IRS Model 402(f) Notice
Rev. 10/09/09; E-mail Alert 2009-16

On September 5, 2009, the IRS released Notice 2009-68, providing a long-awaited updated model 402(f) notice. The updated model notice reflects recent changes in the law and attempts to simplify this lengthy notice by using a Q&A format.

Section 402(f) of the Internal Revenue Code (the Code) requires an administrator of a qualified plan and 403(b) arrangement to provide a written explanation prior to the distribution of an “eligible rollover distribution.” Contents of the 402(f) notice must include a description of the direct rollover rules, the participant rollover rules, and the mandatory 20% federal income-tax withholding rules for eligible rollover distributions that are not rolled over. The notice also explains other taxation rules involving distributions and rollovers and has always been a great source of tax information for participants.

The last IRS model 402(f) notices came in 2002, when the IRS issued Notice 2002-3 due to changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). In 2007, the IRS published Notice 2007-7 to implement changes from the PPA that were effective for plan years beginning on or after January 1, 2007. Section 1102(b)(1) of PPA requires the 402(f) notice to contain a description of available investment options and fees that will be incurred in a defined contribution plan if a distribution is deferred upon severance. Adding specific participant level investment information to the model language means that the 402(f) notice must be customized for each participant and is no longer able to be a “canned” notice.

Because of the differences in treating distributions from designated Roth accounts, the IRS released two model notices: one for payments from a designated Roth account and the other for payments not from a designated Roth account.

The following is a list of all of the provisions that have been added to the model notices. In addition, information has also been added to explain rules that apply when a distribution is made to a nonresident alien.

HEART Act

• The 10% penalty on early distributions [§72(t)] does not apply to a qualified reservist distribution. An individual who is/was in the reserves and is/was called into active duty for more than 179 days is entitled to withdraw certain retirement funds without incurring the under age 59½ 10% penalty. This applies to distributions from IRAs and to elective deferrals from a 401(k) or 403(b), provided the distribution is made between the beginning date on the order/call and ending at the close of the active duty period. Further, any or all of the amount so withdrawn may be repaid during the two-year period starting on the day after active duty is ended.

PPA

• A direct trustee-to-trustee transfer of a distribution from an eligible employer plan to an inherited IRA for a nonspouse designated beneficiary is treated as a direct rollover of an eligible rollover distribution for purposes of §402(c). WRERA requires a §402(f) notice be provided to a nonspouse beneficiary for plan years beginning after December 31, 2009.

• The 10% early distribution penalty does not apply to a distribution from a governmental 414(d) DB plan, if the distribution is made to a qualified public safety employee who separates from service after attainment of age 50.

• Distributions from a government plan that are paid directly to an accident or health plan or a qualified long-term care insurance contract for health or long-term care insurance premiums of an eligible retired public safety officer, his or her spouse, or his or her dependents are provided a limited exclusion from gross income.

• Sec. 414(w) permissible withdrawals from automatic contribution arrangements are:

1.	not eligible rollover distributions,
2.	not includible in gross income (to the extent not a return of designated Roth contributions),
3.	taxable year in which the distribution is made, and
4.	not subject to the 10% penalty under §72(t).

Roth

• A rollover contribution of any payment or distribution to an individual from a designated Roth account may be made only if the contribution is to another designated Roth account of the individual or to a Roth IRA of the individual.

• A taxpayer who makes a rollover to a Roth IRA from an eligible employer plan that is not from a designated Roth account must include in gross income the amount of the rollover contribution (other than after-tax contributions).

• A rollover to a Roth IRA is permitted only if the recipient’s modified adjusted gross income for the year of the distribution does not exceed $100,000 and, if married, the recipient files a joint return.

Note: As a result of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), the $100,000 income and joint filing requirements do not apply to distributions made after 2009.

Effective Date
The IRS has stated the safe harbor explanations provided in Notice 2002-3 will continue to apply until December 31, 2009. Therefore, plan administrators can provide their current version of the 402(f) notice until the end of this year. Plan administrators may also customize the safe harbor explanation that has been provided by omitting sections that may not be applicable to their plan.

It is a not a requirement to provide the exact safe harbor notice template that has been published by the IRS. A plan administrator may adopt his or her own version which contains information required under Section 402(f) as long as the communication is in writing and is provided in a manner designed to be easily understood.

The notice may continue to be provided electronically, provided the IRS rules for providing electronic notices are followed.

Bill Grossman, ERPA, QPA