Plan administrators should review and update the written notices they send to participants when making distributions from their retirement plans. Recent changes in the law have expanded the rollover options available to recipients of such distributions, and these should be reflected in the notice.
Under Code Section 402(f), before making an “eligible rollover distribution,” a plan administrator must provide a written explanation of the tax consequences of the distribution (a “Special Tax Notice”). The last time the IRS issued a model Special Tax Notice was in 2002. Since that time, there have been numerous changes in the law.
For example, the Pension Protection Act of 2006 provided that, effective as of January 1, 2008, pre-tax amounts may be rolled into a Roth IRA. Although the IRS has issued guidance on this new option, it has yet to update the model Special Tax Notice.
The IRS has indicated that it intends to issue an updated Special Tax Notice in the near future. In the interim, however, plan administrators are still required to provide updated information to participants. For example, the Form 1099-R instructions provide that the Special Tax Notice “must contain the rollover and taxation rules for the distribution of designated Roth contributions.”
For that matter, a rollover of pre-tax benefits into a Roth IRA may be an attractive option for certain participants. This is another reason to update a plan’s Special Tax Notice without delay.