Atlanta, Georgia
Code Section 402(f) requires plan administrators to provide a
written explanation to participants who receive eligible rollover distributions. The explanation must describe the rollover
rules and related tax consequences. The IRS has issued
safe-harbor explanations that plan administrators may use to meet this
requirement.
The
IRS recently issued an updated safe-harbor explanation in Notice 2002-3 to
reflect changes made by EGTRRA. For example, the new explanation describes rollovers of
after-tax contributions, rollovers to and from governmental 457(b) plans and
tax-sheltered annuities, and rollovers by surviving spouses to eligible
retirement plans (previously they could only rollover to IRAs). The new safe-harbor explanation also
reflects amendments to Code Section 402 that were part of the Small Business
Job Protection Act of 1996 and the 1998 IRS Restructuring and Reform Act,
including the provision that certain hardship distributions are not eligible
for rollover.
EGTRRA also expanded the explanation under Code Section
402(f). The expanded explanation must
include information regarding when a subsequent distribution from an eligible
retirement plan that previously received an eligible rollover distribution may
be subject to restrictions and how the tax consequences may differ from the
plan that made the first distribution.
Notice
2002-3 contains two explanations: one for qualified
plans and Code Section 403(b) plans, and the other for governmental 457(b)
plans. The appropriate
safe-harbor explanation meets the requirements of Code Section 402(f) for
distributions made after December 31, 2001 if it is provided to the participant
within a reasonable period of time. A
reasonable period of time is no less than 30 days (subject to waiver) and no
more than 90 days before the date on which a distribution is made.
The new safe-harbor explanation is fairly comprehensive. A plan administrator may tailor the
safe-harbor explanation to its plan’s terms by deleting any portions that do
not apply. A plan administrator also
may provide additional information, so long as the information is not
inconsistent with the safe-harbor explanation.
Alternatively, a plan administrator can satisfy Code Section 402(f) by
providing its own explanation, but the explanation must include the information
required by Code Section 402(f) and must be written in a manner designed to be
easily understood.
The
last safe-harbor explanation that the IRS issued was in Notice 2000-11. This old
safe-harbor explanation will no longer satisfy Code Section 402(f) to the
extent that it is inconsistent with applicable law for distributions made after
December 31, 2001. However, the IRS
will not impose a penalty for the failure to provide an expanded explanation
with respect to any distribution made before April 14, 2002, as long as the
plan administrator makes a reasonable attempt to comply with the expanded notice
requirements. Most employers are
expected to use the new safe-harbor explanation rather than try to determine
what is a reasonable attempt to comply with EGTRRA.