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<em>Compliance Alert</em>

 

November 19, 2009

New Safe Harbor Rollover Explanations and Other Helpful Retirement Plan Guidance from the IRS

The Internal Revenue Service (IRS) recently issued several pieces of guidance relating to rollovers from retirement plans and specific design features for individual account plans. This Compliance Alert describes the rollover-related guidance and briefly summarizes the rest.

New Safe Harbor Rollover Explanations

Section 402(f) of the Internal Revenue Code (IRC) requires retirement plan sponsors to provide plan participants and beneficiaries with explanations of the rollover rules as part of the plan's distribution package when they pay out a lump sum or other form of benefit that is eligible to be rolled over to another plan or an individual retirement account (IRA). In Notice 2009-681, the IRS has provided its most recent updated model language for this, in the form of two new model explanations that reflect the legislative and regulatory changes to the rollover rules that have taken effect since the Economic Growth and Tax Relief Reconciliation Act of 2001. The Notice also provides general information about use of the models and about other distribution-related issues. Plans that use the new models are deemed to be in compliance with the IRC rollover explanation requirements.

Specifically:

  • The new guidance provides two model explanations. One model is for use by §401(k) and §403(b) plans with respect to distributions from designated Roth accounts (Roth model). The other model is for use by all plans with respect to all other distributions (standard model). Plans that do not offer designated Roth accounts will use only the standard model; plans that have both Roth and non-Roth accounts will use both.
  • Among the legislative changes reflected in the new standard model are: automatic rollovers for mandatory cashouts in excess of $1,000, expanded rollovers to Roth Individual Retirement Accounts (Roth IRAs) and rollovers to inherited IRAs by non-spouse beneficiaries. The Roth model explanation describes the rollover options for distributions from designated Roth accounts. Both models include information related to the rollover options for nonresident aliens, the treatment of "qualified reservist distributions" and distributions refunding salary-reduction contributions taken from people who were automatically enrolled in a §401(k) or §403(b) plan under §414(w).

As noted above, a plan sponsor is considered to be in compliance with the IRC requirement to provide an explanation of the rollover rules if the plan uses one or both of the model explanations. Plan sponsors may customize the models by omitting information that is not relevant to their plans, and will not lose the safe harbor by doing so. The Notice warns that a plan sponsor will lose the safe harbor, however, if, after September 29, 2009, there is a change in the law governing distributions and the model no longer accurately reflects the law, unless the sponsor updates the relevant provisions of the model for the change.

Plan sponsors that want to take advantage of the safe harbor by using the model language must use the new models beginning January 1, 2010. Until that time, the old model language will continue to provide the safe harbor, but only if those models have been updated to reflect the statutory changes that have been made since the models were published in Notice 2002-3.2

Rollovers from Employer Plans to Roth IRAs

The other piece of rollover-related guidance recently provided by the IRS is Notice 2009-75,3 which provides additional information on the tax consequences of making a rollover from an employer-sponsored retirement plan to a Roth IRA.

Changes in the rollover rules under both the Pension Protection Act of 2006 and the Worker, Retiree, and Employer Recovery Act of 2008 have significantly expanded the opportunities for individuals to roll over amounts from both pre-tax §401(k)/§403(b) accounts and designated Roth accounts in employer-sponsored plans to Roth IRAs:

  • Individuals who want to roll over otherwise eligible distributions from pre-tax accounts in employer-sponsored plans to Roth IRAs may now do so directly rather than having to go through the interim step of rolling the funds into a traditional IRA. Effective for distributions made on and after January 1, 2010, eligibility to make these rollovers is no longer restricted to individuals with modified adjusted gross income of no more than $100,000 and who, if married, file joint tax returns.
  • Individuals who want to roll over otherwise eligible distributions from designated Roth accounts in employer-sponsored plans to Roth IRAs may now do so without income restrictions and without having to include any additional amounts in their gross income.

Notice 2009-75 updates previous guidance to recognize these changes.

Other Retirement Plan Guidance

The other guidance issued by the IRS and covered in this Compliance Alert relates to defined contribution plans. This guidance does not break new ground, but is intended to clarify existing law on certain specific points so that plan sponsors are more easily able to take advantage of the clarified provisions, if they want to do so. The specific issues covered are:

  • Automatic Enrollment  Notice 2009-65 provides two sample plan amendments for plan sponsors that want to add certain features to their §401(k) plans. The first sample can be used to add certain automatic contribution features to a §401(k) plan. The second sample can be used to add an eligible automatic contribution arrangement (EACA) to a §401(k) plan. An EACA permits participants who do not want to participate in the plan to withdraw automatic contributions within 90 days of the first salary-reduction contribution. Revenue Ruling 2009-30,4 clarifies certain basic questions with respect to automatic contributions: whether automatic contributions will continue to be treated as elective deferrals if the contribution amount is automatically increased and whether contributions can increase on a date other than the first day of a plan year. The answer is generally "yes" in both cases.
  • Paid Time-Off Contributions  Revenue Ruling 2009-315 provides guidance on whether a profit-sharing or a §401(k) plan may be amended to permit the annual contribution of the dollar equivalent of a participant's unused paid time-off to the plan and on the tax consequences to the participant of the contribution. Revenue Ruling 2009-326 provides guidance on whether a profit-sharing or a §401(k) plan may be amended to allow employees to contribute the dollar equivalent of unused paid time-off to the plan at termination of employment and on the tax consequences of the contribution. Here again, very generally speaking, in both cases the answer to the first part is "yes" and the answer to the second part is "no income inclusion until the contributed amounts are distributed."7

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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on the latest IRS guidance on retirement plans. Sibson Consulting can be retained for actuarial calculations, assistance with plan design, participant communications and to work with plan sponsors and their attorneys on compliance.

1
Notice 2009-68 is available on the IRS Web site. The notice was issued in a package of guidance distributed as part of President Obama's retirement initiative. A press release about the President's initiative is on the White House Web site. (Click on the following text to return to the Compliance Alert.)
2
Notice 2002-3 is available on the IRS Web site. (Click on the following text to return to the Compliance Alert.)
3
Notice 2009-75 is available on the IRS Web site. (Click on the following text to return to the Compliance Alert.)
4
Revenue Ruling 2009-30 is available on the IRS Web site. (Click on the following text to return to the Compliance Alert.)
5
Revenue Ruling 2009-31 is available on the IRS Web site. (Click on the following text to return to the Compliance Alert.)
6
Revenue Ruling 2009-32 is available on the IRS Web site. (Click on the following text to return to the Compliance Alert.)
7
The IRS also issued Notice 2009-66 and Notice 2009-67, which provide guidance and sample amendments with regard to automatic enrollment in SIMPLE IRA plans. (Click on the following text to return to the Compliance Alert.)

Compliance Alert, Sibson Consulting's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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