor explanations in 2018 (see our Checkpoint article). Notice 2020-62 updates those explanations to reflect subsequent statutory changes and make various clarifications.

The updated safe harbor explanations reflect the increased age for determining the required beginning date for minimum distributions (age 72, for individuals attaining age 70-1/2 after 2019), and address the tax treatment of qualified birth or adoption distributions—both enacted as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act (see our Checkpoint article). Each explanation’s list of exceptions to the 10% additional tax on early distributions has also been revised to refer to payments “excepted from the additional income tax by federal legislation relating to certain emergencies and disasters.” The notice explains that coronavirus-related distributions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (see our Checkpoint article) may be recontributed to an eligible retirement plan, but they are not eligible rollover distributions for certain purposes, so a plan administrator is not required to provide Code § 402(f) notices to recipients of those distributions. Plan administrators are advised that they may customize the safe harbor explanations to remove provisions inapplicable to their plans, such as those relating to after-tax contributions or employer stock. And while the previous update included an additional appendix with instructions for updating existing explanations (if plan administrators did not want to simply replace those explanations with the new versions), this update includes no such guidance.

EBIA Comment: Like its predecessor, the notice warns that its safe harbor explanations reflect the law as of the date they were issued, and they will cease to satisfy Code § 402(f) if they become inaccurate because of subsequent law changes. Although the law changes identified in the notice should already be reflected in explanations that plans are currently using, the updated safe harbor explanations nevertheless provide useful guidance on what constitutes sufficient disclosure regarding those changes. For more information, see EBIA’s 401(k) Plans manual at Sections XIV.G (“Required Explanation of Rollover Rules (the Rollover Notice)”), XII.G (“Other Permissible Distribution Events”), and XII.I (“Required Minimum Distributions”).

Contributing Editors: EBIA Staff.