[Federal Register Volume 79, Number 182 (Friday, September 19, 2014)]
[Proposed Rules]
[Pages 56310-56312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22324]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-105739-11]
RIN 1545-BK08


Removal of Allocation Rule for Disbursements From Designated Roth 
Accounts to Multiple Destinations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
that address the tax treatment of distributions from designated Roth 
accounts under tax-favored retirement plans. The proposed regulations 
would limit the applicability of the rule regarding the allocation of 
after-tax amounts when disbursements are made to multiple destinations 
so the allocation rule applies only to distributions made before the 
earlier of January 1, 2015 or a date chosen by the taxpayer that is on 
or after September 18, 2014. These regulations would affect 
administrators of, employers maintaining, participants in, and 
beneficiaries of designated Roth accounts under tax-favored retirement 
plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 18, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-105739-11), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washingtonm, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
105739-11), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-105739-11).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Michael P. 
Brewer at (202) 317-6700; concerning submission of comments or to 
requests for a public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 
317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 402(a) provides generally that any amount distributed from 
a trust described in section 401(a) that is exempt from tax under 
section 501(a) is taxable to the distributee under section 72 in the 
taxable year of the distributee in which distributed. Under section 
403(b)(1), any amount distributed from a section 403(b) plan is also 
taxable to the distributee under section 72.
    If a participant's account balance in a plan qualified under 
section 401(a) or in a section 403(b) plan includes both after-tax and 
pretax amounts, then, under section 72(e)(8), each distribution (other 
than a distribution that is paid as part of an annuity) from the plan 
will include a pro rata share of both after-tax and pretax amounts. 
(Under section 72(d), a different allocation method applies to annuity 
distributions.)
    Under section 402A(d)(4), section 72 is applied separately with 
respect to distributions and payments from a designated Roth account 
and other distributions and payments from the plan.
    Section 402(c) prescribes rules for amounts that are rolled over 
from qualified trusts to eligible retirement plans, including 
individual retirement accounts or annuities (``IRAs''). Subject to 
certain exceptions, section 402(c)(1) provides that if any portion of 
an eligible rollover distribution paid to an employee from a qualified 
trust is transferred to an eligible retirement plan, the portion of the 
distribution so transferred is not includible in gross income in the 
taxable year in which paid.
    Under section 402(c)(2), the maximum portion of an eligible 
rollover distribution that may be rolled over in a transfer to which 
section 402(c)(1) applies generally cannot exceed the portion of the 
distribution that is otherwise includible in gross income. However, 
under section 402(c)(2)(A) and (B), the general rule does not apply to 
such a distribution to the extent that such portion is transferred in a 
direct trustee-to-trustee transfer to a qualified trust or to an 
annuity contract described in section 403(b) and such trust or contract 
provides for separate accounting for amounts so transferred (and 
earnings thereon), including separately accounting for the portion of 
such distribution which is includible in gross income and the portion 
of such distribution which is not so includible, or such portion is 
transferred to an IRA.
    In addition, section 402(c)(2) that, in the case of a transfer 
described in subparagraph (A) or (B), the amount transferred shall be 
treated as consisting first of the portion of such distribution that is 
includible in gross income (determined without regard to section 
402(c)(1)).
    Under section 402A, an applicable retirement plan may include a 
designated Roth account. An applicable retirement plan is defined in 
section 402A(e)(1) to mean a plan qualified under section 401(a), a 
section 403(b) plan, and a governmental section 457(b) plan. Section 
402A(d) provides that a qualified distribution (as defined in section 
402A(d)(2)) from a designated Roth account is not includible in gross 
income.
    Section 1.402A-1, Q&A-5(a), of the Income Tax Regulations 
prescribes taxability rules for a distribution from a designated Roth 
account that is rolled over. Q&A-5(a) provides, in part, that ``any 
amount paid in a direct rollover is treated as a separate distribution 
from any amount paid directly to the employee.''
    Section 402(f) requires that the plan administrator of a plan 
qualified under section 401(a) provide any recipient of an eligible 
rollover distribution with a written explanation describing certain 
provisions of law. Notice 2009-68, 2009-2 CB 423 (September 28, 2009), 
contains two safe harbor explanations that may be provided to 
recipients of eligible rollover distributions from an employer plan in 
order to satisfy section 402(f). The safe harbor explanation with 
respect to distributions that are not from a designated Roth account 
provides in part (under the heading ``If your payment includes after-
tax contributions'') that ``[i]f you do a direct rollover of only a 
portion of the amount paid from the Plan and a portion is paid to you, 
each of the payments will include an allocable portion of the after-tax 
contributions.'' Similarly, for distributions from a designated Roth

[[Page 56311]]

account, the safe harbor explanation provides in part (under the 
heading ``How Do I Do a Rollover?'') that ``[i]f you do a direct 
rollover of only a portion of the amount paid from the Plan and a 
portion is paid to you, each of the payments will include an allocable 
portion of the earnings in your designated Roth account.''
    Sections 403(b)(8)(B) and 457(e)(16)(B) provide that the rules of 
section 402(c)(2) through (7), (9), and (11) and the rules of section 
402(f) also apply to section 403(b) plans and governmental section 
457(b) plans.
    In response to Notice 2009-68, comments were received requesting 
changes to the rules regarding the allocation of basis among 
simultaneous disbursements to multiple destinations from a retirement 
plan that contains both after-tax and pretax amounts. Commenters 
indicated that some plan providers were treating disbursements to 
separate destinations not as separate distributions but rather as a 
single distribution of the aggregate disbursement amounts. These plan 
providers permitted allocation of all the after-tax amounts included in 
the disbursements to a Roth IRA. The commenters also pointed out that, 
even under the allocation method described in Notice 2009-68, a 
participant who wishes to disburse after-tax amounts to one destination 
and pretax amounts to another could accomplish this result in a series 
of steps. First, the participant could take an eligible rollover 
distribution as a single cash distribution. Second, by taking advantage 
of the rule in section 402(c)(2) that distribution amounts that are 
rolled over are treated as consisting first of pretax amounts, the 
participant could roll over the pretax amounts included in the 
distribution to one destination, such as a traditional IRA. The 
remaining amount of the distribution would be after-tax, which the 
participant could either roll over into a Roth IRA or retain without 
incurring any tax liability. The option to roll over all after-tax 
amounts into a Roth IRA, however, would be available only to taxpayers 
with sufficient funds available outside of the plan to be able to roll 
over the entire amount distributed, including an amount equal to the 20 
percent of the taxable portion of the distribution that is required to 
be paid to the IRS as withholding pursuant to Sec.  3405(c).
    These proposed regulations are being issued in conjunction with 
Notice 2014-54 (to be published in IRB 2014-41 (October 6, 2014)), 
which will permit a taxpayer to direct after-tax and pretax amounts 
that are simultaneously disbursed to multiple destinations so as to 
allocate them to specific destinations. Taxpayers will be able to 
direct these allocations in connection with disbursements that are 
directly rolled over, not only in connection with 60-day rollovers 
after receiving a distribution.

Explanation of Provisions

    The proposed regulations would limit the applicability of the 
existing requirement in Sec.  1.402A-1, Q&A-5(a), that ``any amount 
paid in a direct rollover is treated as a separate distribution from 
any amount paid directly to the employee.'' Under the proposed 
regulations, that separate distribution requirement would not apply to 
distributions made on or after January 1, 2015, or an earlier date 
chosen by the taxpayer. An earlier date chosen by the taxpayer for this 
purpose may not be earlier than September 18, 2014. See the ``Proposed 
Effective Date'' section of this preamble for a description of the 
rules that will apply after the separate distribution rule of Sec.  
1.402A-1, Q&A-5(a), no longer applies to distributions.

Proposed Effective Date

    These regulations are proposed to apply to distributions from 
designated Roth accounts made on or after January 1, 2015. For 
distributions from designated Roth accounts made on or after the 
applicability date of the Treasury decision that finalizes these 
proposed regulations (but no earlier than January 1, 2015), the rules 
in section III of Notice 2014-54 will apply.
    For distributions that are made on or after September 18, 2014 and 
before the applicability date of the Treasury decision that finalizes 
these proposed regulations, taxpayers may rely on these proposed 
regulations. Taxpayers relying on these proposed regulations should 
apply a reasonable interpretation of the last sentence of section 
402(c)(2) to allocate after-tax and pretax amounts among disbursements 
made to multiple destinations. For this purpose, a reasonable 
interpretation of the last sentence of section 402(c)(2) includes the 
rules issued by the IRS in section III of Notice 2014-54.

Statement of Availability of IRS Documents

    The IRS notices cited in this preamble are published in the 
Internal Revenue Bulletin or Cumulative Bulletin and are available from 
the Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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) does not apply to these regulations, and because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS specifically request comments 
on the clarity of the proposed regulations and how they may be made 
easier to understand.
    All comments will be available for public inspection and copying at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the hearing will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Michael P. 
Brewer, IRS Office of Division Counsel/Associate Chief Counsel (Tax 
Exempt and Government Entities). However, other personnel from the IRS 
and the Department of Treasury participated in the development of the 
proposed regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

[[Page 56312]]

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.402A-1 is amended by adding a sentence after the 
third sentence of paragraph A-5. (a) to read as follows:


Sec.  1.402A-1  Designated Roth Accounts.

* * * * *
    A-5. (a) * * * The preceding sentence does not apply to 
distributions made on or after January 1, 2015; in addition, a taxpayer 
may elect not to apply the preceding sentence to distributions made on 
or after an earlier date that is no earlier than September 18, 2014. * 
* *
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-22324 Filed 9-18-14; 8:45 am]
BILLING CODE 4830-01-P