IRS Updates 401(k) Model Rollover Notice

On August 6, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-62 which updates the information that must be provided to participants in retirement plans (including 401(k) plans) when they become eligible for a distribution (this is often referred to as the “rollover notice”). In addition, Notice 2020-62 provides two model rollover notices (one solely for payments from Roth contribution accounts, and another for payments from traditional, non-Roth accounts) which, if used for this purpose, are deemed to satisfy the statutory requirement.

Background. The Internal Revenue Code requires 401(k) and other retirement plan administrators to provide a written explanation meeting specific statutory requirements to any recipient of an “eligible rollover distribution.” (See our article entitled “401(k) Plan Distributions and Vesting” for details.)

Briefly stated, an “eligible rollover distribution” is a distribution from any tax-qualified retirement plan (which for these purposes includes an individual retirement account (“IRA”)) that is eligible to be “rolled over” into another qualified plan or IRA. The rollover notice must be provided within a “reasonable period of time” (generally, no less than 30 days and no more than 90 days) before the distribution is made.

To assist plan administrators, the IRS has traditionally provided model notices that are deemed to meet the statutory requirements. 401(k) plan administrators are permitted to use all or any part of the model notices in an effort to customize them to reflect their specific plan provisions. Prior to Notice 2020-62, the most recent IRS-provided model notices were issued in September 2018.

Recent Legislation Affecting 401(k) Plans. On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, which contained a large number of significant retirement-related provisions (see our twin blogs entitled “How Will the SECURE Act Affect Me? Highlights of Some of the Top New Provisions Affecting 401(k) Plans, Part I and Part II.”

Separately, on March 27, 2020, in response to the global COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted, which also contained certain retirement-related provisions (see our blog entitled “Congress Passes CARES Act in Response to COVID-19 Crisis, Contains 401(k) Ease of-Access and Other Provisions” for details).

Because both the SECURE and the CARE Acts contained provisions that affect 401(k) and retirement plan distributions, the IRS recognized that the required “rollover notice” language needed to be updated accordingly.

Updates to Model “Safe Harbor” Rollover Notice

NOTE: This article is not intended to describe all the SECURE Act or CARES Act provisions, or to detail the rules regarding 401(k) plan rollovers. For more information on these topics, please refer to the resources mentioned above.

Notice 2020-62 modifies the required explanations to participants (and the language in the related model “safe harbor” notices) to reflect the following new changes in the law:

• Qualified Birth or Adoption Distributions. Among other things, the SECURE Act added a new 401(k) distributable event that is exempt from the otherwise applicable ten-percent penalty tax on early distributions. Generally stated, a “qualified birth or adoption distribution” is any distribution to a 401(k) plan participant or beneficiary that is made during the one-year period beginning on the date on which:
  • A child of such individual is born, or
  • The legal adoption by the individual of an eligible adoptee becomes final.
• Changes Regarding Required Minimum Distributions (“RMDs”). The SECURE Act also changed the “required beginning date” (i.e., the date on which a 401(k) or retirement plan participant or beneficiary must begin taking distributions from the 401(k) plan, if he or she is no longer employed) from:
  • April 1^st of the year following the calendar year in which such individual reaches age 70½; until
  • April 1^st of the year following the calendar year in which he or she reaches age 72.
• Coronavirus-Related Distributions. Among other things, the CARES Act permitted eligible individuals to take “coronavirus-related distributions” from 401(k) plans. Generally stated, these are distributions (limited to $100,000 in the aggregate) made from a 401(k) or another eligible retirement plan made:
  • On or after January 1, 2020, and before December 31, 2020;
  • To an individual affected by the COVID-19 pandemic.

These distributions are not subject to the ten-percent penalty tax on early distributions, and they may be taxed ratably over a three-year period.

Further, they may be (but are not required to be) repaid to the same or another 401(k) plan that accepts rollover contributions.

COMMENT: Notably, notwithstanding the special payback provision referred to above, coronavirus-related distributions are not in themselves “eligible rollover distributions” and are not, therefore, eligible for rollover treatment. Notice 2020-62 clarifies that, accordingly, there is no requirement to provide a “rollover notice” to an individual who receives a coronavirus-related distribution.

Action Required! Plan administrators who have been using the IRS “safe harbor” model notices for their plans should be sure to replace the previous notices taken from IRS Notice 2018-74 with the new models contained in Notice 2020-62. When customizing one or both of the model notices to fit individual plans, it is a good idea to ask qualified ERISA counsel or another competent professional to review the final product.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.