Time to Update Your Retirement Plan’s Tax Notice

Internal Revenue Code Section 402(f) requires plan administrators of certain retirement plans to provide a tax notice to payees that describes their rollover rights. The Internal Revenue Service (IRS) historically has provided model forms of this tax notice (sometimes referred to as a “402(f) notice”) for plan administrators’ use, most recently in 2018. The IRS recently issued an updated model notice to reflect some recent changes in the law, which requires plan administrators to take action now.

Which Plan Administrators are Required to Provide the Notice?

As a reminder, the tax notice should be provided with respect to the following retirement plans which pay benefits that are eligible to be rolled over, such as lump sums:

• Qualified retirement plans, such as 401(k) and pension plans
• Code section 403(b) plans
• Eligible Code section 457(b) plans maintained by government employers

When is the Notice Required to be Provided?

The notice should be provided to payees within 180 days before the plan pays benefits. The notice is normally provided with the plan’s benefit election package.  

Do Plan Administrators Have to use the IRS Model Notice?

No, plan administrators do not need to use the model notice. For example, the IRS allows the model notice to be customized, such as by omitting information that is not relevant to the particular plan. For example, if a particular retirement plan does not have after-tax contributions, the section of the notice regarding rolling over after-tax contributions can be omitted. Alternatively, plan administrators can create their own form of notice, as long as it has all of the information required by Code section 402(f).

How is the New Model Notice Different?

The updated model notice provided by the IRS modifies two provisions as a result of legal changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act):

• It explains that a “qualified birth or adoption distribution” is not subject to the typical 10% additional tax on early withdrawals. A qualified birth or adoption distribution is any distribution, up to $5,000, from an applicable eligible retirement plan that is made during the 1-year period beginning on the date on which the child of the participant is born or on which the legal adoption by the participant of an eligible adoptee is finalized.
  
  
• It changes the minimum required distribution age to age 72 for employees born after June 30, 1949.

The updated model notice also includes other minor modifications to improve clarity, such as rearranging bullet points and spelling out acronyms.

What Should Plan Administrators Do Now?

Plan administrators that utilize the model form will want to ensure that the new, updated notice is being used as soon as practicable. Plan administrators that use a custom form will want to update it to include the new information listed under “How is the New Model Notice Different?” above.

Most plan administrators rely on their third-party recordkeepers to provide the notice. In that case, a call or email to the recordkeeper to confirm that they will start utilizing the new notice is advisable. If the plan administrator self-administers the plan, the new form of tax notice can be found here.

The new model notice includes those legal changes occurring on or before August 6, 2020 that the IRS determined should be discussed in the section 402(f) notice. If other legal changes affecting the content of the notice occur after August 6, 2020, plan administrators may need to do their own updates to the notice, pending any future-issued IRS model notice.

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