New IRS Model Rollover Notices

President Obama has launched a new Retirement and Savings Initiative. As part of this Initiative, the IRS has announced a package of guidance aimed at making it easier to save. Included is an updated safe-harbor rollover explanation. The purpose is to encourage rollovers by providing a clear explanation of the rules.

Background

Retirement plan administrators are required to provide a written explanation of the rollover rules to any recipient of an eligible rollover distribution. The written explanation must describe both the direct and regular rollover rules, the mandatory income tax withholding for distributions not directly rolled over, the tax treatment of distributions not rolled over, and restrictions and tax consequences following rollover. An eligible rollover distribution is generally a lump sum or installment payments over less than 10 years. Hardship distributions, minimum required distributions and corrective distributions are not eligible for rollover.

The IRS historically has provided a safe-harbor notice that is deemed to satisfy the requirement for a written explanation. The last safe-harbor notice was published in 2002. It does not reflect several changes in the law made by the Economic Growth and Tax Relief Reconciliation Act of 2001, the Pension Protection Act and the Worker, Retiree, and Employer Recovery Act of 2008. Plan administrators have struggled with explaining the new rules while staying as close as possible to the safe-harbor notice language from 2002.

New Notices

The new safe-harbor explanation is clearer than the 2002 version and takes into account all changes in the law. The explanation has been divided into two separate notices, one for Roth accounts and one for non-Roth accounts. A participant who has both Roth and non-Roth accounts should receive both notices.

Although some of the provisions do not apply to every plan, for example, information on ESOP dividends, the notices can be revised to delete inapplicable provisions. We recommend that plan administrators, or their legal counsel, tailor the notices to reflect plan provisions; the rules are hard enough to understand without muddying the waters with explanations that do not apply.

The new notices can be used immediately. The old notice, updated as necessary for changes in the law, may be used on a transition basis through the end of 2009.

You can find the new safe-harbor notices and additional detail about them in Notice 2009-68, WARNING: The notices should not be used until they are appropriately tailored to your plan.

Other Guidance Included in the IRS Package

Several other items were also included in the package of IRS guidance on retirement and savings:

• Information and model amendments for adding automatic contribution arrangements to 401(k) plans or SIMPLE IRA plans (Notice 2009-65, Revenue Ruling 2009-30, Notice 2009-66, Notice 2009-67)
• Guidance for making employer or elective employee contributions of accumulated paid time off at termination of employment (Revenue Ruling 2009-32)
• Guidance for contributing unused vacation time annually on either a mandatory or optional basis (Revenue Ruling 2009-31)
• A “check-the-box” option on income tax returns for automatically investing income tax refunds in an IRA, U.S. Savings Bond or other savings vehicle. (Questions & Answers)

If you would like a safe-harbor notice tailored to the provisions of your plan, or if you have any questions about any of the guidance issued as part of the IRS Retirement and Savings Initiative package, please contact any of the attorneys in the Warner Norcross & Judd LLP Employee Benefits Practice Group.