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Client Alert: New Safe Harbor 402(f) Notice

January 5, 2015

On November 24, 2014, the Internal Revenue Service (IRS) issued Notice 2014-74, which updates and amends the safe harbor explanations for eligible rollover distributions to reflect recent changes in the law.

Under § 402(f) of the Internal Revenue Code, certain notices (or “explanations”) that explain the tax treatment of rollovers, transfers, and distributions must be sent to recipients of “eligible rollover distributions” from qualified retirement plans. Previously, if a distribution included pre- and after-tax contributions and only a portion of the distribution was directly rolled over, each portion was treated as a separate distribution and included a pro-rata share of the pre- and after-tax contributions. Notice 2014-54 announced the IRS’s new position that, for the purpose of determining the proration of a distribution that includes pre- and after-tax amounts, distributions made at the same time to multiple destinations are treated as a single distribution. More recently, the IRS amended its safe harbor explanations to reflect the new allocation rules.

Amendments to the Safe Harbor Explanation

  • Payments not from a Designated Roth Account
    Eight amendments are made to the safe harbor explanation for payments from a non-Roth account. These amendments make changes to sections discussing the amount that may be rolled over and the 10% additional income tax on early distributions. The amendments also include special rules for payments that include after-tax contributions and payments rolled over to a Roth IRA. Additionally, Notice 2014-74 adds a new section allowing rollovers to an in-plan designated Roth account.
  • Payments from a Designated Roth Account
    Four amendments are made to the safe harbor explanation for payments from a designated Roth account. These amendments make changes to sections discussing how to do a rollover, the amount that may be rolled over, and the 10% additional income tax on early distributions.

For additional guidance, please see Notice 2014-74. If you have any questions regarding the implications of this IRS guidance for your qualified plan, or if you would like assistance in tailoring the new safe harbor explanations to your plan, please contact one of our Employee Benefits attorneys.

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