[Federal Register Volume 60, Number 184 (Friday, September 22, 1995)]
[Rules and Regulations]
[Pages 49199-49218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23265]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 602
[TD 8619]
RIN 1545-AR01
Direct Rollovers and 20-Percent Withholding Upon Eligible
Rollover Distributions From Qualified Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to eligible
rollover distributions from tax-qualified retirement plans and section
403(b) annuities. These regulations reflect the changes made by the
Unemployment Compensation Amendments of 1992 and affect the
administrators, sponsors, payors of, and participants in tax-qualified
retirement plans and section 403(b) annuities.
EFFECTIVE DATE: These regulations are effective on October 19, 1995.
FOR FURTHER INFORMATION CONTACT: Thomas Foley, (202) 622-6050 (not a
toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1341. Responses to this collection of information
are mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per plan administrator/payor/
recordkeeper varies from .05 hour to 330 hours, depending on individual
circumstances, with an estimated average of .50 hour.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Books and records relating to this collection of information must
be
[[Page 49200]]
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On October 22, 1992, Temporary Income Tax Regulations (TD 8443)
under sections 401(a)(31), 402(c), 402(f), 403(b), and 3405(c) of the
Internal Revenue Code (Code) were published in the Federal Register (57
FR 48163). A notice of proposed rulemaking (EE-43-92) cross-referencing
the temporary regulations was published in the Federal Register (57 FR
48194) on the same day. The temporary regulations provide guidance for
complying with the Unemployment Compensation Amendments of 1992 (UCA).
In addition, Notice 92-48 (1992-2 C.B. 381), provides a safe harbor
explanation that can be used in order to satisfy section 402(f) of the
Code. Written comments were received on the proposed and temporary
regulations and a public hearing on the proposed and temporary
regulations was held on January 15, 1993.
In response to initial comments on the proposed and temporary
regulations, the IRS provided additional guidance under UCA in Notice
93-3 (1993-1 C.B. 293), and Notice 93-26 (1993-1 C.B. 308). The notices
solicited public comments concerning the additional guidance.
After consideration of all the comments, the temporary regulations
are replaced and the proposed regulations under sections 401(a)(31),
402(c), 402(f), 403(b), and 3405(c) are adopted as revised by this
Treasury decision.
Explanation of Provisions
1. Overview
UCA significantly changed the treatment of distributions from
qualified plans and section 403(b) annuities. First, under section
402(c), as amended by UCA, all distributions from qualified plans to an
employee (or to the employee's spouse after the employee's death) from
the ``balance to the credit'' of the employee are ``eligible rollover
distributions'' to the extent includible in gross income, except (1)
substantially equal periodic payments over life or life expectancy or
for a period of ten years or more, and (2) required minimum
distributions under section 401(a)(9).
Second, UCA added a new qualification provision under section
401(a)(31) that requires qualified plans to provide employees with a
direct rollover option. Under a direct rollover option, an employee may
elect to have an eligible rollover distribution paid directly to an
individual retirement account or individual retirement annuity, or to
another qualified plan that accepts rollovers (collectively referred to
as eligible retirement plans). The direct rollover option is provided
in addition to the pre-existing rollover provisions under section 402.
Thus, an employee who receives an eligible rollover distribution but
who does not elect a direct rollover still has the option to
subsequently roll over the distribution to an eligible retirement plan
within 60 days of receipt.
Third, UCA amended section 3405 to impose mandatory 20-percent
income tax withholding on any eligible rollover distribution that the
employee does not elect to have paid in a direct rollover. This
withholding applies even if the employee receives a distribution and
then rolls it over within the 60-day period. (However, where employer
securities are distributed, a special rule limits withholding to the
value of cash and other property received in the distribution.) To the
extent that a distribution is both includible in gross income and not
an eligible rollover distribution, the elective withholding rules under
section 3405 and Sec. 35.3405-1 continue to apply.
Finally, section 402(f), as amended by UCA, requires that, within a
reasonable period of time before making a distribution, the plan
administrator give a written explanation (the section 402(f) notice) to
the employee of: (1) The availability of the direct rollover option;
(2) the rules that require income tax withholding on distributions; (3)
the rules under which the employee may roll over the distribution
within 60 days of receipt; and, (4) if applicable, the other special
tax rules (e.g., five-year averaging) that may apply to the
distribution.
Similar rules are provided for section 403(b) annuities. However, a
distribution from a section 403(b) annuity may only be rolled over to
another section 403(b) annuity or individual retirement plan and not to
a qualified plan.
UCA requirements generally apply to distributions from qualified
plans and section 403(b) annuities that are made on or after January 1,
1993. (A special delayed effective date applies to certain section
403(b) annuities sponsored by state or local governments.)
In general, comments received on the proposed and temporary
regulations were favorable. Thus, the final regulations retain the
general structure and substance of the proposed and temporary
regulations.
2. Notice 93-3 and Notice 93-26
As discussed above, in response to initial comments on the proposed
and temporary regulations, additional guidance under UCA was provided
by Notice 93-3, 1993-1 C.B. 293, and Notice 93-26, 1993-1 C.B. 308. The
major issues addressed in these notices include the following:
A distribution that occurs when a participant's accrued
benefit is offset by the amount of a plan loan is an eligible rollover
distribution if it otherwise qualifies as such. However, the plan need
not offer a direct rollover of the offset distribution. For purposes of
determining the amount that must be withheld, the offset distribution
is treated in the same manner as a distribution of employer securities.
In determining whether a distribution is a required
minimum distribution for purposes of section 402(c), any distribution
prior to the year an employee attains (or would have attained) age
70\1/2\ is not treated as a required minimum distribution and any
annuity distribution paid from a defined benefit plan or an annuity
contract in that year or a subsequent year is treated as a required
minimum distribution.
A participant may affirmatively elect to make an immediate
direct rollover or receive an immediate payment, provided that the
participant has been informed of the right to take at least 30 days,
after receiving the appropriate notices, to make this decision.
Amounts paid under an annuity contract distributed by a
qualified plan are payments of the balance to the credit in the
qualified plan for purposes of section 402(c) and, thus, are subject to
the same UCA rules as distributions from qualified plans (e.g.,
permitting direct rollover and requiring 20-percent withholding).
The commentary on Notices 93-3 and 93-26 was favorable.
Accordingly, the guidance contained in the notices has been
incorporated into these final regulations. In addition, certain other
revisions have been made to the regulations in response to comments, to
clarify certain issues, and to facilitate administration and
compliance. The most significant of these revisions are discussed
below.
3. Section 402(f) and Other Participant Notices
a. Timing of Notice
As discussed above, the Code requires that the plan administrator
provide the section 402(f) notice within a reasonable period of time
prior to making an eligible rollover distribution. The
[[Page 49201]]
temporary regulations provide that this reasonable time period is the
same period required for obtaining consent to a distribution under
section 411(a)(11). The regulations under section 411(a)(11) provide
that a participant's consent to a distribution is not valid unless the
participant receives a notice of his or her rights under the plan,
including the right to defer the distribution, no more than 90 days and
no less than 30 days prior to the annuity starting date.
The 90/30-day time period was adopted in the temporary regulations
under section 402(f) because the IRS and Treasury believed that it was
appropriate for the section 402(f) notice to be provided within the
same time period in which plan administrators are required to provide
other distribution information. In response to initial comments, the
IRS and Treasury issued Notice 93-26, which modified the 30-day time
period to allow a participant to affirmatively elect to make an
immediate direct rollover or receive an immediate payment, but did not
change the 90-day time period for either section 402(f) or section
411(a)(11). As discussed above, the final regulations are modified in a
manner consistent with the additional guidance provided in Notice 93-
26.
Commentators requested an expansion of the 90-day time period. More
broadly, commentators asked that the requirements of sections
411(a)(11), 417, and 402(f) be addressed in the context of new
technologies that use electronic media, such as telephone or computer
systems, to automate plan administrative functions that traditionally
have been processed manually by use of paper-based systems (e.g.,
notices to participants and participant distribution requests). For
example, some commentators suggested that plans be permitted to provide
an annual written notice if a summary of the notice is provided through
these new technologies. In addition, commentators asked that the
modification to the 30-day rule permitting immediate payment after an
affirmative election, announced in Notice 93-26, be applied to
distributions subject to section 401(a)(11) and 417.
The IRS and Treasury continue to believe that the section 402(f)
notice (as well as the section 411(a)(11) and section 417 notices)
should be provided close to the time participants are considering the
distribution to which the notice applies. Therefore, no change to the
90-day rule is made in these final regulations.
Although no additional guidance on the use of electronic media is
provided in these final regulations, the IRS and Treasury will continue
to consider modifications of the notice and consent requirements that
might be appropriate to accommodate new technologies, if adequate
safeguards are provided. The IRS and Treasury continue to invite
comments on this issue. These final regulations specifically delegate
authority to the Commissioner to modify or provide additional guidance
in the Internal Revenue Bulletin with respect to the notice
requirements of section 402(f). A parallel delegation of authority is
provided in the proposed and temporary regulations under sections
411(a)(11) and 417 which are being published in connection with these
final regulations.
The proposed and temporary regulations under section 411(a)(11) are
modified in a manner consistent with the changes to the 30-day rule
described in Notice 93-26. The proposed and temporary regulations under
section 417 modify the timing requirement with respect to the notice
required by that section. Under this modification, if a participant
affirmatively elects a distribution (whether a qualified joint and
survivor annuity or an optional form of benefit), the plan may permit
the distribution to commence at any time more than seven days after the
section 417 notice is given, provided that the distributee has the
right to revoke the election until the later of the annuity starting
date or the expiration of the seven-day period that begins the day
after the section 417 notice is provided.
b. Posting of Notice
In response to questions from commentators, the final regulations
clarify that section 402(f) notices must be provided directly to each
distributee rather than by posting at the place of employment.
c. Additions to Model Notice
Notice 92-48, 1992-2 C.B. 381, contains the model section 402(f)
notice that serves as a ``Safe Harbor Explanation'' for purposes of
complying with section 402(f). The IRS is considering developing
additional model language to address specific subjects not addressed in
the current model notice, including withholding on employer securities,
treatment of plan loan offset amounts (including withholding and the
timing and availability of a right to roll over), and the $5,000 death
benefit exclusion. Until this additional language is published, plan
administrators may continue to satisfy section 402(f) by providing the
current model notice, even if issues not addressed in the current
notice (such as those listed in the preceding sentence) are relevant to
the distributee. Plan administrators are encouraged, however, to
supplement the model notice with language addressing these issues when
applicable to a distributee. The IRS and Treasury invite comments or
suggestions concerning possible additions or modifications to the
notice.
4. Definition of Eligible Rollover Distribution
As noted above, under section 402(c) and section 403(b), as amended
by UCA, all distributions from qualified plans and section 403(b)
annuities to an employee (or to the employee's spouse after the
employee's death) of any portion of the ``balance to the credit'' of
the employee are ``eligible rollover distributions'' to the extent
includible in gross income, except (1) substantially equal periodic
payments over life or life expectancy or for a period of ten years or
more, and (2) required minimum distributions under section 401(a)(9).
a. Benefits Included in the Balance to the Credit
Based on the broad statutory definition of an eligible rollover
distribution and the UCA legislative history, the final regulations
provide that generally all plan benefits are included in the ``balance
to the credit'' of an employee, including ancillary benefits not
protected by section 411(d)(6). Therefore, the final regulations do not
adopt commentators' suggestions to exclude various items from the
definition, such as qualified disability benefits, hardship
distributions, and distributions that are includible in gross income
but that are made to a distributee reasonably expected to have no
income tax liability.
b. Substantially Equal Periodic Payments From a Defined Contribution
Plan
The final regulations retain the rule that the principles of
section 72(t) apply for purposes of determining whether distributions
constitute a series of substantially equal periodic payments. The
preamble to the temporary regulations provides that, in determining
whether payments in a series are substantially equal for purposes of
section 402(c)(4), the principles of Notice 89-25, 1989-1 C.B. 662, are
applicable. Notice 89-25 provides guidance for determining whether
distributions from a separate account are substantially equal for
purposes of section 72(t). Commentators requested guidance on applying
the three methods in Notice 89-25 for
[[Page 49202]]
determining whether payments are substantially equal over life or life
expectancy to payments for a period other than life or life expectancy.
In response to these comments, the final regulations provide that
payments from a qualified defined contribution plan that are calculated
on a declining balance of years will be considered substantially equal.
In addition, if a distribution from a defined contribution plan
consists of payments of a fixed amount each year until the account
balance is exhausted, reasonable actuarial assumptions must be used to
determine the period of years over which the payments will be made.
c. Disregard of Contingencies
The final regulations retain the rule that the determination of
whether payments are substantially equal for a given period is made
when payments commence, without regard to contingencies or
modifications that have not yet occurred. Recovery from a disability is
added to the final regulations as an example of a contingency that is
disregarded until it occurs. In addition, although not addressed in the
regulations, it should be noted that a mere change in the type (as
opposed to the amount) of benefit being paid in a series of payments is
not relevant in determining whether the payments are substantially
equal and are being paid for a period described in section
402(c)(4)(A). Thus, if a distributee receives a series of disability
benefits followed by a series of retirement benefits, and the two
benefits are reasonably expected to be substantially equal, the
retirement benefits may be combined with the disability benefits in
determining whether a series of payments are substantially equal and
are for a period described in section 402(c)(4)(A).
In response to comments, the final regulations also clarify that a
mere change in distributee upon the death of an employee is not a
modification that requires a redetermination of whether the remaining
payments under the annuity are substantially equal periodic payments
over a period described in section 402(c)(4)(A) and, thus, excluded
from the definition of eligible rollover distribution.
d. Coordination With Social Security Benefits
The final regulations expand the scope of the rule in the temporary
regulations permitting social security benefits to be taken into
account in determining whether a series of periodic payments are
substantially equal. Under the final regulations, if the amount paid
annually from the plan is reduced upon attainment of social security
retirement age (or commencement of social security benefits), the
payments after the reduction will be treated as substantially equal to
the payments prior to the reduction, even if the reduction is not equal
to the distributee's annual social security benefits, provided that the
reduction does not exceed the annual social security benefits and the
post-reduction payments are substantially equal.
e. Supplements and Adjustments to Annuity Payments
The final regulations retain the rule that a payment will be
treated as independent, and thus as not part of a series of
substantially equal periodic payments, if the payment is substantially
larger or smaller than the other payments in the series. However, in
response to comments, the final regulations clarify that adjustments to
the amount of annuity payments that result solely from correction of
reasonable administrative error or delay in payment will not cause any
payment in a series of payments that are otherwise substantially equal
to fail to be treated as a payment in the series.
Further, in response to comments concerning the payment of ``13th
checks'' and other supplemental annuity payments, the regulations
provide an additional rule for defined benefit plans. If a defined
benefit plan provides a benefit increase for annuitants (e.g., retirees
or beneficiaries) that supplements a series of substantially equal
annuity payments in a consistent manner for all similarly situated
annuitants, the benefit increase will not constitute an independent
payment (and will not cause the series of payments to be treated as not
substantially equal), if the payment either is not more than 10 percent
of the annual rate of payment or is not more than $750.
f. Required Minimum Distributions
As noted above, the final regulations incorporate the guidance in
Notice 93-3 concerning the determination of the required minimum
distribution for purposes of section 402(c). Also, in response to
questions concerning the allocation of basis in the case of a required
minimum distribution, the final regulations clarify that if part (but
not all) of a payment is required under section 401(a)(9) and if part
(but not all) of the same payment represents return of basis, the plan
must first allocate the return of basis toward satisfaction of the
section 401(a)(9) required minimum distribution. This rule has the
effect of maximizing the amount that is eligible to be rolled over.
g. Corrective Distributions and Deemed Distributions
The final regulations retain the rule that certain corrective
distributions and deemed distributions are excluded from the definition
of an eligible rollover distribution. The regulations also clarify
that, to the extent corrective distributions are properly made from a
section 403(b) annuity, they are not eligible rollover distributions.
With respect to deemed distributions under section 72(p), the final
regulations include the clarifications provided in Notice 93-3 with
respect to the distinction between plan loan offset amounts and deemed
distributions under section 72(p), except for the portion of Example 6
from Notice 93-3 that addressed issues relating to the tax treatment of
a distribution that occurs after a deemed distribution. This portion of
the example generated numerous questions and comments concerning the
proper interpretation of section 72(p). Those questions and comments
are best addressed in the context of guidance under section 72(p)
rather than section 402(c). No inference should be drawn from the
deletion of a portion of the example.
h. $5,000 Death Benefit Exclusions
The final regulations clarify that, to the extent that a death
benefit is a distribution from a qualified plan, the portion of the
distribution that is excluded from gross income under section 101(b) is
not an eligible rollover distribution. However, recognizing that a
surviving spouse or former spouse may be entitled to more than one
death benefit that might qualify for the death benefit exclusion, the
final regulations permit the plan administrator of a qualified plan to
assume, for purposes of section 401(a)(31) and section 3405, that any
death benefit being distributed from the plan to the surviving spouse
or former spouse of an employee that qualifies for the exclusion is the
only benefit that so qualifies.
5. Direct Rollover Requirement
a. Procedures for Accomplishing a Direct Rollover
The final regulations under section 401(a)(31) retain the rules
that permit the employer to accomplish an employee's direct rollover by
any reasonable means of delivery to an eligible retirement plan,
including delivery of a check to the eligible retirement plan by the
employee (provided that the payee line of the
[[Page 49203]]
check is made out in a manner that will ensure that the check is
negotiable solely by the trustee or custodian of the recipient plan).
The preamble to the temporary regulations requested comments on whether
a standard notation, such as ``Direct Rollover,'' should be required to
appear on the face of any check provided to an employee for delivery.
The comments received were divided, and the final regulations do not
require any standard notation.
b. Procedures That Substantially Impair the Availability of Direct
Rollover
The temporary regulations provide that it would not be reasonable,
and thus would not satisfy section 401(a)(31), for a plan administrator
to require information or documentation or to establish procedures that
``effectively eliminate'' the right to take a direct rollover. The
final regulations broaden this language to include procedures that
``substantially impair'' the right to take a direct rollover, and
provide additional examples illustrating violations of section
401(a)(31).
c. Qualification Protection for Recipient Plans
The temporary regulations do not address qualification protection
for qualified plans accepting rollovers. Comments were received asking
for criteria that, if satisfied, would permit a receiving plan to
assume that the plan from which it is accepting a rollover is
qualified. To encourage plans to accept rollovers, these final
regulations provide a safe harbor for receiving plans that reasonably
determine that the distributing plan is qualified. The regulations also
provide an example of a reasonable determination in this respect. The
example illustrates that a reasonable determination will have been made
if, prior to accepting a rollover contribution, the receiving plan
obtains a plan administrator's letter indicating that the distributing
plan had a favorable determination letter regarding qualification.
However, if the receiving plan later obtains actual knowledge that the
distributing plan was not qualified at the time of the direct rollover,
corrective distributions with respect to the rollover amount would be
required.
In addition, the final regulations under section 3405 retain the
rule that no withholding liability will be imposed on a plan
administrator that reasonably relies on ``adequate information''
provided by the distributee. Commentators asked whether this ``adequate
information'' protection under section 3405 could also be extended to
section 401(a)(31). Specifically, they asked if the distributing plan
is protected from being treated as violating section 401(a)(31) where
the distributee purports to elect a direct rollover but the
distribution made in accordance with the information provided by the
distributee does not in fact result in a direct rollover. The IRS and
Treasury do not believe any special relief is needed in this case
because there is no violation of section 401(a)(31) if the plan follows
the distributee's directions after providing a direct rollover option.
d. Direct Rollovers to Qualified Defined Benefit Plans
The definition of eligible retirement plan under section 402(c)
includes all qualified trusts (defined contribution plans and defined
benefit plans) as well as qualified annuity plans under section 403(a)
and individual retirement plans. For purposes of section 401(a)(31),
section 401(a)(31)(D) provides that the only qualified trusts that are
treated as eligible retirement plans are defined contribution plans.
Commentators asked whether a plan may permit direct rollovers to
qualified defined benefit plans. The final regulations clarify that the
limitation in section 401(a)(31)(D) applies only for purposes of
determining the scope of the requirement under section 401(a)(31),
while the definition of eligible retirement plan in section
402(c)(8)(B) controls the types of plans to which direct rollovers are
permitted. Thus, under section 401(a)(31), a plan is required to offer
a direct rollover to any defined contribution plan, and is permitted
(but not required) to offer a direct rollover to a qualified trust that
is a defined benefit plan. In addition, the final regulations clarify
that an eligible rollover distribution that is paid in a direct
rollover to a defined benefit plan is not subject to withholding.
e. Default Procedures
The final regulations retain the rules permitting a plan
administrator to establish a procedure for a participant who fails to
make any election. However, the regulations clarify that if a default
procedure is implemented, the distributee must receive an explanation
of the procedure in conjunction with the section 402(f) notice.
f. Valuation of Distributed Property
Some commentators raised concerns about the valuation of property
in order to determine the portion of the distribution eligible for
direct rollover or subject to withholding. The IRS and Treasury
recognize the difficulties in satisfying the rollover, withholding, and
reporting requirements where property is involved and invite comments
regarding these issues, including suggested approaches for addressing
the valuation and taxation of property distributed by qualified plans.
While these regulations include no changes with respect to these
issues, they continue to permit use of the rules provided in Q&A F-1
and Q&A F-3 of Sec. 35.3405-1 for purposes of withholding.
g. Plan Amendments
The final regulations retain the rule that, although plans must
comply in operation with section 401(a)(31) beginning January 1, 1993,
plans need not be amended to comply with section 401(a)(31) until the
end of the remedial amendment period for amending the plan to comply
with the amendments to section 401(a) made by the Tax Reform Act of
1986 (TRA '86). Notice 92-36 (1992-2 C.B. 364), specifies the remedial
amendment period for most employers. Announcement 95-48 (1995-23 IRB
11), dated June 5, 1995, extends this period for plans maintained by
tax exempt organizations and governments.
Plans may continue to use the model amendment published in Rev.
Proc. 93-12 (1993-1 C.B. 479), to comply in form with section
401(a)(31) and these final regulations. For plans that have received
favorable determination letters, see the relevant guidance for the
timing of plan amendments, e.g., section 21.04 of Rev. Proc. 95-6
(1995-1 I.R.B. 166).
6. Other Rollover Rules
a. Rollover Elections Are Irrevocable
The final regulations incorporate the rule in Sec. 1.402(a)(5)-1T
that, in order for a contribution of an eligible rollover distribution
to an individual retirement plan to qualify for exclusion from gross
income as a rollover contribution, the participant must irrevocably
elect to treat the contribution as a rollover contribution at the time
the contribution is made to the individual retirement plan. A direct
rollover election is deemed to be such an irrevocable election.
b. 60-Day Rule
The final regulations clarify that the 60-day period for a
distributee to roll over a distribution commences on the date of that
distribution regardless of the number of distributions during the
taxable year. Because section 402, as amended by UCA, no longer
requires that the distribution constitute a specified portion of the
balance to the credit of the employee in order to be eligible for
rollover, there is no longer
[[Page 49204]]
any need for the prior administrative rule under which the 60-day
period began as of the date of the last distribution during the taxable
year.
c. Rollover From Plan Not Counted in One-Year-Look-Back Rule
The final regulations clarify that a rollover (whether or not it is
a direct rollover) from a qualified plan is not treated as a rollover
contribution for purposes of the one-year-look-back rule in section
408(d)(3)(B).
7. 20-Percent Mandatory Withholding
a. Additional Withholding
In response to comments, the regulations clarify that a plan
administrator or payor may (but is not required to) permit a
distributee to elect to have more than 20 percent withheld from an
eligible rollover distribution.
b. Limitation of Withholding to Cash and Property Distributed
Section 3405(e)(8) limits the maximum amount that may be withheld
on any designated distribution to the sum of the amount of money and
the fair market value of property (other than employer securities) that
is received in the distribution. Commentators asked whether 20-percent
withholding applies if the portion of the distribution that is a
designated distribution is allocated to employer stock and paid to the
employee, while the portion of the distribution that is the return of
basis is allocated to cash. The final regulations clarify that the
section 3405(e)(8) provision limiting withholding to the sum of cash
and property (other than employer securities) applies to the total
distribution (including, for example, return of basis) and not just to
the designated distribution.
Effective Date
These final regulations apply to distributions made on or after
October 19, 1995. The text of these regulations replaces the temporary
regulations published in the Federal Register on October 22, 1992.
Although they will be removed from the Code of Federal Regulations
(CFR), the temporary regulations, as they appear in the April 1, 1995
edition of 26 CFR part 1, retain their effectiveness with respect to
distributions made on or after January 1, 1993, but before October 19,
1995. However, for any distribution made on or after January 1, 1993
but before October 19, 1995, plans may comply with the provisions of
UCA by substituting all or part of the provisions of these final
regulations for the corresponding provisions of the temporary
regulations, if any.
In addition, no penalties or sanctions will apply for failure to
satisfy section 401(a)(31) or section 402(f), or for failure to
withhold in accordance with section 3405(c), if the requirements of UCA
are satisfied with respect to a distribution, made on or after October
19, 1995 but before January 1, 1996, by substituting all or part of the
provisions of the temporary regulations for the corresponding
provisions of these final regulations. For any distribution made on or
after October 19, 1995 but before January 1, 1996, a distributee may
roll over the distribution if it qualifies as an eligible rollover
distribution if all or part of the provisions of the temporary
regulations are substituted for the corresponding provisions of these
final regulations. Moreover, during this period, the plan administrator
and the employee (or spousal distributee) need not apply the provisions
in the same manner with respect to any distribution.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Marjorie Hoffman,
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the Service and the
Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
26 CFR Part 602
Reporting and recordkeeping requirements.
Accordingly, 26 CFR parts 1, 31, and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805. * * *
Secs. 1.401(a)(31)-1T, 1.402(c)-2T, 1.402(f)-2T, and 1.403(b)-
2T [Removed]
Par. 2. Sections 1.401(a)(31)-1T, 1.402(c)-2T, 1.402(f)-2T, and
1.403(b)-2T are removed.
Par. 3. Sections 1.401(a)(31)-1, 1.402(c)-2, and 1.403(b)-2 are
added and Sec. 1.402(f)-1 is revised to read as follows:
Sec. 1.401(a)(31)-1 Requirement to offer direct rollover of eligible
rollover distributions; questions and answers.
The following questions and answers relate to the qualification
requirement imposed by section 401(a)(31) of the Internal Revenue Code
of 1986, pertaining to the direct rollover option for eligible rollover
distributions from pension, profit-sharing, and stock bonus plans.
Section 401(a)(31) was added by section 522(a) of the Unemployment
Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290
(UCA). For additional UCA guidance under sections 402(c), 402(f),
403(b)(8) and (10), and 3405(c), see Secs. 1.402(c)-2, 1.402(f)-1, and
1.403(b)-2, and Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What are the direct rollover requirements under section
401(a)(31)?
Q-2: Does section 401(a)(31) require that a qualified plan
permit a direct rollover to be made to a qualified trust that is not
part of a defined contribution plan?
Q-3: What is a direct rollover that satisfies section
401(a)(31), and how is it accomplished?
Q-4: Is providing a distributee with a check for delivery to an
eligible retirement plan a reasonable means of accomplishing a
direct rollover?
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible
in gross income or subject to 20-percent withholding?
Q-6: What procedures may a plan administrator prescribe for
electing a direct rollover, and what information may the plan
administrator require a distributee to provide when electing a
direct rollover?
Q-7: May the plan administrator treat a distributee as having
made an election under a default procedure where the distributee
does not affirmatively elect to make or not
[[Page 49205]]
make a direct rollover within a certain time period?
Q-8: May the plan administrator establish a deadline after which
the distributee may not revoke an election to make or not make a
direct rollover?
Q-9: Must the plan administrator permit a distributee to elect
to have a portion of an eligible rollover distribution paid to an
eligible retirement plan in a direct rollover and to have the
remainder of that distribution paid to the distributee?
Q-10: Must the plan administrator allow a distributee to divide
an eligible rollover distribution into two or more separate
distributions to be paid in direct rollovers to two or more eligible
retirement plans?
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct
rollover if his or her eligible rollover distributions during a year
are reasonably expected to total less than $200?
Q-12: Is a plan administrator permitted to treat a distributee's
election to make or not make a direct rollover with respect to one
payment in a series of periodic payments as applying to all
subsequent payments in the series?
Q-13: Is the eligible retirement plan designated by a
distributee to receive a direct rollover distribution required to
accept the distribution?
Q-14: For purposes of applying the plan qualification
requirements of section 401(a), is an eligible rollover distribution
that is paid to an eligible retirement plan in a direct rollover a
distribution and rollover or is it a transfer of assets and
liabilities?
Q-15: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset
amount?
Q-16: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
Q-17: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
Q-18: When must a qualified plan be amended to comply with
section 401(a)(31)?
Questions and Answers
Q-1: What are the direct rollover requirements under section
401(a)(31)?
A-1: (a) General rule. To satisfy section 401(a)(31), added by UCA,
a plan must provide that if the distributee of any eligible rollover
distribution elects to have the distribution paid directly to an
eligible retirement plan, and specifies the eligible retirement plan to
which the distribution is to be paid, then the distribution will be
paid to that eligible retirement plan in a direct rollover described in
Q&A-3 of this section. Thus, the plan must give the distributee the
option of having his or her distribution paid in a direct rollover to
an eligible retirement plan specified by the distributee. For purposes
of section 401(a)(31) and this section, eligible rollover distribution
has the meaning set forth in section 402(c)(4) and Sec. 1.402(c)-2,
Q&A-3 through Q&A-10 and Q&A-14, except as otherwise provided in Q&A-2
of this section, eligible retirement plan has the meaning set forth in
section 402(c)(8)(B) and Sec. 1.402(c)-2, Q&A-2.
(b) Related Internal Revenue Code provisions--(1) Mandatory
withholding. If a distributee of an eligible rollover distribution does
not elect to have the eligible rollover distribution paid directly from
the plan to an eligible retirement plan in a direct rollover under
section 401(a)(31), the eligible rollover distribution is subject to
20-percent income tax withholding under section 3405(c). See
Sec. 31.3405(c)-1 of this chapter for guidance concerning the
withholding requirements applicable to eligible rollover distributions.
(2) Notice requirement. Section 402(f) requires the plan
administrator of a qualified plan to provide, within a reasonable
period of time before making an eligible rollover distribution, a
written explanation to the distributee of the distributee's right to
elect a direct rollover and the withholding consequences of not making
that election. The explanation also is required to provide certain
other relevant information relating to the taxation of distributions.
See Sec. 1.402(f)-1 for guidance concerning the written explanation
required under section 402(f).
(3) Section 403(b) annuities. Section 403(b)(10) provides that
requirements similar to those imposed by section 401(a)(31) apply to
annuities described in section 403(b). See Sec. 1.403(b)-2 for guidance
concerning the direct rollover requirements for distributions from
annuities described in section 403(b).
(c) Effective date--(1) Statutory effective date. Section
401(a)(31) applies to eligible rollover distributions made on or after
January 1, 1993.
(2) Regulatory effective date. This section applies to eligible
rollover distributions made on or after October 19, 1995. For eligible
rollover distributions made on or after January 1, 1993 and before
October 19, 1995, Sec. 1.401(a)(31)-1T (as it appeared in the April 1,
1995 edition of 26 CFR part 1), applies. However, for any distribution
made on or after January 1, 1993 but before October 19, 1995, a plan
may satisfy section 401(a)(31) by substituting any or all provisions of
this section for the corresponding provisions of Sec. 1.401(a)(31)-1T,
if any.
Q-2: Does section 401(a)(31) require that a qualified plan permit a
direct rollover to be made to a qualified trust that is not part of a
defined contribution plan?
A-2: No. Section 401(a)(31)(D) limits the types of qualified trusts
that are treated as eligible retirement plans to defined contribution
plans that accept eligible rollover distributions. Therefore, although
a plan is permitted, at a participant's election, to make a direct
rollover to any type of eligible retirement plan, as defined in section
402(c)(8)(B) (including a defined benefit plan), a plan will not fail
to satisfy section 401(a)(31) solely because the plan will not permit a
direct rollover to a qualified trust that is part of a defined benefit
plan. In contrast, if a distributee elects a direct rollover of an
eligible rollover distribution to an annuity plan described in section
403(a), that distribution must be paid to the annuity plan, even if the
recipient annuity plan is a defined benefit plan.
Q-3: What is a direct rollover that satisfies section 401(a)(31),
and how is it accomplished?
A-3: A direct rollover that satisfies section 401(a)(31) is an
eligible rollover distribution that is paid directly to an eligible
retirement plan for the benefit of the distributee. A direct rollover
may be accomplished by any reasonable means of direct payment to an
eligible retirement plan. Reasonable means of direct payment include,
for example, a wire transfer or the mailing of a check to the eligible
retirement plan. If payment is made by check, the check must be
negotiable only by the trustee of the eligible retirement plan. If the
payment is made by wire transfer, the wire transfer must be directed
only to the trustee of the eligible retirement plan. In the case of an
eligible retirement plan that does not have a trustee (such as a
custodial individual retirement account or an individual retirement
annuity), the custodian of the plan or issuer of the contract under the
plan, as appropriate, should be substituted for the trustee for
purposes of this Q&A-3, and Q&A-4 of this section.
Q-4: Is providing a distributee with a check for delivery to an
eligible retirement plan a reasonable means of accomplishing a direct
rollover?
A-4: Providing the distributee with a check and instructing the
distributee to deliver the check to the eligible retirement plan is a
reasonable means of direct payment, provided that the check is made
payable as follows: [Name of the trustee] as trustee of [name of the
eligible retirement plan]. For example, if the name of the eligible
retirement plan is ``Individual Retirement Account of John Q. Smith,''
and the name of the trustee is ``ABC Bank,'' the payee line of a check
would read ``ABC Bank as trustee of Individual Retirement
[[Page 49206]]
Account of John Q. Smith.'' Unless the name of the distributee is
included in the name of the eligible retirement plan, the check also
must indicate that it is for the benefit of the distributee. If the
eligible retirement plan is not an individual retirement account or an
individual retirement annuity, the payee line of the check need not
identify the trustee by name. For example, the payee line of a check
for the benefit of distributee Jane Doe might read, ``Trustee of XYZ
Corporation Savings Plan FBO Jane Doe.''
Q-5: Is an eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover currently includible in
gross income or subject to 20-percent withholding?
A-5: No. An eligible rollover distribution that is paid to an
eligible retirement plan in a direct rollover is not currently
includible in the distributee's gross income under section 402(c) and
is exempt from the 20-percent withholding imposed under section
3405(c)(2). However, when any portion of the eligible rollover
distribution is subsequently distributed from the eligible retirement
plan, that portion will be includible in gross income to the extent
required under section 402, 403, or 408.
Q-6: What procedures may a plan administrator prescribe for
electing a direct rollover, and what information may the plan
administrator require a distributee to provide when electing a direct
rollover?
A-6: (a) Permissible procedures. Except as otherwise provided in
paragraph (b) of this Q&A-6, the plan administrator may prescribe any
procedure for a distributee to elect a direct rollover under section
401(a)(31), provided that the procedure is reasonable. The procedure
may include any reasonable requirement for information or documentation
from the distributee in addition to the items of adequate information
specified in Sec. 31.3405(c)-1(b), Q&A-7 of this chapter. For example,
it would be reasonable for the plan administrator to require that the
distributee provide a statement from the designated recipient plan that
the plan will accept the direct rollover for the benefit of the
distributee and that the recipient plan is, or is intended to be, an
individual retirement account, an individual retirement annuity, a
qualified annuity plan described in section 403(a), or a qualified
trust described in section 401(a), as applicable. In the case of a
designated recipient plan that is a qualified trust, it also would be
reasonable for the plan administrator to require a statement that the
qualified trust is not excepted from the definition of an eligible
retirement plan by section 401(a)(31)(D) (i.e., is not a defined
benefit plan).
(b) Impermissible procedures. A plan will fail to satisfy section
401(a)(31) if the plan administrator prescribes any unreasonable
procedure, or requires information or documentation, that effectively
eliminates or substantially impairs the distributee's ability to elect
a direct rollover. For example, it would effectively eliminate or
substantially impair the distributee's ability to elect a direct
rollover if the recipient plan required the distributee to obtain an
opinion of counsel stating that the eligible retirement plan receiving
the rollover is a qualified plan or individual retirement account.
Similarly, it would effectively eliminate or substantially impair the
distributee's ability to elect a direct rollover if the distributing
plan required a letter from the recipient eligible retirement plan
stating that, upon request by the distributing plan, the recipient plan
will automatically return any direct rollover amount that the
distributing plan advises the recipient plan was paid incorrectly. It
would also effectively eliminate or substantially impair the
distributee's ability to elect a direct rollover if the distributing
plan required, as a condition for making a direct rollover, a letter
from the recipient eligible retirement plan indemnifying the
distributing plan for any liability arising from the distribution.
Q-7: May the plan administrator treat a distributee as having made
an election under a default procedure where the distributee does not
affirmatively elect to make or not make a direct rollover within a
certain time period?
A-7: Yes, the plan administrator may establish a default procedure
whereby any distributee who fails to make an affirmative election is
treated as having either made or not made a direct rollover election.
However, the plan administrator may not make a distribution under any
default procedure unless the distributee has received an explanation of
the default procedure and an explanation of the direct rollover option
as required under section 402(f) and Sec. 1.402(f)-1, Q&A-1 and unless
the timing requirements described in Sec. 1.402(f)-1, Q&A-2 and Q&A-3
have been satisfied with respect to the explanations of both the
default procedure and the direct rollover option.
Q-8: May the plan administrator establish a deadline after which
the distributee may not revoke an election to make or not make a direct
rollover?
A-8: Yes, but the plan administrator is not permitted to prescribe
any deadline or time period with respect to revocation of a direct
rollover election that is more restrictive for the distributee than
that which otherwise applies under the plan to revocation of the form
of distribution elected by the distributee.
Q-9: Must the plan administrator permit a distributee to elect to
have a portion of an eligible rollover distribution paid to an eligible
retirement plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
A-9: Yes, the plan administrator must permit a distributee to elect
to have a portion of an eligible rollover distribution paid to an
eligible retirement plan in a direct rollover and to have the remainder
paid to the distributee. However, the plan administrator is permitted
to require that, if the distributee elects to have only a portion of an
eligible rollover distribution paid to an eligible retirement plan in a
direct rollover, that portion be equal to at least a specified minimum
amount, provided the specified minimum amount is less than or equal to
$500 or any greater amount as prescribed by the Commissioner in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter. If the entire
amount of the eligible rollover distribution is less than or equal to
the specified minimum amount, the plan administrator need not allow the
distributee to divide the distribution.
Q-10: Must the plan administrator allow a distributee to divide an
eligible rollover distribution into two or more separate distributions
to be paid in direct rollovers to two or more eligible retirement
plans?
A-10: No. The plan administrator is not required (but is permitted)
to allow the distributee to divide an eligible rollover distribution
into separate distributions to be paid to two or more eligible
retirement plans in direct rollovers. Thus, the plan administrator may
require that the distributee select a single eligible retirement plan
to which the eligible rollover distribution (or portion thereof) will
be distributed in a direct rollover.
Q-11: Will a plan satisfy section 401(a)(31) if the plan
administrator does not permit a distributee to elect a direct rollover
if his or her eligible rollover distributions during a year are
reasonably expected to total less than $200?
A-11: Yes. A plan will satisfy section 401(a)(31) even though the
plan
[[Page 49207]]
administrator does not permit any distributee to elect a direct
rollover with respect to eligible rollover distributions during a year
that are reasonably expected to total less than $200 or any lower
minimum amount specified by the plan administrator. The rules described
in Sec. 31.3405(c)-1, Q&A-14 of this chapter (relating to whether
withholding under section 3405(c) is required for an eligible rollover
distribution that is less than $200) also apply for purposes of
determining whether a direct rollover election under section 401(a)(31)
must be provided for an eligible rollover distribution that is less
than $200 or the lower specified amount.
Q-12: Is a plan administrator permitted to treat a distributee's
election to make or not make a direct rollover with respect to one
payment in a series of periodic payments as applying to all subsequent
payments in the series?
A-12: (a) Yes. A plan administrator is permitted to treat a
distributee's election to make or not make a direct rollover with
respect to one payment in a series of periodic payments as applying to
all subsequent payments in the series, provided that:
(1) The employee is permitted at any time to change, with respect
to subsequent payments, a previous election to make or not make a
direct rollover; and
(2) The written explanation provided under section 402(f) explains
that the election to make or not make a direct rollover will apply to
all future payments unless the employee subsequently changes the
election.
(b) See Sec. 1.402(f)-1, Q&A-3 for further guidance concerning the
rules for providing section 402(f) notices when eligible rollover
distributions are made in a series of periodic payments.
Q-13: Is the eligible retirement plan designated by a distributee
to receive a direct rollover distribution required to accept the
distribution?
A-13: (a) General rule. No. Although section 401(a)(31) requires
qualified plans to provide distributees the option to make a direct
rollover of their eligible rollover distributions to an eligible
retirement plan, it imposes no requirement that any eligible retirement
plan accept rollovers. Thus, a plan can refuse to accept rollovers.
Alternatively, a plan can limit the circumstances under which it will
accept rollovers. For example, a plan can limit the types of plans from
which it will accept a rollover or limit the types of assets it will
accept in a rollover (such as accepting only cash or its equivalent).
(b) Qualification of receiving plan. A plan that accepts a direct
rollover from another plan will not fail to satisfy section 401(a)
merely because the plan making the distribution is, in fact, not
qualified under section 401(a) or section 403(a) at the time of the
distribution, if, prior to accepting the rollover, the receiving plan
reasonably concluded that the distributing plan was qualified under
section 401(a) or section 403(a). For example, the receiving plan may
reasonably conclude that the distributing plan was qualified under
section 401(a) or section 403(a) if, prior to accepting the rollover,
the plan administrator of the distributing plan provided the receiving
plan with a statement that the distributing plan had received a
determination letter from the Commissioner indicating that the plan was
qualified.
Q-14: For purposes of applying the plan qualification requirements
of section 401(a), is an eligible rollover distribution that is paid to
an eligible retirement plan in a direct rollover a distribution and
rollover or is it a transfer of assets and liabilities?
A-14: For purposes of applying the plan qualification requirements
of section 401(a), a direct rollover is a distribution and rollover of
the eligible rollover distribution and not a transfer of assets and
liabilities. For example, if the consent requirements under section
411(a)(11) or sections 401(a)(11) and 417(a)(2) apply to the
distribution, they must be satisfied before the eligible rollover
distribution may be distributed in a direct rollover. Similarly, the
direct rollover is not a transfer of assets and liabilities that must
satisfy the requirements of section 414(l). Finally, a direct rollover
is not a transfer of benefits for purposes of applying the requirements
under section 411(d)(6), as described in Sec. 1.411(d)-4, Q&A-3.
Therefore, for example, the eligible retirement plan is not required to
provide, with respect to amounts paid to it in a direct rollover, the
same optional forms of benefits that were provided under the plan that
made the direct rollover. The direct rollover requirements of section
401(a)(31) do not affect the ability of a qualified plan to make an
elective or nonelective transfer of assets and liabilities to another
qualified plan in accordance with applicable law (such as section
414(l)).
Q-15: Must a direct rollover option be provided for an eligible
rollover distribution that is in the form of a plan loan offset amount?
A-15: A plan will not fail to satisfy section 401(a)(31) merely
because the plan does not permit a distributee to elect a direct
rollover of an eligible rollover distribution in the form of a plan
loan offset amount. Section 1.402(c)-2(b), Q&A-9 defines a plan loan
offset amount, in general, as a distribution that occurs when, under
the terms governing a plan loan, the participant's accrued benefit is
reduced (offset) in order to repay the loan. A plan administrator is
permitted to allow a direct rollover of a participant note for a plan
loan to a qualified trust described in section 401(a) or a qualified
annuity plan described in section 403(a). See Sec. 1.402(c)-2, Q&A-9
for examples illustrating the rules for plan loan offset amounts that
are set forth in this Q&A-15. See Sec. 31.3405(c)-1, Q&A-11 of this
chapter for guidance concerning special withholding rules that apply to
a distribution in the form of a plan loan offset amount.
Q-16: Must a direct rollover option be provided for an eligible
rollover distribution from a qualified plan distributed annuity
contract?
A-16: Yes. If any amount to be distributed under a qualified plan
distributed annuity contract is an eligible rollover distribution (in
accordance with Sec. 1.402(c)-2), Q&A-10 the annuity contract must
satisfy section 401(a)(31) in the same manner as a qualified plan under
section 401(a). Section 1.402(c)-2, Q&A-10 defines a qualified plan
distributed annuity contract as an annuity contract purchased for a
participant, and distributed to the participant, by a qualified plan.
In the case of a qualified plan distributed annuity contract, the payor
under the contract is treated as the plan administrator. See
Sec. 31.3405(c)-1, Q&A-13 of this chapter concerning the application of
mandatory 20-percent withholding requirements to distributions from a
qualified plan distributed annuity contract.
Q-17: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution?
A-17: (a) General rule. For purposes of section 401(a)(31), a plan
administrator may make the assumptions described in paragraphs (b) and
(c) of this Q&A-17 in determining the amount of a distribution that is
an eligible rollover distribution for which a direct rollover option
must be provided. Section 31.3405(c)-1, Q&A-10 of this chapter provides
assumptions for purposes of complying with section 3405(c). See
Sec. 1.402(c)-2, Q&A-15 concerning the effect of these assumptions for
purposes of section 402(c).
(b) $5,000 death benefit. A plan administrator is permitted to
assume that a distribution from the plan that
[[Page 49208]]
qualifies for the $5,000 death benefit exclusion under section 101(b)
is the only death benefit being paid with respect to a deceased
employee that qualifies for that exclusion. Thus, to the extent that
such a distribution would be excludible from gross income based on this
assumption, the plan administrator is permitted to assume that it is
not an eligible rollover distribution.
(c) Determination of designated beneficiary. For the purpose of
determining the amount of the minimum distribution required to satisfy
section 401(a)(9)(A) for any calendar year, the plan administrator is
permitted to assume that there is no designated beneficiary.
Q-18: When must a qualified plan be amended to comply with section
401(a)(31)?
A-18: Even though section 401(a)(31) applies to distributions from
qualified plans made on or after January 1, 1993, a qualified plan is
not required to be amended before the last day by which amendments must
be made to comply with the Tax Reform Act of 1986 and related
provisions, as permitted in other administrative guidance of general
applicability, provided that:
(a) In the interim period between January 1, 1993, and the date on
which the plan is amended, the plan is operated in accordance with the
requirements of section 401(a)(31); and
(b) The amendment applies retroactively to January 1, 1993.
Sec. 1.402(c)-2 Eligible rollover distributions; questions and
answers.
The following questions and answers relate to the rollover rules
under section 402(c) of the Internal Revenue Code of 1986, as added by
sections 521 and 522 of the Unemployment Compensation Amendments of
1992, Public Law 102-318, 106 Stat. 290 (UCA). For additional UCA
guidance under sections 401(a)(31), 402(f), 403(b)(8) and (10), and
3405(c), see Secs. 1.401(a)(31)-1, 1.402(f)-1, and 1.403(b)-2, and
Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan?
Q-2: What is an eligible retirement plan and a qualified plan?
Q-3: What is an eligible rollover distribution?
Q-4: Are there other amounts that are not eligible rollover
distributions?
Q-5: For purposes of determining whether a distribution is an
eligible rollover distribution, how is it determined whether a
series of payments is a series of substantially equal periodic
payments over a period specified in section 402(c)(4)(A)?
Q-6: What types of variations in the amount of a payment cause
the payment to be independent of a series of substantially equal
periodic payments and thus not part of the series?
Q-7: When is a distribution from a plan a required minimum
distribution under section 401(a)(9)?
Q-8: How are amounts that are not includible in gross income
allocated for purposes of determining the required minimum
distribution?
Q-9: What is a distribution of a plan loan offset amount and is
it an eligible rollover distribution?
Q-10: What is a qualified plan distributed annuity contract, and
is an amount paid under such a contract a distribution of the
balance to the credit of the employee in a qualified plan for
purposes of section 402(c)?
Q-11: If an eligible rollover distribution is paid to an
employee, and the employee contributes all or part of the eligible
rollover distribution to an eligible retirement plan within 60 days,
is the amount contributed not currently includible in gross income?
Q-12: How does section 402(c) apply to a distributee who is not
the employee?
Q-13: Must an employee's (or spousal distributee's) election to
treat a contribution of an eligible rollover distribution to an
individual retirement plan as a rollover contribution be
irrevocable?
Q-14: How is the $5,000 death benefit exclusion under section
101(b) treated for purposes of determining the amount that is an
eligible rollover distribution?
Q-15: May an employee (or spousal distributee) roll over more
than the plan administrator determines to be an eligible rollover
distribution using an assumption described in Sec. 1.401(a)(31)-1,
Q&A-17?
Q-16: Is a rollover from a qualified plan to an individual
retirement account or individual retirement annuity treated as a
rollover contribution for purposes of the one-year look-back
rollover limitation of section 408(d)(3)(B)?
Questions and Answers
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan?
A-1: (a) General rule. Under section 402(c), as added by UCA, any
portion of a distribution from a qualified plan that is an eligible
rollover distribution described in section 402(c)(4) may be rolled over
to an eligible retirement plan described in section 402(c)(8)(B). For
purposes of section 402(c) and this section, a rollover is either a
direct rollover as described in Sec. 1.401(a)(31)-1, Q&A-3 or a
contribution of an eligible rollover distribution to an eligible
retirement plan that satisfies the time period requirement in section
402(c)(3) and Q&A-11 of this section and the designation requirement
described in Q&A-13 of this section. See Q&A-2 of this section for the
definition of an eligible retirement plan and a qualified plan.
(b) Related Internal Revenue Code provisions--(1) Direct rollover
option. Section 401(a)(31), added by UCA, requires qualified plans to
provide a distributee of an eligible rollover distribution the option
to elect to have the distribution paid directly to an eligible
retirement plan in a direct rollover. See Sec. 1.401(a)(31)-1 for
further guidance concerning this direct rollover option.
(2) Notice requirement. Section 402(f) requires the plan
administrator of a qualified plan to provide, within a reasonable time
before making an eligible rollover distribution, a written explanation
to the distributee of the distributee's right to elect a direct
rollover and the withholding consequences of not making that election.
The explanation also is required to provide certain other relevant
information relating to the taxation of distributions. See
Sec. 1.402(f)-1 for guidance concerning the written explanation
required under section 402(f).
(3) Mandatory income tax withholding. If a distributee of an
eligible rollover distribution does not elect to have the eligible
rollover distribution paid directly from the plan to an eligible
retirement plan in a direct rollover under section 401(a)(31), the
eligible rollover distribution is subject to 20-percent income tax
withholding under section 3405(c). See Sec. 31.3405(c)-1 of this
chapter for provisions relating to the withholding requirements
applicable to eligible rollover distributions.
(4) Section 403(b) annuities. See Sec. 1.403(b)-2 for guidance
concerning the direct rollover requirements for distributions from
annuities described in section 403(b).
(c) Effective date--(1) Statutory effective date. Section 402(c),
added by UCA, applies to eligible rollover distributions made on or
after January 1, 1993, even if the event giving rise to the
distribution occurred on or before January 1, 1993 (e.g. termination of
the employee's employment with the employer maintaining the plan before
January 1, 1993), and even if the eligible rollover distribution is
part of a series of payments that began before January 1, 1993.
(2) Regulatory effective date. This section applies to any
distribution made on or after October 19, 1995. For eligible rollover
distributions made on or after January 1, 1993 and before October 19,
1995, Sec. 1.402(c)-2T (as it appeared in the April 1, 1995 edition of
26 CFR part 1), applies. However, for any distribution made on or after
January 1, 1993 but before October 19, 1995, any
[[Page 49209]]
or all of the provisions of this section may be substituted for the
corresponding provisions of Sec. 1.402(c)-2T, if any.
Q-2: What is an eligible retirement plan and a qualified plan?
A-2: An eligible retirement plan, under section 402(c)(8)(B), means
a qualified plan or an individual retirement plan. For purposes of
section 402(c) and this section, a qualified plan is an employees'
trust described in section 401(a) which is exempt from tax under
section 501(a) or an annuity plan described in section 403(a). An
individual retirement plan is an individual retirement account
described in section 408(a) or an individual retirement annuity (other
than an endowment contract) described in section 408(b).
Q-3: What is an eligible rollover distribution?
A-3: (a) General rule. Unless specifically excluded, an eligible
rollover distribution means any distribution to an employee (or to a
spousal distributee described in Q&A-12(a) of this section) of all or
any portion of the balance to the credit of the employee in a qualified
plan. Thus, except as specifically provided in Q&A-4(b) of this
section, any amount distributed to an employee (or such a spousal
distributee) from a qualified plan is an eligible rollover
distribution, regardless of whether it is a distribution of a benefit
that is protected under section 411(d)(6).
(b) Exceptions. An eligible rollover distribution does not include
the following:
(1) Any distribution that is one of a series of substantially equal
periodic payments made (not less frequently than annually) over any one
of the following periods--
(i) The life of the employee (or the joint lives of the employee
and the employee's designated beneficiary);
(ii) The life expectancy of the employee (or the joint life and
last survivor expectancy of the employee and the employee's designated
beneficiary); or
(iii) A specified period of ten years or more;
(2) Any distribution to the extent the distribution is a required
minimum distribution under section 401(a)(9); or
(3) The portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation described in section 402(e)(4)). Thus, for example, an
eligible rollover distribution does not include the portion of any
distribution that is excludible from gross income under section 72 as a
return of the employee's investment in the contract (e.g., a return of
the employee's after-tax contributions), but does include net
unrealized appreciation.
Q-4: Are there other amounts that are not eligible rollover
distributions?
A-4: Yes. The following amounts are not eligible rollover
distributions:
(a) Elective deferrals, as defined in section 402(g)(3), that,
pursuant to Sec. 1.415-6(b)(6)(iv), are returned as a result of the
application of the section 415 limitations, together with the income
allocable to these corrective distributions.
(b) Corrective distributions of excess deferrals as described in
Sec. 1.402(g)-1(e)(3), together with the income allocable to these
corrective distributions.
(c) Corrective distributions of excess contributions under a
qualified cash or deferred arrangement described in Sec. 1.401(k)-
1(f)(4) and excess aggregate contributions described in Sec. 1.401(m)-
1(e)(3), together with the income allocable to these distributions.
(d) Loans that are treated as deemed distributions pursuant to
section 72(p).
(e) Dividends paid on employer securities as described in section
404(k).
(f) The costs of life insurance coverage (P.S. 58 costs).
(g) Similar items designated by the Commissioner in revenue
rulings, notices, and other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
Q-5: For purposes of determining whether a distribution is an
eligible rollover distribution, how is it determined whether a series
of payments is a series of substantially equal periodic payments over a
period specified in section 402(c)(4)(A)?
A-5: (a) General rule. Generally, whether a series of payments is a
series of substantially equal periodic payments over a specified period
is determined at the time payments begin, and by following the
principles of section 72(t)(2)(A)(iv), without regard to contingencies
or modifications that have not yet occurred. Thus, for example, a joint
and 50-percent survivor annuity will be treated as a series of
substantially equal payments at the time payments commence, as will a
joint and survivor annuity that provides for increased payments to the
employee if the employee's beneficiary dies before the employee.
Similarly, for purposes of determining if a disability benefit payment
is part of a series of substantially equal payments for a period
described in section 402(c)(4)(A), any contingency under which payments
cease upon recovery from the disability may be disregarded.
(b) Certain supplements disregarded. For purposes of determining
whether a distribution is one of a series of payments that are
substantially equal, social security supplements described in section
411(a)(9) are disregarded. For example, if a distributee receives a
life annuity of $500 per month, plus a social security supplement
consisting of payments of $200 per month until the distributee reaches
the age at which social security benefits of not less than $200 a month
begin, the $200 supplemental payments are disregarded and, therefore,
each monthly payment of $700 made before the social security age and
each monthly payment of $500 made after the social security age is
treated as one of a series of substantially equal periodic payments for
life. A series of payments that are not substantially equal solely
because the amount of each payment is reduced upon attainment of social
security retirement age (or, alternatively, upon commencement of social
security early retirement, survivor, or disability benefits) will also
be treated as substantially equal as long as the reduction in the
actual payments is level and does not exceed the applicable social
security benefit.
(c) Changes in the amount of payments or the distributee. If the
amount (or, if applicable, the method of calculating the amount) of the
payments changes so that subsequent payments are not substantially
equal to prior payments, a new determination must be made as to whether
the remaining payments are a series of substantially equal periodic
payments over a period specified in Q&A-3(b)(1) of this section. This
determination is made without taking into account payments made or the
years of payment that elapsed prior to the change. However, a new
determination is not made merely because, upon the death of the
employee, the spouse or former spouse of the employee becomes the
distributee. Thus, once distributions commence over a period that is at
least as long as either the first annuitant's life or 10 years (e.g.,
as provided by a life annuity with a five-year or ten-year-certain
guarantee), then substantially equal payments to the survivor are not
eligible rollover distributions even though the payment period
remaining after the death of the employee is or may be less than the
period described in section 402(c)(4)(A). For example, substantially
equal periodic payments made under a life annuity with a five-year term
certain would not be an eligible rollover distribution even when
[[Page 49210]]
paid after the death of the employee with three years remaining under
the term certain.
(d) Defined contribution plans. The following rules apply in
determining whether a series of payments from a defined contribution
plan constitute substantially equal periodic payments for a period
described in section 402(c)(4)(A):
(1) Declining balance of years. A series of payments from an
account balance under a defined contribution plan will be considered
substantially equal payments over a period if, for each year, the
amount of the distribution is calculated by dividing the account
balance by the number of years remaining in the period. For example, a
series of payments will be considered substantially equal payments over
10 years if the series is determined as follows. In year 1, the annual
payment is the account balance divided by 10; in year 2, the annual
payment is the remaining account balance divided by 9; and so on until
year 10 when the entire remaining balance is distributed.
(2) Reasonable actuarial assumptions. If an employee's account
balance under a defined contribution plan is to be distributed in
annual installments of a specified amount until the account balance is
exhausted, then, for purposes of determining if the period of
distribution is a period described in section 402(c)(4)(A), the period
of years over which the installments will be distributed must be
determined using reasonable actuarial assumptions. For example, if an
employee has an account balance of $100,000, elects distributions of
$12,000 per year until the account balance is exhausted, and the future
rate of return is assumed to be 8% per year, the account balance will
be exhausted in approximately 14 years. Similarly, if the same employee
elects a fixed annual distribution amount and the fixed annual amount
is less than or equal to $10,000, it is reasonable to assume that a
future rate of return will be greater than 0% and, thus, the account
will not be exhausted in less than 10 years.
(e) Series of payments beginning before January 1, 1993. Except as
provided in paragraph (c) of this Q&A, if a series of periodic payments
began before January 1, 1993, the determination of whether the post-
December 31, 1992 payments are a series of substantially equal periodic
payments over a specified period is made by taking into account all
payments made, including payments made before January 1, 1993. For
example, if a series of substantially equal periodic payments beginning
on January 1, 1983, is scheduled to be paid over a period of 15 years,
payments in the series that are made after December 31, 1992, will not
be eligible rollover distributions even though they will continue for
only five years after December 31, 1992, because the pre- January 1,
1993 payments are taken into account in determining the specified
period.
Q-6: What types of variations in the amount of a payment cause the
payment to be independent of a series of substantially equal periodic
payments and thus not part of the series?
A-6: (a) Independent payments. Except as provided in paragraph (b)
of this Q&A, a payment is treated as independent of the payments in a
series of substantially equal payments, and thus not part of the
series, if the payment is substantially larger or smaller than the
other payments in the series. An independent payment is an eligible
rollover distribution if it is not otherwise excepted from the
definition of eligible rollover distribution. This is the case
regardless of whether the payment is made before, with, or after
payments in the series. For example, if an employee elects a single
payment of half of the account balance with the remainder of the
account balance paid over the life expectancy of the distributee, the
single payment is treated as independent of the payments in the series
and is an eligible rollover distribution unless otherwise excepted.
Similarly, if an employee's surviving spouse receives a survivor life
annuity of $1,000 per month plus a single payment on account of death
of $7,500, the single payment is treated as independent of the payments
in the annuity and is an eligible rollover distribution unless
otherwise excepted (e.g., $5,000 of the $7,500 might qualify to be
excluded from gross income as a death benefit under section 101(b)).
(b) Special rules--(1) Administrative error or delay. If, due
solely to reasonable administrative error or delay in payment, there is
an adjustment after the annuity starting date to the amount of any
payment in a series of payments that otherwise would constitute a
series of substantially equal payments described in section
402(c)(4)(A) and this section, the adjusted payment or payments will be
treated as part of the series of substantially equal periodic payments
and will not be treated as independent of the payments in the series.
For example, if, due solely to reasonable administrative delay, the
first payment of a life annuity is delayed by two months and reflects
an additional two months worth of benefits, that payment will be
treated as a substantially equal payment in the series rather than as
an independent payment. The result will not change merely because the
amount of the adjustment is paid in a separate supplemental payment.
(2) Supplemental payments for annuitants. A supplemental payment
from a defined benefit plan to annuitants (e.g., retirees or
beneficiaries) will be treated as part of a series of substantially
equal payments, rather than as an independent payment, provided that
the following conditions are met--
(i) The supplement is a benefit increase for annuitants;
(ii) The amount of the supplement is determined in a consistent
manner for all similarly situated annuitants;
(iii) The supplement is paid to annuitants who are otherwise
receiving payments that would constitute substantially equal periodic
payments; and
(iv) The aggregate supplement is less than or equal to the greater
of 10% of the annual rate of payment for the annuity, or $750 or any
higher amount prescribed by the Commissioner in revenue rulings,
notices, and other guidance published in the Federal Register. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(3) Final payment in a series. If a payment in a series of payments
from an account balance under a defined contribution plan represents
the remaining balance to the credit and is substantially less than the
other payments in the series, the final payment must nevertheless be
treated as a payment in the series of substantially equal payments and
may not be treated as an independent payment if the other payments in
the series are substantially equal and the payments are for a period
described in section 402(c)(4)(A) based on the rules provided in
paragraph (d)(2) of Q&A-5 of this section. Thus, such final payment
will not be an eligible rollover distribution.
Q-7: When is a distribution from a plan a required minimum
distribution under section 401(a)(9)?
A-7: (a) General rule. Except as provided in paragraphs (b) and (c)
of this Q&A, if a minimum distribution is required for a calendar year,
the amounts distributed during that calendar year are treated as
required minimum distributions under section 401(a)(9), to the extent
that the total required minimum distribution under section 401(a)(9)
for the calendar year has not been satisfied. Accordingly, these
amounts are not eligible rollover distributions. For example, if an
employee is required under section
[[Page 49211]]
401(a)(9) to receive a required minimum distribution for a calendar
year of $5,000 and the employee receives a total of $7,200 in that
year, the first $5,000 distributed will be treated as the required
minimum distribution and will not be an eligible rollover distribution
and the remaining $2,200 will be an eligible rollover distribution if
it otherwise qualifies. If the total section 401(a)(9) required minimum
distribution for a calendar year is not distributed in that calendar
year (e.g., when the distribution for the calendar year in which the
employee reaches age 70\1/2\ is made on the following April 1), the
amount that was required but not distributed is added to the amount
required to be distributed for the next calendar year in determining
the portion of any distribution in the next calendar year that is a
required minimum distribution.
(b) Distribution before age 70\1/2\. Any amount that is paid before
January 1 of the year in which the employee attains (or would have
attained) age 70\1/2\ will not be treated as required under section
401(a)(9) and, thus, is an eligible rollover distribution if it
otherwise qualifies.
(c) Special rule for annuities. In the case of annuity payments
from a defined benefit plan, or under an annuity contract purchased
from an insurance company (including a qualified plan distributed
annuity contract (as defined in Q&A-10 of this section)), the entire
amount of any such annuity payment made on or after January 1 of the
year in which an employee attains (or would have attained) age 70\1/2\
will be treated as an amount required under section 401(a)(9) and,
thus, will not be an eligible rollover distribution.
Q-8: How are amounts that are not includible in gross income
allocated for purposes of determining the required minimum
distribution?
A-8: If section 401(a)(9) has not yet been satisfied by the plan
for the year with respect to an employee, a distribution is made to the
employee that exceeds the amount required to satisfy section 401(a)(9)
for the year for the employee, and a portion of that distribution is
excludible from gross income, the following rule applies for purposes
of determining the amount of the distribution that is an eligible
rollover distribution. The portion of the distribution that is
excludible from gross income is first allocated toward satisfaction of
section 401(a)(9) and then the remaining portion of the required
minimum distribution, if any, is satisfied from the portion of the
distribution that is includible in gross income. For example, assume an
employee is required under section 401(a)(9) to receive a minimum
distribution for a calendar year of $4,000 and the employee receives a
$4,800 distribution, of which $1,000 is excludible from income as a
return of basis. First, the $1,000 return of basis is allocated toward
satisfying the required minimum distribution. Then, the remaining
$3,000 of the required minimum distribution is satisfied from the
$3,800 of the distribution that is includible in gross income, so that
the remaining balance of the distribution, $800, is an eligible
rollover distribution if it otherwise qualifies.
Q-9: What is a distribution of a plan loan offset amount, and is it
an eligible rollover distribution?
A-9: (a) General rule. A distribution of a plan loan offset amount,
as defined in paragraph (b) of this Q&A, is an eligible rollover
distribution if it satisfies Q&A-3 of this section. Thus, an amount
equal to the plan loan offset amount can be rolled over by the employee
(or spousal distributee) to an eligible retirement plan within the 60-
day period under section 402(c)(3), unless the plan loan offset amount
fails to be an eligible rollover distribution for another reason. See
Sec. 1.401(a)(31)-1, Q&A-15 for guidance concerning the offering of a
direct rollover of a plan loan offset amount. See Sec. 31.3405(c)-1,
Q&A-11 of this chapter for guidance concerning special withholding
rules with respect to plan loan offset amounts.
(b) Definition of plan loan offset amount. For purposes of section
402(c), a distribution of a plan loan offset amount is a distribution
that occurs when, under the plan terms governing a plan loan, the
participant's accrued benefit is reduced (offset) in order to repay the
loan (including the enforcement of the plan's security interest in a
participant's accrued benefit). A distribution of a plan loan offset
amount can occur in a variety of circumstances, e.g., where the terms
governing a plan loan require that, in the event of the employee's
termination of employment or request for a distribution, the loan be
repaid immediately or treated as in default. A distribution of a plan
loan offset amount also occurs when, under the terms governing the plan
loan, the loan is cancelled, accelerated, or treated as if it were in
default (e.g., where the plan treats a loan as in default upon an
employee's termination of employment or within a specified period
thereafter). A distribution of a plan loan offset amount is an actual
distribution, not a deemed distribution under section 72(p).
(c) Examples. The rules with respect to a plan loan offset amount
in this Q&A-9, Sec. 1.401(a)(31)-1, Q&A-15 and Sec. 31.3405(c)-1, Q&A-
11 of this chapter are illustrated by the following examples:
Example 1. (a) In 1996, Employee A has an account balance of
$10,000 in Plan Y, of which $3,000 is invested in a plan loan to
Employee A that is secured by Employee A's account balance in Plan
Y. Employee A has made no after-tax employee contributions to Plan
Y. Plan Y does not provide any direct rollover option with respect
to plan loans. Upon termination of employment in 1996, Employee A,
who is under age 70\1/2\ , elects a distribution of Employee A's
entire account balance in Plan Y, and Employee A's outstanding loan
is offset against the account balance on distribution. Employee A
elects a direct rollover of the distribution.
(b) In order to satisfy section 401(a)(31), Plan Y must pay
$7,000 directly to the eligible retirement plan chosen by Employee A
in a direct rollover. When Employee A's account balance was offset
by the amount of the $3,000 unpaid loan balance, Employee A received
a plan loan offset amount (equivalent to $3,000) that is an eligible
rollover distribution. However, under Sec. 1.401(a)(31)-1, Q&A-15
Plan Y satisfies section 401(a)(31), even though a direct rollover
option was not provided with respect to the $3,000 plan loan offset
amount.
(c) No withholding is required under section 3405(c) on account
of the distribution of the $3,000 plan loan offset amount because no
cash or other property (other than the plan loan offset amount) is
received by Employee A from which to satisfy the withholding.
Employee A may roll over $3,000 to an eligible retirement plan
within the 60 day period provided in section 402(c)(3).
Example 2. (a) The facts are the same as in Example 1, except
that the terms governing the plan loan to Employee A provide that,
upon termination of employment, Employee A's account balance is
automatically offset by the amount of any unpaid loan balance to
repay the loan. Employee A terminates employment but does not
request a distribution from Plan Y. Nevertheless, pursuant to the
terms governing the plan loan, Employee A's account balance is
automatically offset by the amount of the $3,000 unpaid loan
balance.
(b) The $3,000 plan loan offset amount attributable to the plan
loan in this example is treated in the same manner as the $3,000
plan loan offset amount in Example 1.
Example 3. (a) The facts are the same as in Example 2, except
that, instead of providing for an automatic offset upon termination
of employment to repay the plan loan, the terms governing the plan
loan require full repayment of the loan by Employee A within 30 days
of termination of employment. Employee A terminates employment, does
not elect a distribution from Plan Y, and also fails to repay the
plan loan within 30 days. The plan administrator of Plan Y declares
the plan loan to Employee A in default and executes on the loan by
offsetting Employee A's account balance by the amount of the $3,000
unpaid loan balance.
[[Page 49212]]
(b) The $3,000 plan loan offset amount attributable to the plan
loan in this example is treated in the same manner as the $3,000
plan loan offset amount in Example 1 and in Example 2. The result in
this Example 3 is the same even though the plan administrator treats
the loan as in default before offsetting Employee A's accrued
benefit by the amount of the unpaid loan.
Example 4. (a) The facts are the same as in Example 1, except
that Employee A elects to receive the distribution of the account
balance that remains after the $3,000 offset to repay the plan loan,
instead of electing a direct rollover of the remaining account
balance.
(b) In this case, the amount of the distribution received by
Employee A is $10,000, not $3,000. Because the amount of the $3,000
offset attributable to the loan is included in determining the
amount that equals 20 percent of the eligible rollover distribution
received by Employee A, withholding in the amount of $2,000 (20
percent of $10,000) is required under section 3405(c). The $2,000 is
required to be withheld from the $7,000 to be distributed to
Employee A in cash, so that Employee A actually receives a check for
$5,000.
Example 5. The facts are the same as in Example 4, except that
the $7,000 distribution to Employee A after the offset to repay the
loan consists solely of employer securities within the meaning of
section 402(e)(4)(E). In this case, no withholding is required under
section 3405(c) because the distribution consists solely of the
$3,000 plan loan offset amount and the $7,000 distribution of
employer securities. This is the result because the total amount
required to be withheld does not exceed the sum of the cash and the
fair market value of other property distributed, excluding plan loan
offset amounts and employer securities. Employee A may roll over the
employer securities and $3,000 to an eligible retirement plan within
the 60-day period provided in section 402(c)(3).
Example 6. Employee B, who is age 40, has an account balance in
Plan Z, a profit sharing plan qualified under section 401(a) that
includes a qualified cash or deferred arrangement described in
section 401(k). Plan Z provides for no after-tax employee
contributions. In 1990, Employee B receives a loan from Plan Z, the
terms of which satisfy section 72(p)(2), and which is secured by
elective contributions subject to the distribution restrictions in
section 401(k)(2)(B). In 1996, the loan fails to satisfy section
72(p)(2) because Employee B stops repayment. In that year, pursuant
to section 72(p), Employee B is taxed on a deemed distribution equal
to the amount of the unpaid loan balance. Under Q&A-4 of this
section, the deemed distribution is not an eligible rollover
distribution. Because Employee B has not separated from service or
experienced any other event that permits the distribution under
section 401(k)(2)(B) of the elective contributions that secure the
loan, Plan Z is prohibited from executing on the loan. Accordingly,
Employee B's account balance is not offset by the amount of the
unpaid loan balance at the time Employee B stops repayment on the
loan. Thus, there is no distribution of an offset amount that is an
eligible rollover distribution in 1996.
Q-10: What is a qualified plan distributed annuity contract, and is
an amount paid under such a contract a distribution of the balance to
the credit of the employee in a qualified plan for purposes of section
402(c)?
A-10: (a) Definition of a qualified plan distributed annuity
contract. A qualified plan distributed annuity contract is an annuity
contract purchased for a participant, and distributed to the
participant, by a qualified plan.
(b) Treatment of amounts paid as eligible rollover distributions.
Amounts paid under a qualified plan distributed annuity contract are
payments of the balance to the credit of the employee for purposes of
section 402(c) and are eligible rollover distributions, if they
otherwise qualify. Thus, for example, if the employee surrenders the
contract for a single sum payment of its cash surrender value, the
payment would be an eligible rollover distribution to the extent it is
includible in gross income and not a required minimum distribution
under section 401(a)(9). This rule applies even if the annuity contract
is distributed in connection with a plan termination. See
Sec. 1.401(a)(31)-1, Q&A-16 and Sec. 31.3405(c)-1, Q&A-13 of this
chapter concerning the direct rollover requirements and 20-percent
withholding requirements, respectively, that apply to eligible rollover
distributions from such an annuity contract.
Q-11: If an eligible rollover distribution is paid to an employee,
and the employee contributes all or part of the eligible rollover
distribution to an eligible retirement plan within 60 days, is the
amount contributed not currently includible in gross income?
A-11: Yes, the amount contributed is not currently includible in
gross income, provided that it is contributed to the eligible
retirement plan no later than the 60th day following the day on which
the employee received the distribution. If more than one distribution
is received by an employee from a qualified plan during a taxable year,
the 60-day rule applies separately to each distribution. Because the
amount withheld as income tax under section 3405(c) is considered an
amount distributed under section 402(c), an amount equal to all or any
portion of the amount withheld can be contributed as a rollover to an
eligible retirement plan within the 60-day period, in addition to the
net amount of the eligible rollover distribution actually received by
the employee. However, if all or any portion of an amount equal to the
amount withheld is not contributed as a rollover, it is included in the
employee's gross income to the extent required under section 402(a),
and also may be subject to the 10-percent additional income tax under
section 72(t).
Q-12: How does section 402(c) apply to a distributee who is not the
employee?
A-12: (a) Spousal distributee. If any distribution attributable to
an employee is paid to the employee's surviving spouse, section 402(c)
applies to the distribution in the same manner as if the spouse were
the employee. The same rule applies if any distribution attributable to
an employee is paid in accordance with a qualified domestic relations
order (as defined in section 414(p)) to the employee's spouse or former
spouse who is an alternate payee. Therefore, a distribution to the
surviving spouse of an employee (or to a spouse or former spouse who is
an alternate payee under a qualified domestic relations order),
including a distribution of ancillary death benefits attributable to
the employee, is an eligible rollover distribution if it meets the
requirements of section 402(c)(2) and (4) and Q&A-3 through Q&A-10 and
Q&A-14 of this section. However, a qualified plan (as defined in Q&A-2
of this section) is not treated as an eligible retirement plan with
respect to a surviving spouse. Only an individual retirement plan is
treated as an eligible retirement plan with respect to an eligible
rollover distribution to a surviving spouse.
(b) Non-spousal distributee. A distributee other than the employee
or the employee's surviving spouse (or a spouse or former spouse who is
an alternate payee under a qualified domestic relations order) is not
permitted to roll over distributions from a qualified plan. Therefore,
those distributions do not constitute eligible rollover distributions
under section 402(c)(4) and are not subject to the 20-percent income
tax withholding under section 3405(c).
Q-13: Must an employee's (or spousal distributee's) election to
treat a contribution of an eligible rollover distribution to an
individual retirement plan as a rollover contribution be irrevocable?
A-13: (a) In general. Yes. In order for a contribution of an
eligible rollover distribution to an individual retirement plan to
constitute a rollover and, thus, to qualify for current exclusion from
gross income, a distributee must elect, at the time the contribution is
made, to treat the contribution as a rollover
[[Page 49213]]
contribution. An election is made by designating to the trustee,
issuer, or custodian of the eligible retirement plan that the
contribution is a rollover contribution. This election is irrevocable.
Once any portion of an eligible rollover distribution has been
contributed to an individual retirement plan and designated as a
rollover distribution, taxation of the withdrawal of the contribution
from the individual retirement plan is determined under section 408(d)
rather than under section 402 or 403. Therefore, the eligible rollover
distribution is not eligible for capital gains treatment, five-year or
ten-year averaging, or the exclusion from gross income for net
unrealized appreciation on employer stock.
(b) Direct rollover. If an eligible rollover distribution is paid
to an individual retirement plan in a direct rollover at the election
of the distributee, the distributee is deemed to have irrevocably
designated that the direct rollover is a rollover contribution.
Q-14: How is the $5,000 death benefit exclusion under section
101(b) treated for purposes of determining the amount that is an
eligible rollover distribution?
A-14: To the extent that a death benefit is a distribution from a
qualified plan, the portion of the distribution that is excluded from
gross income under section 101(b) is not an eligible rollover
distribution. See Sec. 1.401(a)(31)-1, Q&A-17 for guidance concerning
assumptions that a plan administrator may make with respect to whether
and to what extent a distribution of a survivor benefit is excludible
from gross income under section 101(b).
Q-15: May an employee (or spousal distributee) roll over more than
the plan administrator determines to be an eligible rollover
distribution using an assumption described in Sec. 1.401(a)(31)-1, Q&A-
17?
A-15: Yes. The portion of any distribution that an employee (or
spousal distributee) may roll over as an eligible rollover distribution
under section 402(c) is determined based on the actual application of
section 402 and other relevant provisions of the Internal Revenue Code.
The actual application of these provisions may produce different
results than any assumption described in Sec. 1.401(a)(31)-1, Q&A-17
that is used by the plan administrator. Thus, for example, even though
the plan administrator calculates the portion of a distribution that is
a required minimum distribution (and thus is not made eligible for
direct rollover under section 401(a)(31)), by assuming that there is no
designated beneficiary, the portion of the distribution that is
actually a required minimum distribution and thus not an eligible
rollover distribution is determined by taking into account the
designated beneficiary, if any. If, by taking into account the
designated beneficiary, a greater portion of the distribution is an
eligible rollover distribution, the distributee may rollover the
additional amount. Similarly, even though a plan administrator assumes
that a distribution from a qualified plan is the only death benefit
with respect to an employee that qualifies for the $5,000 death benefit
exclusion under section 101(b), to the extent that the death benefit
exclusion is allocated to a different death benefit, a greater portion
of the distribution may actually be includible in gross income and,
thus, be an eligible rollover distribution, and the surviving spouse
may roll over the additional amount if it otherwise qualifies.
Q-16: Is a rollover from a qualified plan to an individual
retirement account or individual retirement annuity treated as a
rollover contribution for purposes of the one-year look-back rollover
limitation of section 408(d)(3)(B)?
A-16: No. A distribution from a qualified plan that is rolled over
to an individual retirement account or individual retirement annuity is
not treated for purposes of section 408(d)(3)(B) as an amount received
by an individual from an individual retirement account or individual
retirement annuity which is not includible in gross income because of
the application of section 408(d)(3).
Sec. 1.402(f)-1 Required explanation of eligible rollover
distributions; questions and answers.
The following questions and answers concern the written explanation
requirement imposed by section 402(f) of the Internal Revenue Code of
1986 relating to distributions eligible for rollover treatment. Section
402(f) was amended by section 521(a) of the Unemployment Compensation
Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). For
additional UCA guidance under sections 401(a)(31), 402(c), 403(b)(8)
and (10), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.403(b)-
2, and 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What are the requirements for a written explanation under
section 402(f)?
Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?
Q-3: Must the plan administrator provide a separate section
402(f) notice for each distribution in a series of periodic payments
that are eligible rollover distributions?
Q-4: May a plan administrator post the section 402(f) notice as
a means of providing it to distributees?
Questions and Answers
Q-1: What are the requirements for a written explanation under
section 402(f)?
A-1: (a) General rule. Under section 402(f), as amended by UCA, the
plan administrator of a qualified plan is required, within a reasonable
period of time before making an eligible rollover distribution, to
provide the distributee with the written explanation described in
section 402(f) (section 402(f) notice). The section 402(f) notice must
be designed to be easily understood and must explain the following: the
rules under which the distributee may elect that the distribution be
paid in the form of a direct rollover to an eligible retirement plan;
the rules that require the withholding of tax on the distribution if it
is not paid in a direct rollover; the rules under which the distributee
may defer tax on the distribution if it is contributed in a rollover to
an eligible retirement plan within 60 days of the distribution; and if
applicable, certain special rules regarding the taxation of the
distribution as described in section 402(d) (averaging with respect to
lump sum distributions) and (e) (other rules including treatment of net
unrealized appreciation). See Sec. 1.401(a)(31)-1, Q&A-7 for additional
information that must be provided if a plan provides a default
procedure regarding the election of a direct rollover.
(b) Model section 402(f) notice. The plan administrator will be
deemed to have complied with the requirements of paragraph (a) of this
Q&A-1 relating to the contents of the section 402(f) notice if the plan
administrator provides the applicable model section 402(f) notice
published by the Internal Revenue Service for this purpose in a revenue
ruling, notice, or other guidance published in the Internal Revenue
Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
(c) Delegation to Commissioner. The Commissioner, in revenue
rulings, notices, and other guidance, published in the Internal Revenue
Bulletin, may modify, or provide any additional guidance with respect
to, the notice requirement of this section. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
(d) Effective date--(1) Statutory effective date. Section 402(f)
applies to eligible rollover distributions made after December 31,
1992.
(2) Regulatory effective date. This section applies to eligible
rollover distributions made on or after October
[[Page 49214]]
19, 1995. For eligible rollover distributions made on or after January
1, 1993 and before October 19, 1995, Sec. 1.402(c)-2T, Q&A-11 through
15 (as it appeared in the April 1, 1995 edition of 26 CFR part 1),
apply. However, for any distribution made on or after January 1, 1993
but before October 19, 1995, a plan administrator or payor may satisfy
the requirements of section 402(f) by substituting any or all
provisions of this section for the corresponding provisions of
Sec. 1.402(c)-1T, Q&A-11 through 15, if any.
Q-2: When must the plan administrator provide the section 402(f)
notice to a distributee?
A-2: The plan administrator must provide a distributee with the
section 402(f) notice no less than 30 days and no more than 90 days
before the date of distribution. However, if the distributee, after
having received the section 402(f) notice, affirmatively elects a
distribution, a plan will not fail to satisfy section 402(f) merely
because the distribution is made less than 30 days after the section
402(f) notice was provided to the distributee, provided that the
following requirement is met. The plan administrator must provide
information to the distributee clearly indicating that (in accordance
with the first sentence of this Q&A-2) the distributee has a right to
consider the decision of whether or not to elect a direct rollover for
at least 30 days after the notice is provided. The plan administrator
may use any method to inform the distributee of the relevant time
period, provided that the method is reasonably designed to attract the
attention of the distributee. For example, this information could be
provided either in the section 402(f) notice or stated in a separate
document (e.g., attached to the election form) that is provided at the
same time as the notice. For purposes of satisfying the requirement in
the first sentence of this Q&A-2, the plan administrator may substitute
the annuity starting date, within the meaning of Sec. 1.401(a)-20, Q&A-
10, for the date of distribution.
Q-3: Must the plan administrator provide a separate section 402(f)
notice for each distribution in a series of periodic payments that are
eligible rollover distributions?
A-3: No. In the case of a series of periodic payments that are
eligible rollover distributions, the plan administrator is permitted to
satisfy section 402(f) with respect to each payment in the series by
providing the section 402(f) notice prior to the first payment in the
series, in accordance with the rules in Q&A-1 and Q&A-2 of this
section, and providing the notice at least once annually for as long as
the payments continue. However, see Sec. 1.401(a)(31)-1, Q&A-12 for
additional guidance if the plan administrator intends to treat a
distributee's election to make or not make a direct rollover with
respect to one payment in a series of periodic payments as applicable
to all subsequent payments in the series (absent a subsequent change of
election).
Q-4: May a plan administrator post the section 402(f) notice as a
means of providing it to distributees?
A-4: No. The posting of the section 402(f) notice will not be
considered provision of the notice. The written notice must be provided
individually to any distributee of an eligible rollover distribution
within the time period described in Q&A-2 and Q&A-3 of this section.
Sec. 1.403(b)-2 Eligible rollover distributions; questions and
answers.
The following questions and answers relate to eligible rollover
distributions from annuities, custodial accounts, and retirement income
accounts described in section 403(b) of the Internal Revenue Code of
1986, as amended by sections 521 and 522 of the Unemployment
Compensation Amendments of 1992 (Public Law 102-318, 106 Stat. 290)
(UCA). For additional UCA guidance under sections 401(a)(31), 402(c),
402(f), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.402(f)-1,
and Sec. 31.3405(c)-1 of this chapter, respectively.
List of Questions
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan from annuities, custodial
accounts, and retirement income accounts described in section
403(b)?
Q-2: Is a section 403(b) annuity required to provide the direct
rollover option described in section 401(a)(31) as a distribution
option?
Q-3: Is the payor of a section 403(b) annuity required to
provide a distributee of an eligible rollover distribution with an
explanation of the direct rollover option?
Q-4: When do sections 403 (b)(8) and (b)(10), as amended by UCA,
and this Sec. 1.403(b)-2 apply to distributions from section 403(b)
annuities?
Questions and Answers
Q-1: What is the rule regarding distributions that may be rolled
over to an eligible retirement plan from annuities, custodial accounts,
and retirement income accounts described in section 403(b)?
A-1: Under section 403(b)(8), as amended by UCA, any eligible
rollover distribution from a section 403(b) annuity is permitted to be
rolled over to an eligible retirement plan. For purposes of this
section, a section 403(b) annuity includes an annuity contract, a
custodial account, and a retirement income account described in section
403(b). For purposes of section 403(b)(8) and this section, an eligible
retirement plan means another section 403(b) annuity or an individual
retirement plan (as defined in Sec. 1.402(c)(2), Q&A-2 but does not
include a qualified plan (as defined in Sec. 1.402(c)-2), Q&A-2. Except
to the extent otherwise provided in this section, an eligible rollover
distribution from a section 403(b) annuity is an eligible rollover
distribution described in section 402(c) (2) and (4) and Sec. 1.402(c)-
2, Q&A-3 through Q&A-10 and Q&A-14, except that the distribution is
from section 403(b) annuity rather than a qualified plan. Thus, for
example, to the extent that corrective distributions described in
Sec. 1.402(c)-2, Q&A-4 are properly made from a section 403(b) annuity,
such distributions are not eligible rollover distributions. Similarly,
in the case of annuity distributions from an annuity contract described
in section 403(b), the entire amount of any such annuity payment made
on or after January 1 of the year in which an employee attains (or
would have attained) age 70\1/2\ will be treated as an amount required
under section 401(a)(9) and, thus, will not be an eligible rollover
distribution. The rules with respect to rollovers in sections 402
(c)(1), (c)(3), and (c)(9) and Sec. 1.402(c)-2, Q&A-11 through Q&A-13
and Q&A-15 also apply to eligible rollover distributions from section
403(b) annuities.
Q-2: Is a section 403(b) annuity required to provide the direct
rollover option described in section 401(a)(31) as a distribution
option?
A-2: (a) General rule. Yes. Pursuant to section 403(b)(10), section
403(b) does not apply to an annuity contract, custodial account, or
retirement income account unless the annuity contract, custodial
account, or retirement income account provides that if the distributee
of any eligible rollover distribution elects to have the distribution
paid directly to an eligible retirement plan (as defined in Q&A-1 of
this section) and specifies the eligible retirement plan to which the
distribution is to be paid, then the distribution will be paid to that
eligible retirement plan in a direct rollover. For purposes of
determining whether a section 403(b) annuity has satisfied this direct
rollover requirement, the provisions of Sec. 1.401(a)(31)-1 apply to
the section 403(b) annuity as though it were a plan qualified under
section 401(a) unless otherwise provided in this section. For example,
as described in Sec. 1.401(a)(31)-
[[Page 49215]]
1, Q&A-14 a direct rollover from a section 403(b) annuity to another
section 403(b) annuity is a distribution and a rollover and not a
transfer of funds between section 403(b) annuities and, thus, is not
subject to the applicable law governing transfers of funds between
section 403(b) annuities. In applying the provisions of
Sec. 1.401(a)(31)-1, the payor of the eligible rollover distribution is
treated as the plan administrator.
(b) Mandatory withholding. As in the case of an eligible rollover
distribution from a qualified plan, if a distributee of an eligible
rollover distribution from a section 403(b) annuity does not elect to
have the eligible rollover distribution paid directly to an eligible
retirement plan in a direct rollover, the eligible rollover
distribution is subject to 20-percent income tax withholding imposed
under section 3405(c). See Sec. 31.3405(c)-1 of this chapter for
provisions regarding the withholding requirements relating to eligible
rollover distributions.
Q-3: Is the payor of a section 403(b) annuity required to provide
the distributee of an eligible rollover distribution with an
explanation of the direct rollover option?
A-3: Yes. In order to ensure that the distributee of an eligible
rollover distribution from a section 403(b) annuity has a meaningful
right to elect a direct rollover, the distributee must be informed of
the option. Thus, within a reasonable time period before making an
eligible rollover distribution, the payor must provide an explanation
to the distributee of his or her right to elect a direct rollover and
the income tax withholding consequences of not electing a direct
rollover. For purposes of satisfying the reasonable time period, the
qualified plan timing rule provided in Sec. 1.402(f)-1, Q&A-2 does not
apply to section 403(b) annuities. However, a payor of a section 403(b)
annuity will be deemed to have provided the explanation within a
reasonable time period if the payor complies with the time period in
that rule.
Q-4: When do sections 403(b)(8) and (b)(10), as amended by UCA, and
this Sec. 1.403(b)-2 apply to distributions from section 403(b)
annuities?
A-4: (a) General rule--(1) Statutory effective date. Section
403(b)(8), as amended by UCA, and section 403(b)(10), as amended by
UCA, apply to distributions made on or after January 1, 1993. In
addition, the underlying section 403(b) annuity document must be
amended at the time provided in, and the section 403(b) annuity must
operate in accordance with the requirements of Sec. 1.401(a)(31)-1,
Q&A-18. Section 522 of UCA provides a special effective date for
governmental section 403(b) annuities. This special effective date is
specified in Sec. 1.403(b)-2T (as it appeared in the April 1, 1995
edition of 26 CFR part 1).
(2) Regulatory effective date. This section applies to
distributions made on or after October 19, 1995. For distributions made
on or after January 1, 1993 and before October 19, 1995, Sec. 1.403(b)-
2T (as it appeared in the April 1, 1995 edition of 26 CFR part 1),
applies. However, for distributions made on or after January 1, 1993
but before October 19, 1995, a section 403(b) annuity may satisfy
section 403(b)(10) by substituting any or all provisions of this
section for the corresponding provisions of Sec. 1.403(b)-2T, if any.
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Par. 4. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 5. Section 31.3402(p)-1 is amended by adding a sentence at the
end of paragraph (a) to read as follows:
Sec. 31.3402(p)-1 Voluntary withholding agreements.
(a) * * * See Sec. 31.3405(c)-1, Q&A-3 concerning agreements to
have more than 20-percent Federal income tax withheld from eligible
rollover distributions within the meaning of section 402.
* * * * *
Par. 6. Section 31.3405(c)-1 is added to read as follows:
Sec. 31.3405(c)-1 Withholding on eligible rollover distributions;
questions and answers.
The following questions and answers relate to withholding on
eligible rollover distributions under section 3405(c) of the Internal
Revenue Code of 1986, as added by section 522(b) of the Unemployment
Compensation Amendments of 1992 (Public Law 102- 318, 106 Stat. 290)
(UCA). For additional UCA guidance under sections 401(a)(31), 402(c),
402(f), and 403(b)(8) and (10), see Secs. 1.401(a)(31)-1, 1.402(c)-2,
1.402(f)-1, and 1.403(b)-2 of this chapter, respectively.
List of Questions
Q-1: What are the withholding requirements under section 3405
for distributions from qualified plans and section 403(b) annuities?
Q-2: May a distributee elect under section 3405(c) not to have
Federal income tax withheld from an eligible rollover distribution?
Q-3: May a distributee be permitted to elect to have more than
20-percent Federal income tax withheld from an eligible rollover
distribution?
Q-4: Who has responsibility for complying with section 3405(c)
relating to the 20-percent income tax withholding on eligible
rollover distributions?
Q-5: May the plan administrator shift the withholding
responsibility to the payor and, if so, how?
Q-6: How does the 20-percent withholding requirement under
section 3405(c) apply if a distributee elects to have a portion of
an eligible rollover distribution paid to an eligible retirement
plan in a direct rollover and to have the remainder of that
distribution paid to the distributee?
Q-7: Will the plan administrator be subject to liability for
tax, interest, or penalties for failure to withhold 20 percent from
an eligible rollover distribution that, because of erroneous
information provided by a distributee, is not paid to an eligible
retirement plan even though the distributee elected a direct
rollover?
Q-8: Is an eligible rollover distribution that is paid to a
qualified defined benefit plan subject to 20-percent withholding?
Q-9: If property other than cash, employer securities, or plan
loans is distributed, how is the 20-percent income tax withholding
required under section 3405(c) accomplished?
Q-10: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution for purposes
of determining the amount of a distribution that is subject to 20-
percent mandatory withholding?
Q-11: Are there special rules for applying the 20-percent
withholding requirement to employer securities and a plan loan
offset amount distributed in an eligible rollover distribution?
Q-12: How does the mandatory withholding rule apply to net
unrealized appreciation from employer securities?
Q-13: Does the 20-percent withholding requirement apply to
eligible rollover distributions from a qualified plan distributed
annuity contract?
Q-14: Must a payor or plan administrator withhold tax from an
eligible rollover distribution for which a direct rollover election
was not made if the amount of the distribution is less than $200?
Q-15: If eligible rollover distributions are made from a
qualified plan, who has responsibility for making the returns and
reports required under these regulations?
Q-16: What eligible rollover distributions must be reported on
Form 1099-R?
Q-17: Must the plan administrator, trustee or custodian of the
eligible retirement plan report amounts received in a direct
rollover?
Questions and Answers
Q-1: What are the withholding requirements under section 3405 for
distributions from qualified plans and section 403(b) annuities?
A-1: (a) General rule. Section 3405(c), added by UCA, provides that
any designated distribution that is an
[[Page 49216]]
eligible rollover distribution (as defined in section 402(f)(2)(A))
from a qualified plan or a section 403(b) annuity is subject to income
tax withholding at the rate of 20 percent unless the distributee of the
eligible rollover distribution elects to have the distribution paid
directly to an eligible retirement plan in a direct rollover. See
Sec. 1.402(c)-2, Q&A-2 of this chapter for the definition of a
qualified plan and Sec. 1.403(b)-2, Q&A-1 of this chapter for the
definition of a section 403(b) annuity. For purposes of section 3405
and this section, with respect to a distribution from a qualified plan,
an eligible retirement plan is a trust qualified under section 401(a),
an annuity plan described in section 403(a), or an individual
retirement plan (as described in Sec. 1.402(c)-2, Q&A-2 of this
chapter). For purposes of section 3405 and this section, with respect
to a distribution from a section 403(b) annuity, an eligible retirement
plan is an annuity contract, a custodial account, a retirement income
account described in section 403(b), or an individual retirement plan.
If a designated distribution is not an eligible rollover distribution,
it is subject to the elective withholding provisions of section 3405(a)
and (b) and Sec. 35.3405-1 of this chapter and is not subject to the
mandatory withholding provisions of section 3405(c) and this section.
(b) Application of other statutory provisions. See
Sec. 1.401(a)(31)-1 of this chapter concerning the requirements and the
procedures for electing a direct rollover under section 401(a)(31). See
section 402(c)(2) and (4), and Sec. 1.402(c)-2, Q&A-3 through Q&A-10
and Q&A-14 of this chapter for rules to determine what constitutes an
eligible rollover distribution. See Sec. 1.402(f)-1, Q&A-1 through Q&A-
3 and Sec. 1.403(b)-2, Q&A-3 of this chapter concerning the notice that
must be provided to a distributee, within a reasonable period of time
before making an eligible rollover distribution. See Sec. 1.403(b)-2,
Q&A-1 and Q&A-2 of this chapter for guidance concerning the rollover
provisions and direct rollover requirements for distributions from
annuities described in section 403(b).
(c) Effective date--(1) Statutory effective date--(i) General rule.
Section 3405(c), as added by UCA, applies to eligible rollover
distributions made on or after January 1, 1993, even if the employee's
employment with the employer maintaining the plan terminated before
January 1, 1993 and even if the eligible rollover distribution is part
of a series of payments that began before January 1, 1993.
(ii) Special rule for governmental section 403(b) annuities.
Section 522 of UCA provides a special effective date for governmental
section 403(b) annuities. This special effective date appears in
Sec. 1.403(b)-2T of this chapter (as it appeared in the April 1, 1995
edition of 26 CFR part 1).
(2) Regulatory effective date. This section applies to eligible
rollover distributions made on or after October 19, 1995. For eligible
rollover distributions made on or after January 1, 1993 and before
October 19, 1995, Sec. 31.3405(c)-1T (as it appeared in the April 1,
1995 edition of 26 CFR part 1), applies. However, for any distribution
made on or after January 1, 1993 but before October 19, 1995, a plan
administrator or payor may comply with the withholding requirements of
section 3405(c) by substituting any or all provisions of this section
for the corresponding provisions of Sec. 31.3405(c)-1T, if any.
Q-2: May a distributee elect under section 3405(c) not to have
Federal income tax withheld from an eligible rollover distribution?
A-2: No. The 20-percent income tax withholding imposed under
section 3405(c)(1) applies to an eligible rollover distribution unless
the distributee elects under section 401(a)(31) to have the eligible
rollover distribution paid directly to an eligible retirement plan in a
direct rollover. See Sec. 1.401(a)(31)-1 and Sec. 1.403(b)-2, Q&A-2 of
this chapter for provisions concerning the requirement that a
distributee of an eligible rollover distribution be permitted to elect
a distribution in the form of a direct rollover.
Q-3: May a distributee be permitted to elect to have more than 20-
percent Federal income tax withheld from an eligible rollover
distribution?
A-3: Yes. Under section 3402(p), a distributee of an eligible
rollover distribution and the plan administrator or payor are permitted
to enter into an agreement to provide for withholding in excess of 20
percent from an eligible rollover distribution. Any agreement must be
made in accordance with applicable forms and instructions. However, no
request for withholding will be effective between the plan
administrator or payor and the distributee until the plan administrator
or payor accepts the request by commencing to withhold from the amounts
with respect to which the request was made. An agreement under section
3402(p) shall be effective for such period as the plan administrator or
payor and the distributee mutually agree upon. However, either party to
the agreement may terminate the agreement prior to the end of such
period by furnishing a signed written notice to the other.
Q-4: Who has responsibility for complying with section 3405(c)
relating to the 20-percent income tax withholding on eligible rollover
distributions?
A-4: Section 3405(d) generally requires the plan administrator of a
qualified plan and the payor of a section 403(b) annuity to withhold
under section 3405(c)(1) an amount equal to 20 percent of the portion
of an eligible rollover distribution that the distributee does not
elect to have paid in a direct rollover. When an amount is paid under a
qualified plan distributed annuity contract as defined in
Sec. 1.402(c)-2, Q&A-10 of this chapter, the payor is treated as the
plan administrator. See Q&A-13 of this section concerning eligible
rollover distributions from a qualified plan distributed annuity
contract.
Q-5: May the plan administrator shift the withholding
responsibility to the payor and, if so, how?
A-5: Yes. The plan administrator may shift the withholding
responsibility to the payor by following the procedures set forth in
Sec. 35.3405-1, Q&A E-2 through E-5 of this chapter (relating to
elective withholding on pensions, annuities and certain other deferred
income) with appropriate adjustments, including the plan
administrator's identification of amounts that constitute required
minimum distributions.
Q-6: How does the 20-percent withholding requirement under section
3405(c) apply if a distributee elects to have a portion of an eligible
rollover distribution paid to an eligible retirement plan in a direct
rollover and to have the remainder of that distribution paid to the
distributee?
A-6: If a distributee elects to have a portion of an eligible
rollover distribution paid to an eligible retirement plan in a direct
rollover and to receive the remainder of the distribution, the 20-
percent withholding requirement under section 3405(c) applies only to
the portion of the eligible rollover distribution that the distributee
receives and not to the portion that is paid in a direct rollover.
Q-7: Will the plan administrator be subject to liability for tax,
interest, or penalties for failure to withhold 20 percent from an
eligible rollover distribution that, because of erroneous information
provided by a distributee, is not paid to an eligible retirement plan
even though the distributee elected a direct rollover?
A-7: (a) General rule. If the plan administrator reasonably relied
on adequate information provided by the
[[Page 49217]]
distributee (as described in paragraph (b) of this Q&A), the plan
administrator will not be subject to liability for taxes, interest, or
penalties for failure to withhold income tax from an eligible rollover
distribution solely because the distribution is paid to an account or
plan that is not an eligible retirement plan (as defined, with respect
to distributions from qualified plans, in section 402(c)(8)(B) and
Sec. 1.402(c)-2, Q&A-2 of this chapter and, with respect to a
distributions from section 403(b) annuities, in Sec. 1.403(b)-2), Q&A-1
of this chapter. Although the plan administrator is not required to
verify independently the accuracy of information provided by the
distributee, the plan administrator's reliance on the information
furnished must be reasonable. For example, it is not reasonable for the
plan administrator to rely on information that is clearly erroneous on
its face.
(b) Adequate information. The plan administrator has obtained from
the distributee adequate information on which to rely in making a
direct rollover if the distributee furnishes to the plan administrator:
the name of the eligible retirement plan; a representation that the
recipient plan is an individual retirement plan, a qualified plan, or a
section 403(b) annuity, as appropriate; and any other information that
is necessary in order to permit the plan administrator to accomplish
the direct rollover by the means it has selected. This information must
include any information needed to comply with the specific requirements
of Sec. 1.401(a)(31)-1, Q&A-3 and Q&A-4 of this chapter. For example,
if the direct rollover is to be made by mailing a check to the trustee
of an individual retirement account, the plan administrator must
obtain, in addition to the name of the individual retirement account
and the representation described above, the name and address of the
trustee of the individual retirement account.
Q-8: Is an eligible rollover distribution that is paid to a
qualified defined benefit plan subject to 20-percent withholding?
A-8: No. If an eligible rollover distribution is paid in a direct
rollover to an eligible retirement plan within the meaning of section
402(c)(8), including a qualified defined benefit plan, it is reasonable
to believe that the distribution is not includible in gross income
pursuant to section 402(c)(1). Accordingly, pursuant to section
3405(e)(1)(B), the distribution is not a designated distribution and is
not subject to 20-percent withholding.
Q-9: If property other than cash, employer securities, or plan
loans is distributed, how is the 20-percent income tax withholding
required under section 3405(c) accomplished?
A-9: When all or a portion of an eligible rollover distribution
subject to 20-percent income tax withholding under section 3405(c)
consists of property other than cash, employer securities, or plan loan
offset amounts, the plan administrator or payor must apply
Sec. 35.3405-1, Q&A F-2 of this chapter and may apply Sec. 35.3405-1,
Q&A F-3 of this chapter in determining how to satisfy the withholding
requirements.
Q-10: What assumptions may a plan administrator make regarding
whether a benefit is an eligible rollover distribution for purposes of
determining the amount of a distribution that is subject to 20-percent
mandatory withholding?
A-10: (a) In general. For purposes of determining the amount of a
distribution that is subject to 20-percent mandatory withholding, a
plan administrator may make the assumptions described in paragraphs
(b), (c), and (d) of this Q&A in determining the amount of a
distribution that is an eligible rollover distribution and a designated
distribution. Q&A-17 of Sec. 1.401(a)(31)-1 of this chapter provides
assumptions for purposes of complying with section 401(a)(31). See
Sec. 1.402(c)-2, Q&A-15 of this chapter concerning the effect of these
assumptions for purposes of section 402(c).
(b) $5,000 death benefit. A plan administrator may assume that a
distribution that qualifies for the $5,000 death benefit exclusion
under section 101(b) is the only death benefit being paid with respect
to a deceased employee that qualifies for that exclusion. Thus, in such
a case, the plan administrator may assume that the distribution is not
an eligible rollover distribution to the extent that it would be
excludible from gross income based on this assumption.
(c) Required minimum distributions. The plan administrator is
permitted to determine the amount of the minimum distribution required
to satisfy section 401(a)(9)(A) for any calendar year by assuming that
there is no designated beneficiary.
(d) Valuation of property. In the case of a distribution that
includes property, in calculating the amount of the distribution for
purposes of applying section 3405(c), the value of the property may be
determined in accordance with Sec. 35.3405-1, Q&A F-1 of this chapter.
Q-11: Are there special rules for applying the 20-percent
withholding requirement to employer securities and a plan loan offset
amount distributed in an eligible rollover distribution?
A-11: Yes. The maximum amount to be withheld on any designated
distribution (including any eligible rollover distribution) under
section 3405(c) must not exceed the sum of the cash and the fair market
value of property (excluding employer securities) received in the
distribution. The amount of the sum is determined without regard to
whether any portion of the cash or property is a designated
distribution or an eligible rollover distribution. For purposes of this
rule, any plan loan offset amount, as defined in Sec. 1.402(c)-2, Q&A-9
of this chapter, is treated in the same manner as employer securities.
Thus, although employer securities and plan loan offset amounts must be
included in the amount that is multiplied by 20-percent, the total
amount required to be withheld for an eligible rollover distribution is
limited to the sum of the cash and the fair market value of property
received by the distributee, excluding any amount of the distribution
that is a plan loan offset amount or that is distributed in the form of
employer securities. For example, if the only portion of an eligible
rollover distribution that is not paid in a direct rollover consists of
employer securities or a plan loan offset amount, withholding is not
required. In addition, if a distribution consists solely of employer
securities and cash (not in excess of $200) in lieu of fractional
shares, no amount is required to be withheld as income tax from the
distribution under section 3405 (including section 3405(c) and this
section). For purposes of section 3405 and this section, employer
securities means securities of the employer corporation within the
meaning of section 402(e)(4)(E)(ii).
Q-12: How does the mandatory withholding rule apply to net
unrealized appreciation from employer securities?
A-12: An eligible rollover distribution can include net unrealized
appreciation from employer securities, within the meaning of section
402(e)(4), even if the net unrealized appreciation is excluded from
gross income under section 402(e)(4). However, to the extent that it is
excludable from gross income pursuant to section 402(e)(4), net
unrealized appreciation is not a designated distribution pursuant to
section 3405(e)(1)(B) because it is reasonable to believe that it is
not includable in gross income. Thus, to the extent that net unrealized
appreciation is excludable from gross income pursuant to section
402(e)(4), net
[[Page 49218]]
unrealized appreciation is not included in the amount of an eligible
rollover distribution that is subject to 20-percent withholding.
Q-13: Does the 20-percent withholding requirement apply to eligible
rollover distributions from a qualified plan distributed annuity
contract?
A-13: The 20-percent withholding requirement applies to eligible
rollover distributions from a qualified plan distributed annuity
contract as defined in Q&A-10 of Sec. 1.402(c)-2 of this chapter. In
the case of an eligible rollover distribution from such an annuity
contract, the payor is treated as the plan administrator for purposes
of section 3405. See Sec. 1.401(a)(31)-1, Q&A-16 of this chapter
concerning the direct rollover requirements that apply to distributions
from such an annuity contract and see Sec. 1.402(c)-2, Q&A-10 of this
chapter concerning the treatment of distributions from such annuity
contracts as eligible rollover distributions.
Q-14: Must a payor or plan administrator withhold tax from an
eligible rollover distribution for which a direct rollover election was
not made if the amount of the distribution is less than $200?
A-14: No. However, all eligible rollover distributions received
within one taxable year of the distributee under the same plan must be
aggregated for purposes of determining whether the $200 floor is
reached. If the plan administrator or payor does not know at the time
of the first distribution (that is less than $200) whether there will
be additional eligible rollover distributions during the year for which
aggregation is required, the plan administrator need not withhold from
the first distribution. If distributions are made within one taxable
year under more than one plan of an employer, the plan administrator or
payor may, but need not, aggregate distributions for purposes of
determining whether the $200 floor is reached. However, once the $200
threshold has been reached, the sum of all payments during the year
must be used to determine the applicable amount to be withheld from
subsequent payments during the year.
Q-15: If eligible rollover distributions are made from a qualified
plan, who has responsibility for making the returns and reports
required under these regulations?
A-15: Generally, the plan administrator, as defined in section
414(g), is responsible for maintaining the records and making the
required reports with respect to eligible rollover distributions from
qualified plans. However, if the plan administrator fails to keep the
required records and make the required reports, the employer
maintaining the plan is responsible for the reports and returns.
Q-16: What eligible rollover distributions must be reported on Form
1099-R?
A-16: Each eligible rollover distribution, including each eligible
rollover distribution that is paid directly to an eligible retirement
plan in a direct rollover, must be reported on Form 1099-R in
accordance with the instructions for Form 1099-R. For purposes of the
reporting required under section 6047(e), a direct rollover is treated
as a distribution that is immediately rolled over to an eligible
retirement plan. Distributions that are not eligible rollover
distributions are subject to the reporting requirements set forth in
Sec. 35.3405-1 of this chapter and applicable forms and instructions.
Q-17: Must the plan administrator, trustee or custodian of the
eligible retirement plan report amounts received in a direct rollover?
A-17: (a) Individual retirement plan. If a distributee elects to
have an eligible rollover distribution paid to an individual retirement
plan in a direct rollover, the eligible rollover distribution is
reported on Form 5498 as a rollover contribution to the individual
retirement plan, in accordance with the instructions for Form 5498.
(b) Qualified plan or section 403(b) annuity. If a distributee
elects to have an eligible rollover distribution paid to a qualified
plan or section 403(b) annuity, the recipient plan or annuity is not
required to report the receipt of the rollover contribution.
Sec. 31.3405(c)-1T [Removed]
Par. 7. Section 31.3405(c)-1T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 8. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 9. In Sec. 602.101, paragraph (c) is amended as follows:
1. Removing the following entries from the table:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.401(a)(31)-1T....................................... 1545-1341
* * * * *
1.402(c)-2T........................................... 1545-1341
* * * * *
1.402(f)-2T........................................... 1545-1341
* * * * *
1.403(b)-2T........................................... 1545-1341
* * * * *
31.3405(c)-1T......................................... 1545-1341
* * * * *
------------------------------------------------------------------------
2. Revising the entry for 1.402(f)-1 and adding entries to the
table in numerical order to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.401(a)(31)-1........................................ 1545-1341
* * * * *
1.402(c)-2............................................ 1545-1341
* * * * *
1.402(f)-1............................................ 1545-1341
* * * * *
1.403(b)-2............................................ 1545-1341
* * * * *
31.3405(c)-1.......................................... 1545-1341
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: August 29, 1995.
Cynthia G. Beerbower,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 95-23265 Filed 9-15-95; 4:00 pm]
BILLING CODE 4830-01-U