“Notice 2008-30 provides guidance on distribution-related provisions of the Pension Protection Act of 2006 (PPA) that are effective in 2008, including rollovers from eligible retirement plans to Roth IRAs, additional survivor annuity options, and interest rate assumptions for lump sum distributions. The notice also provides guidance regarding plan amendments for certain gap-period earnings.
Rollover Contributions to Roth IRAs
The only rollover contributions a Roth IRA can accept are “qualified rollover contributions,” which, prior to PPA, included only amounts distributed from a designated Roth account, from another Roth IRA or from a nonRoth IRA (i.e., a traditional or SIMPLE IRA). The definition of a qualified rollover contribution was expanded by PPA to also include distributions from qualified plans described in Code §401(a), from §403(a) and (b) annuities, and from governmental §457(b) plans. A rollover from a nonRoth IRA to a Roth IRA is often referred to as a “conversion.” So, beginning in 2008, individuals can roll over into a Roth IRA distributions from any eligible retirement plan, provided such distributions meet the usual requirements for rollover including, in the case of certain rollovers, a modified adjusted gross income requirement.
Some Highlights:
- Generally, in the case of a rollover of a distribution from an eligible retirement plan (other than a Roth IRA) to a Roth IRA, the previously untaxed amounts are included in gross income as if the distribution were not rolled over, basically “converting” the rollover into an after-tax contribution. For taxable years beginning before January 1, 2010, an individual cannot roll over to a Roth IRA a distribution from an eligible retirement plan other than a Roth IRA if, for the year the distribution is made, such individual’s modified adjusted gross income exceeds $100,000 or if the individual is married and files a separate return.
- The 10-percent additional tax under §72(t) does not apply to amounts included in gross income as a result of a qualified rollover contribution to a Roth IRA, but if such amounts are distributed from the Roth IRA within 5 years of the rollover, §72(t) applies as if such distribution were includible in gross income.
- Under §401(a)(31)(A), a plan must permit a distributee of an eligible rollover distribution to elect a direct rollover to a Roth IRA.
- An eligible rollover distribution that a distributee elects, under §401(a)(31)(A), to have paid directly to an eligible retirement plan (including a Roth IRA) is not subject to mandatory withholding, even if the distribution is includible in gross income. Also, a distribution that is directly rolled over to a Roth IRA by a nonspouse beneficiary is not subject to mandatory withholding.
- Beneficiaries can make rollovers to Roth IRAs. In the case of a distribution from an eligible retirement plan (other than a Roth IRA) the beneficiary’s modified adjusted gross income and filing status are used to determine eligibility to make a qualified rollover contribution to a Roth IRA.”
“Qualified rollover contributions as defined in section 408A(e). A qualified rollover contribution as defined in section 408A(e) is:
- A rollover contribution to a Roth IRA from another IRA that meets the requirements of section 408(d)(3) or
- A rollover contribution to a Roth IRA from an eligible retirement plan (other than an IRA) that meets the requirements of section 408A(e)(2)(B).
For reporting a rollover from an IRA other than a Roth IRA to a Roth IRA, see Roth IRA conversions on pages 2 and 8.
For a direct rollover of an eligible rollover distribution to a Roth IRA (other than from a designated Roth account), report the total amount rolled over in box 1, the taxable amount in box 2a, and any basis recovery amount in box 5. (See the instructions for box 5 on page 9.) Use Code G in box 7.
For reporting instructions for a direct rollover from a designated Roth account, see Designated Roth accounts on page 3.”
The remainder of the IRS Plain Language version of Notice 2008-30 follows:
“Gap-Period Earnings for 401(k) Excess Deferrals
Notice 2008-30 also provided plan amendment guidance regarding the mandatory inclusion of gap-period earnings with the distribution of excess deferrals. Excess deferrals are a plan participant’s elective deferrals that exceed the limit under §402(g) for the year. A distribution to correct excess deferrals must be made by April 15th following the year of the excess and the distribution must be adjusted for gains and losses. For tax years beginning on or after January 1, 2007, the adjustment for gains and losses generally must include gains and losses that occur during the “gap-period” (the period beginning immediately after the tax year and ending up to 7 days before the distribution). Under Notice 2008-30, an interim plan amendment to provide for the inclusion of gap-period earnings in the distribution of excess deferrals is required to be adopted by the end of the 2009 plan year. Plan restatements submitted to the IRS in Cycle B (02/01/07 – 01/31/08) and Cycle C (02/01/08 – 01/31/09) must contain such gap-period language. In operation, beginning with excess deferrals occurring in taxable year 2007, plans must include gap-period earnings in the distribution of excess deferrals.”
Note: McKay Hochman’s defined contribution basic plan document incorporated GAP-period earnings language as part of the final 401(k) and (m) regulations plan amendment.
“Qualified Optional Survivor Annuity (QOSA)
PPA amends Code §417 to require that a plan subject to the annuity requirements of §401(a)(11) must offer a qualified optional survivor annuity (QOSA) to a participant who waives the qualified joint and survivor annuity (QJSA). The plan must also provide participants with a written explanation of the terms and conditions of the QOSA.
The level of spouse survivor annuity under the QOSA depends on a plan’s level of spouse survivor annuity under the QJSA. If the QJSA for a married participant under a plan provides a survivor annuity for the life of the participant’s spouse that is less than 75% of the amount of the annuity that is payable during the joint lives of the participant and the participant’s spouse, the QOSA must provide a spouse survivor annuity of 75%. If the QJSA for a married participant under a plan provides a survivor annuity for the life of the participant’s spouse that is greater than or equal to 75% of the amount of the annuity that is payable during the joint lives of the participant and the participant’s spouse, the QOSA must provide a spouse survivor annuity of 50%.
The QOSA must be at least actuarially equivalent to the plan’s form of benefit that is a single life annuity for the life of the participant payable at the same time as the QOSA. It is important to note that the QOSA does not have to be actuarially equivalent to the plan’s QJSA.
In general, the QOSA requirement applies to distributions with annuity starting dates in plan years beginning after December 31, 2007 (there is a special rule for collectively bargained plans). Pursuant to §1107 of PPA, a plan amendment is not required until the last day of the first plan year beginning on or after January 1, 2009. An amendment that implements a QOSA is not eligible for any relief, pursuant to PPA §1107, from the requirements of Code §411(d)(6). No plan amendment is necessary if the plan currently provides an optional joint and survivor annuity that meets the QOSA requirements.
Calculation of Lump Sum Distributions and Other Forms Subject to §417(e)(3)
For plan years beginning on or after January 1, 2008, PPA §302 changed the present value determination under §417(e)(3). Post-PPA, the “applicable interest rate” is defined as the adjusted first, second, and third segment rates applied under rules similar to the rules of §430(h)(2)(C) for the month before the date of the distribution. The adjusted first, second, and third segment rates are determined without regard to the 24-month averaging provided under §430(h)(2)(D)(i). There is a transition rule that phases in the use of the segment rates over 5 years. Post-PPA, the “applicable mortality table” is defined as a mortality table, as modified as appropriate by the Secretary, based on the mortality table specified for the plan year under §430(h)(3)(A).
Revenue Ruling 2007-67, provides guidance regarding the implementation of PPA §302.
A plan amended to provide the “greater of” amount payable calculated using pre-PPA assumptions or post-PPA assumptions will not fail to satisfy the requirement that the QJSA be at least as valuable as any other form or benefit payable under the plan at the same time. This special treatment for amounts calculated by using pre-PPA assumptions applies only through the end of the 2009 plan year (2011 for governmental plans).
In general, PPA §1107 relief applies to an amendment that provides the “greater of” amount payable calculated using pre-PPA assumptions or post-PPA assumptions even if the pre-PPA assumptions apply only for a specified period of time, as long as the amendment is adopted during the §1107 timeframe. The plan will not fail to satisfy the requirements §411(d)(6) at the end of the specified time period.
Relief under §1107 only applies to the first plan amendment that implements the post-PPA applicable interest rate and/or post-PPA applicable mortality table, and any subsequent amendment relating to the provision will not be treated as adopted “pursuant to” statutory provisions under PPA, as required for relief under §1107. Amendments adopted on or before June 30, 2008 are disregarded for purposes of determining whether an amendment that implements the post-PPA assumptions with respect to a particular plan provision is the first such amendment.
Relief under §1107 applies to a plan amendment that implements the post-PPA applicable interest rate and/or post-PPA applicable mortality table without regard to whether PPA §302 requires such an amendment.” |
