EMPLOYEE BENEFIT PLANS

July 2000

NEW SPECIAL TAX NOTICE FOR ROLLOVERS

By Gabriel J. Minc

IRC section 402(f) requires plan administrators to provide qualified retirement plan participants that are about to receive an eligible rollover distribution with a notice describing the possible federal income tax treatment of the distribution. Unfortunately, the rules governing the tax treatment of distributions from qualified plans are complex and ever changing. Furthermore, plan administrators are rightfully concerned about the level of detail required and potential liability for providing insufficient or misleading information.

In 1992, the IRS addressed these concerns by issuing a model notice that plan administrators could use to satisfy their section 402(f) notice obligations. Unfortunately, the model quickly became outdated due to changes in the law.

Now, after an eight-year hiatus, the IRS is back with an updated model notice. The new model notice, like the old, addresses direct rollovers and the income tax withholding requirements for failing to elect a direct rollover (i.e., 20% mandatory federal income tax withholding). The updates in the new model notice include descriptions of the following legal changes since 1992:

* Nonqualification of Roth IRAs, Simple-IRAs, and Education IRAs to receive rollover contributions from a qualified plan or section 403(b) plan
* Five-year income averaging beginning this year. However, for individuals born before 1936, 10-year averaging and capital gains treatment may still be available.
* Changes in the rollover treatment of hardship distributions
* Tax treatment of defaulted participant loans as part of a distribution.

Plan administrators using the old model notice should begin using the updated notice. Plan administrators using their own signed notice should review it to ensure that it reflects the current rules governing qualified plan distributions. *

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