Part III. Administrative, Procedural and Miscellaneous
Internal Revenue Bulletin 2002-2 · 2026-10-03 edition · updated 2026-10-04 · United States
Elimination of User Fees for Certain Determination Letter Requests Pursuant to Section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001
Notice 2002–1
I. Purpose
This notice provides guidance on section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107–16 (EGTRRA) which provides that, for requests made after December 31, 2001, the Secretary of the Treasury or the Secretary’s delegate shall not require payment of user fees for requests to the Internal Revenue Service (Service) for certain determination letters with respect to the qualified status of a pension, profit-sharing, stock bonus, annuity, or employee stock ownership plan. The guidance in this notice will help a plan sponsor determine if it is required to pay a user fee for a determination letter application.
II. Background
Rev. Proc. 2002–6 (2002–1 I.R.B. 203) (January 7, 2002), contains the procedures of the Service for issuing determination letters on the qualified status of employee plans under §§ 401(a), 403(a), 409, and 4975(e)(7) of the Internal Revenue Code and the exempt status of related trusts or custodial accounts under § 501(a). Section 3.01 of Rev. Proc. 2002–6 describes the types of determination letters that may be requested by a taxpayer.
Rev. Proc. 2002–8 (2002–1 I.R.B. 252) (January 7, 2002) provides guidance for complying with the Service’s user fee program as it pertains to requests for determination letters on matters under the jurisdiction of the Commissioner, Tax Exempt and Government Entities (TE/ GE). Form 8717, User Fee for Employee Plan Determination Letter Request, is used as an attachment to a determination
letter application to transmit the payment of the required user fee.
Notice 98–4 (1998–1 C.B. 269) provides guidance regarding SIMPLE IRA plans under § 408(p).
III. Questions and Answers on EGTRRA section 620
Q–1: What does section 620 of EGTRRA provide?
A–1: In general, section 620 of EGTRRA provides that the Secretary of the Treasury or his delegate shall not require, for requests made after December 31, 2001, payment of user fees for certain requests to the Service for determination letters with respect to the qualified status of a pension, profit-sharing, stock bonus, annuity, or employee stock ownership plan maintained solely by one or more eligible employers, as defined in Q&A–5, or the exempt status of any trust which is part of the plan. In order to be exempt from the user fee with respect to a determination letter request, an eligible employer must also meet the requirements of Q&A–3.
Q–2: Which determination letter requests are eligible for elimination of the user fee?
A–2: In general, any determination letter request described in section 3.01 of Rev. Proc. 2002–6 that meets the requirements of this notice is exempt from the user fee. However, a request for a determination letter on the qualified status of a group trust under Rev. Rul. 81–100 (1981–1 C.B. 326) and a request for a waiver of the minimum funding requirement are not eligible for elimination of the user fee. In addition, user fees are not eliminated for any opinion or advisory letter request made by a sponsor of any master or prototype or volume submitter specimen plan that the sponsor intends to market to participating employers.
Q–3: Are user fees eliminated for all determination letter requests filed by an eligible employer after December 31, 2001? A–3: No. User fees are not eliminated for any determination letter request made after the later of (a) the fifth plan year the plan is in existence or (b) the end of any
remedial amendment period with respect to the plan beginning within the first five plan years.
Q–4: When is a plan “in existence” for this purpose?
A–4: In general, a plan is in existence on the first day the plan was in effect. Thus, payment of a user fee generally will not be required for any determination letter request filed by an eligible employer before the first day of a plan’s sixth plan year. However, a plan established as a result of a spin-off from another plan will be treated as in existence on the first day the plan from which it was spun off was in effect. Also, a plan established as the result of a merger of two or more plans will be treated as in existence on the earliest date any of the merged plans was in effect.
Q–5: Who is an “eligible employer” for purposes of determining eligibility for elimination of the user fee?
A–5: An “eligible employer” means an eligible employer (as defined in § 408(p)(2)(C)(i)(I) of the Code) that has at least one employee who is not a highly compensated employee (as defined in § 414(q)) and is participating in the plan. Under § 408(p)(2)(C)(i)(I), an employer is an eligible employer for a year if the employer had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year. In general, the determination of who is an eligible employer is to be made in accordance with the provisions of Q&As B–1, B–5, C–4, and C–5 of Notice 98–4 (1998–1 C.B. 269) relating to SIMPLE IRA Plans under § 408(p), as described below. Thus, for example, in determining if an employer is an eligible employer for purposes of the elimination of the user fee, all employers aggregated under § 414(b), (c) or (m) are treated as a single employer and leased employees described in § 414(n) are treated as employed by the employer.
Q–6: When is the determination of whether an employer is an eligible employer made?
A–6: The determination of whether an employer is an eligible employer is made as of the date the determination request is
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not eliminated unless each employer that maintains the plan meets the requirements for an eligible employer under this notice. For example, the user fee for an application for a determination letter for a multiple employer plan is not eliminated unless each employer that maintains the plan is an eligible employer, even if the application is for a letter only for the plan and not for any employer that maintains the plan.
Q–11: When is the elimination of user fees effective?
A–11: The elimination of user fees is effective with respect to determination letter requests made after December 31, 2001. The user fee for any application filed before January 1, 2002, is not eliminated, regardless of when the GUST 1
remedial amendment period for the plan ends. Failure to include the proper user fee with an application filed before January 1, 2002, may result in the return of the application and possible adverse effect if the application is not resubmitted with the correct user fee within 30 days. See section 9.03 of Rev. Proc. 2002–8.
Q–12: For purposes of determining if a user fee is eliminated, when does the GUST remedial amendment period begin?
A–12: The date the GUST remedial amendment period begins can vary from plan to plan. The earliest date on which a plan’s GUST remedial amendment period could have begun is December 8, 1994, the date of enactment of the Uruguay Round Agreements Act (GATT). For user fee purposes, the Service will treat the GUST remedial amendment period as beginning on December 8, 1994, in all cases. The first day of the 5-year period ending on December 8, 1994, is December 9, 1989. Thus, a GUST determination letter application for a plan that was first in existence on or after December 9, 1989, may be eligible for elimination of the user fee.
made. Thus, an employer will be an eligible employer with respect to a determination letter application if the following two conditions are met. First, the employer must have had no more than 100 employees who received at least $5,000 of compensation from the employer for the calendar year immediately preceding the calendar year in which the determination letter request is filed (“the preceding calendar year”). Second, at least one employee who was not a highly compensated employee for the plan year immediately preceding the plan year in which the determination letter request is filed (“preceding plan year”) must have participated in the plan for the preceding plan year. If the determination letter request is filed in the first plan year, then at least one employee who is not a highly compensated employee must participate in the plan for the plan year. See Q&A–9 regarding when an employee is treated as participating in a plan.
Q–7: Which employees are taken into account for purposes of determining if the employer had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding calendar year met?
A–7: For this purpose, all employees employed at any time during the preceding calendar year, including selfemployed individuals described in § 401(c)(1) who received earned income from the employer during the preceding calendar year, are taken into account, regardless of whether they were eligible to participate in the plan. Thus, for example, employees who are excludable under the rules of § 410(b)(3) or who have not met the plan’s minimum eligibility requirements must be taken into account.
Q–8: What definition of compensation is used to determine if an employee received at least $5,000 of compensation from the employer for the preceding calendar year?
A–8: For purposes of determining if an employee received at least $5,000 of compensation from the employer for the preceding calendar year, in the case of an individual who is not a self-employed individual, compensation means the amount described in § 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under § 3401(a)) and amounts described in § 6051(a)(8) (elective deferrals within the meaning of § 402(g)(3) and compensation deferred under § 457). In the case of a self-employed individual, compensation means net earnings determined from self-employment under § 1402, prior to subtracting elective deferral contributions made on behalf of the individual.
Q–9: When is an employee treated as participating in a plan for purposes of determining if at least one employee who is not a highly compensated employee participated in the plan for the preceding plan year?
A–9: For this purpose, an employee is treated as participating in a plan for a plan year if the employee benefits under the plan (within the meaning of § 1.410(b)–3 of the Income Tax Regulations) for the plan year. If the plan year in which the determination letter request is filed is the first plan year of the plan, then an employee is treated as participating if the employee is eligible to benefit under the plan for the year, subject to the satisfaction of applicable conditions for accruing a benefit or receiving an allocation for the year provided in the terms of the plan (whether or not the employee satisfies these conditions).
Q–10: Is the user fee for an application for a determination letter for a plan maintained by more than one employer eliminated if any of the employers that maintain the plan are not eligible employers?
A–10: No. The user fee for an application for a determination letter for a plan maintained by more than one employer is
1The term “GUST” refers to the following:
the Uruguay Round Agreements Act, Pub. L. 103–465;
the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103–353;
the Small Business Job Protection Act of 1996, Pub. L. 104–188;
the Taxpayer Relief Act of 1997, Pub. L. 105–34;
the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105–206; and
the Community Renewal Tax Relief Act of 2000, Pub. L. 106–554.
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Q–13: If a determination letter application filed before January 1, 2002, is withdrawn after December 31, 2001, will the user fee be refunded?
A–13: No. As provided in section 10.01 of Rev. Proc. 2002–8, unless the Service declines to rule, a user fee will not be refunded, regardless of when the application is withdrawn.
Q–14: If a determination letter application filed before January 1, 2002, is modified after December 31, 2001, will the user fee be affected?
A–14: Generally, the modification after December 31, 2001, of a determination letter application filed before January 1, 2002, will not result in a refund of the applicable user fee. Furthermore, if the effect of the modification of the application is to change the subcategory of the application under section 6.06 of Rev. Proc. 2002–8 to a different subcategory with a higher user fee, the applicant will be required to pay the additional user fee.
For example, assume an application for a determination letter for a singleemployer plan is filed on Form 5300 before January 1, 2002. The application does not request a determination with respect to the general test for nondiscrimination in amount of contributions or benefits or the minimum coverage average benefit test. The application includes payment of the required $700 user fee. After December 31, 2001, the applicant modifies the application to request a determination regarding the average benefit test. The Service will not issue a determination letter covering the average benefit test unless the applicant pays an additional $550, the difference between the $700 fee and the $1,250 fee that applies to a request for a determination with respect to the general test or the average benefit test.
Q–15: Does a form have to be filed to indicate that a user fee for a determination letter is not required?
A–15: Yes. Form 8717 is being revised to allow applicants to indicate that the application meets the requirements for elimination of the user fee and to provide for the applicant’s signature in these cases. The revised Form 8717 is to be used with all section 620 applications that are filed after December 31, 2001 (which is when that section becomes effective). The revised form will be available to be
downloaded from the IRS Web Site at http://www.irs.gov/forms_pubs/ forms.html . Failure to include Form 8717, or to sign it, if required, may result in the return of the determination letter application.
IV. Effect on Documents
Rev. Proc. 2002–6 and Rev. Proc. 2002–8 are modified.
Drafting Information
The principal drafter of this notice is James Flannery of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 (a tollfree number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Flannery may be reached at 1–202–283–9888 (not a tollfree number).
Questions and Answers Regarding Dividend Elections Under Section 404(k) and ESOPs Holding S Corporation Stock
Notice 2002–2
I. Purpose
This notice provides guidance in question and answer format regarding the changes made to § 404(k) of the Internal Revenue Code (Code) by section 662 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (Pub. L. No. 107–16) enacted on June 7, 2001. This notice also provides guidance on the effective date of § 409(p) of the Code, as added by section 656 of EGTRRA, regarding the allocation of stock in an S corporation held by an employee stock ownership plan (ESOP), as defined in § 4975(e)(7) of the Code.
II. Background
Section 404(k) provides a deduction for applicable dividends paid on applicable employer securities of a C corpora
tion held by an ESOP. Under § 404(k) prior to its amendment by EGTRRA, an applicable dividend included a dividend that is paid in cash to participants or their beneficiaries or paid to the ESOP and distributed in cash to participants or their beneficiaries not later than 90 days after the end of the plan year in which the dividends were paid by the corporation. Effective for taxable years of the corporation beginning on or after January 1, 2002, section 662 of EGTRRA amended the definition of applicable dividend by adding new § 404(k)(2)(A)(iii) of the Code to allow a deduction for dividends paid on employer securities held by the ESOP and with respect to which participants or beneficiaries are provided an election to have the dividend paid in cash to participants or beneficiaries pursuant to § 404(k)(2)(A)(i), paid to the ESOP and distributed in cash to participants or beneficiaries not later than 90 days after the close of the plan year in which paid pursuant to § 404(k)(2)(A)(ii), or paid to the ESOP and reinvested in qualifying employer securities. The deduction under § 404(k) is available both with respect to dividends that the participant or beneficiary elects to reinvest and with respect to dividends that the participant or beneficiary elects to receive in cash.
Section 404(k)(5)(A) prior to its amendment by EGTRRA provided that the Secretary of the Treasury may disallow a deduction under § 404(k)(1) if the Secretary determines that the dividend constitutes, in substance, an evasion of taxation. Section 662 of EGTRRA also amended § 404(k)(5)(A) of the Code to provide that the Secretary may disallow a deduction under § 404(k)(1) if the Secretary determines that the dividend constitutes, in substance, an avoidance or evasion of taxation.
Section 656 of EGTRRA amended § 409 of the Code to add a new subsection (p) regarding the allocation of employer securities consisting of stock in an S corporation. Section 656(d)(1) of EGTRRA provides that § 409(p) of the Code applies to plan years beginning after December 31, 2004. However, section 656(d)(2) provides that § 409(p) of the Code applies to plan years ending after March 14, 2001 (the date the provision was introduced in committee), in the case of any ESOP established after March 14,
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participants, a participant must be given a reasonable opportunity to make an election under the new plan terms prior to the date on which the first dividend subject to the new plan terms is paid or distributed. An ESOP does not fail to comply with the requirements of this Q&A–3 solely because it provides that, if a participant fails to make an affirmative dividend election, one of the options offered to participants is treated as a default election.
Q–4 —When are dividends with respect to which an election is provided pursuant to Q&A–3 deductible by the employer corporation under § 404(k) (2)(A)(iii)?
A–4 —(a) Dividends reinvested in employer securities pursuant to an election that satisfies the requirements of Q&A–3 of this notice are deductible in the later of the taxable year of the corporation in which (i) the dividends are reinvested in employer securities at the participant’s election or (ii) the participant’s election becomes irrevocable.
(b) Dividends paid to participants or paid to the ESOP and distributed to participants within 90 days after the end of the plan year are deductible in the taxable year of the corporation in which the dividend is paid or distributed to the participant.
(c) An election is not considered made until the date the election becomes irrevocable. Therefore, for purposes of (a), dividends are not considered to be reinvested at the participant’s election prior to the time that the participant’s election becomes irrevocable.
Q–5 —Where dividends on employer securities are paid to participants not later than 90 days after the close of the plan year in which the dividends are paid by the corporation, can earnings on those dividends be deducted under § 404(k) if they are paid to plan participants at the same time and in the same manner? Do losses reduce the amount that may be deducted under 404(k)?
A–5 —(a) Section 404(k) allows a deduction for dividends paid on applicable employer securities if the requirements of that section are satisfied. Earnings on dividends held in the plan do not constitute dividends within the meaning of § 404(k) and accordingly are not deductible under that section. Investment
2001, or in the case of an ESOP established on or before March 14, 2001, if employer securities held by the ESOP consist of stock in a corporation with respect to which an election to be an S corporation under § 1362(a) of the Code is not in effect on such date.
III. Questions and Answers
For purposes of this notice, the term “dividend” means a dividend paid with respect to applicable employer securities that otherwise satisfies the requirements of § 404(k)(2) and the term “employer securities” means employer securities as defined in § 404(k)(6). References to participants include beneficiaries.
Q–1 —What is the effective date of § 404(k)(2)(A)(iii), as added by section 662 of EGTRRA? A–1 —(a) Section 404(k)(2)(A)(iii), as added by section 662 of EGTRRA, is effective for taxable years of a corporation beginning on or after January 1, 2002. In order for dividends with respect to which an election is provided to be applicable dividends under § 404(k)(2) of the Code for a taxable year beginning on or after January 1, 2002, the election provided must comply with § 404(k)(2)(iii) (accordingly, Q&A–2 of § 1.404(k)–1T of the temporary Income Tax Regulations no longer reflects current law).
(b) A dividend subject to an election by ESOP participants is an applicable dividend under § 404(k)(2)(A)(iii) if the election provided with respect to the dividend complies with Q&A–2 and Q&A–3 and if, based on the timing rules in Q&A–4, the deduction for the dividend is allowed for a taxable year beginning on or after January 1, 2002. Therefore, if an ESOP offers participants an election between reinvestment in employer securities and distribution with respect to dividends paid by a corporation to the ESOP in 2001 and all other applicable requirements of § 404(k) are satisfied, a dividend that a participant elects to reinvest is an applicable dividend and the corporation is allowed a deduction for 2002 if the later of the date on which the dividend is reinvested in employer securities or the date on which the participant’s election becomes irrevocable occurs in 2002. A dividend paid by a corporation to an ESOP in 2001 that a participant elects to receive in a distribution is an applicable
dividend and such corporation is allowed a deduction for 2002 if the date of the distribution occurs in 2002. Dividends paid by a corporation to an ESOP in 2001 do not fail to be applicable dividends with respect to which a corporation is allowed a deduction in 2002 solely because participants were offered an election in 2001 between reinvestment and distribution, except to the extent that such dividends were actually distributed to participants in 2001. (c) In no event is a dividend an applicable dividend under § 404(k)(2)(A)(iii) if such dividend was paid by a corporation to an ESOP before January 1, 2001.
Q–2 —What dividend elections can be offered to ESOP participants under § 404(k)(2)(A)(iii)?
A–2 —Under § 404(k)(2)(A)(iii), the election provided to ESOP participants with respect to dividends paid on applicable employer securities must be offered in accordance with the terms of the plan and offer participants an election between:
(a) Either (i) the payment of dividends in cash to participants or (ii) the payment to the ESOP and distribution in cash to participants not later than 90 days after the close of the plan year in which the dividends are paid by the corporation, and, (b) The payment of dividends to the ESOP and reinvestment in employer securities. An ESOP can also offer participants a choice among both of the options described in (a) and the option described in (b).
Q–3 —What are the requirements for participant elections under § 404(k)(2) (A)(iii)?
A–3 —In order for dividends subject to an election to be applicable dividends under 404(k)(2)(A)(iii), the election must be provided in a manner that satisfies the following requirements:
(a) A participant must be given a reasonable opportunity before a dividend is paid or distributed to the participant in which to make the election. (b) A participant must have a reasonable opportunity to change a dividend election at least annually. (c) If there is a change in the plan terms governing the manner in which the dividends are paid or distributed to
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losses attributable to the dividends, or the reduction of the dividend amount paid to the ESOP by the corporation through tax withholding ( e.g., by a foreign country with respect to dividends paid by a foreign corporation) or other means, reduce the amount of dividend that is available for reinvestment or distribution to participants and therefore reduce the amount that is deductible under § 404(k).
For example, assume that dividends of $2 per share are paid to an ESOP and invested in employer securities prior to the time when participants elect either to have the dividends reinvested in employer securities or to receive a distribution of the dividends within 90 days of the end of the plan year. During the period between when the dividends are paid by the corporation to the ESOP and when participant elections become irrevocable, the fund suffers investment losses of 50%, so that the amount of the dividend remaining is $1 per share. The deduction available with respect to participants who elect reinvestment is determined based on $1 of dividends per share. During the period between when participant elections become irrevocable and dividends are distributed to participants who elect a distribution, the fund suffers further losses, so that the amount of the dividend remaining is 75¢. The ESOP pays the remaining dividends (75¢ per share) and is allowed a deduction with respect to participants who elect a distribution based on a dividend of 75¢ per share, regardless of whether nondividend amounts are paid to participants by the ESOP.
Section 404(k)(5)(B) provides that a plan is not treated as violating the requirements of § 401, 409, or 4975(e)(7) merely by reason of any payment described in § 404(k)(2)(A). The distribution of amounts not attributable to dividends from a participant’s account does not constitute a payment or distribution described in § 404(k)(2) and accordingly could be treated as violating the requirements of § 401, 409 or 4975.
(b) The guidance provided in this Q&A–5 is not applicable for deductions taken in taxable years beginning before January 1, 2003.
Q–6 —Are dividends that are paid or reinvested as provided in § 404(k)(2) (A)(iii) treated as annual additions for
purposes of the limitations on contributions to defined contribution plans under § 415(c), elective contributions under § 401(k), employee contributions under § 401(m), or elective deferrals under § 402(g)?
A–6 —No. The payment or reinvestment of dividends under § 404(k)(2) (A)(iii) does not constitute an employer contribution, employee contribution or forfeiture under § 415(c)(2). Consequently, these dividends are not annual additions for purposes of § 415(c). In addition, these dividends are not elective deferrals for purposes of § 402(g), elective contributions for purposes of § 401(k), or employee contributions for purposes of § 401(m).
Q–7 —If, pursuant to an election satisfying the requirements of Q&A–2 and 3 of this notice, dividends are paid to the plan and reinvested in qualifying employer securities, how are those dividends treated under the ESOP?
A–7 —Dividends that are reinvested in qualifying employer securities at the participant’s election lose their identity as dividends and are treated as earnings in the same manner as dividends with respect to which a participant is not provided an election. Therefore, for example, dividends reinvested at a participant’s election are no longer eligible for the exception to the early distribution tax under § 72(t)(2)(A)(vi) for dividends paid on employer securities under § 404(k). Similarly, such amounts are no longer treated as dividends for purposes of § 72, 402, 411(a)(11) or 401(k). In contrast, dividends paid in cash to a participant pursuant to an election under § 404(k)(2)(A)(iii) are taxable without regard to the return of basis provisions under § 72, and are not subject to the consent requirements of § 411(a)(11) or the restrictions of § 401(k)(2)(B). In addition, dividends paid to participants under § 404(k) are not eligible rollover distributions under § 402(c), even if the dividends are distributed at the same time as amounts that do constitute an eligible rollover distribution (or are reported on a 1099–R in accordance with Announcement 85–168, 1985–48 I.R.B. 40). Therefore, if, prior to the date a participant receives a distribution, such participant has made an irrevocable election offered by the ESOP under § 404(k)(2)(A)(iii) to
have dividends distributed, any dividends subject to that election are distributed under § 404(k) and are not eligible rollover distributions. The corporation is allowed a deduction with respect to such dividends for the year in which the distribution is paid to the participant.
Q–8 —In order to receive a hardship distribution from a qualified cash or deferred arrangement, must an employee who is also a participant in an ESOP elect to receive either a payment of dividends in cash from the employer or a payment of dividends to the plan followed by a cash distribution to the participant?
A–8 —Under § 1.401(k)–1(d)(2) of the Income Tax Regulations, a distribution is made on account of hardship only if the distribution is made on account of an immediate and heavy financial need of the employee and is necessary to satisfy the financial need. A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if the employee has obtained all distributions currently available under all plans maintained by the employer. See § 1.401 (k)–1(d)( 2 )(iii)(B)( 4 ) or (iv)(B)( 2 ). For purposes of satisfying these hardship distribution requirements, a participant in an ESOP that offers a dividend reinvestment election under Q&A–2 and 3 of this notice must elect to receive dividends to the extent currently available to the participant under the ESOP.
Q–9 —What are the vesting requirements for dividends with respect to which a corporation is allowed a deduction under § 404(k)?
A–9 —Participants must be fully vested in dividends with respect to which a corporation claims a deduction under § 404(k). Prior to its amendment by EGTRRA, a corporation was allowed a deduction only with respect to dividends that were paid in cash or distributed to participants and therefore were nonforfeitable with respect to the participant who received the distribution (and with respect to which a deduction was allowable). Under § 404(k)(2)(A)(iii), a corporation is permitted to offer participants an election between receipt of a dividend in cash or reinvestment in employer securities under the ESOP and is allowed a deduction without regard to the participant’s election. Therefore, an ESOP must provide that a participant is fully vested
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in any dividend with respect to which the participant is offered an election under § 404(k)(2)(A)(iii). This requirement applies to applicable dividends under § 404(k)(2)(A)(iii) for taxable years of a corporation beginning on or after January 1, 2002. An ESOP can comply with this requirement by providing that participants are fully vested in dividends with respect to which an election under § 404(k)(2)(A)(iii) is offered, without regard to whether the participant is vested in the stock with respect to which the dividend is paid. Alternatively, an ESOP can comply with this requirement by offering an election under § 404(k)(2)(A)(iii) only to vested participants. See § 1.401(a)(4)–4(b)(2)(ii)( 2 )(B).
Q–10 —In order for an applicable dividend on stock held by an ESOP to be deductible under 404(k), when must the plan be an ESOP ?
A–10 —Under § 404(k)(1), the applicable dividends must be paid with respect to applicable employer securities. Section 404(k)(3) provides that, for this purpose, applicable employer securities are employer securities held on the record date for a dividend by an ESOP maintained by the corporation paying such dividend or any other corporation which is a member of the controlled group of corporations (within the meaning of § 409(l)(4)) that includes such corporation. In order to satisfy this requirement, the ESOP must be designated as an ESOP no later than the record date for such dividend and must comply with the other requirements of § 4975(e) as of a date no later than the record date. The retroactive designation of a plan as an ESOP does not satisfy the requirement that a plan be designated as an ESOP no later than the record date.
Q–11 —When does the payment of a dividend constitute an avoidance or evasion of taxation resulting in the disallowance of the deduction under § 404(k)(5)(A)?
A–11 —As amended by § 662 of EGTRRA, § 404(k)(5)(A) provides that the Secretary may disallow a deduction for any dividend under § 404(k)(1) if the Secretary determines that the dividend constitutes, in substance, an avoidance or evasion of taxation. This includes the authority to disallow a deduction for unreasonable dividends. With respect to
dividends reinvested under § 404(k) (2)(A)(iii), a dividend paid on common stock that is primarily and regularly traded on an established securities market (within the meaning of § 54.4975– 7(b)(1)(iv) of the Pension Excise Tax Regulations) is presumed to be a reasonable dividend. In the case of a corporation with no outstanding common stock (determined on a controlled group basis) that is primarily and regularly traded on an established securities market, a determination regarding whether the dividend is reasonable is made by comparing the dividend rate on the stock held by the ESOP with the dividend rate for common stock of comparable corporations whose stock is primarily and regularly traded on an established securities market. Whether a closely held corporation is comparable to a corporation whose stock is primarily and regularly traded on an established securities market is determined by comparing relevant corporate characteristics such as industry, size of the corporation, earnings, debt-equity structure, and dividend history.
As under prior law, payments in redemption of stock held by an ESOP that are used to make distributions to terminating ESOP participants constitute an evasion of taxation under § 404(k)(5)(A) and are not applicable dividends under § 404(k)(1). See Rev. Rul. 2001–6 (2001–6 I.R.B. 491). Moreover, any deduction for such payments in redemption of stock is barred under § 162(k).
Q–12 —Can an ESOP offer a dividend election to an ESOP participant who terminates employment but does not receive a distribution of his or her account balance?
A–12 —A participant who terminates employment but does not receive a distribution of his or her account balance continues to be a participant in the ESOP. An ESOP may provide that the same election under § 404(k)(2)(A)(iii) is offered to all participants, including both active participants and participants who are no longer active participants in the ESOP, and the corporation is allowed a deduction with respect to all dividends subject to the election. Cf. § 1.401(a)(4)–5(b); § 1.410 (b)–2(c)(1).
Q–13 —When does an ESOP have to be amended for the changes made by § 662 of EGTRRA?
A–13 —An ESOP has a remedial amendment period under § 401(b), ending not prior to the last day of the first plan year beginning on or after January 1, 2005, in which to adopt any needed retroactive remedial amendment with regard to section 662 of EGTRRA. Amendments necessary to establish an ESOP or for compliance with the requirements of § 4975(e) of the Code are not amendments with regard to section 662 of EGTRRA.
Under Notice 2001–42 (2001–30 I.R.B. 70) the availability of the EGTRRA remedial amendment period is conditioned on the timely adoption of a good faith EGTRRA plan amendment for section 662 of EGTRRA. A good faith EGTRRA plan amendment is timely if it is adopted no later than the later of (i) the end of the plan year in which the EGTRRA change in the qualification requirement is required to be, or is optionally, put into effect under the plan, or (ii) the end of the GUST remedial amendment period for the plan. See also Notice 2001–57 (2001–38 I.R.B. 279). Therefore, a good faith plan amendment for section 662 of EGTRRA must be adopted by the end of the plan year in which the first taxable year of the corporation for which the deduction is being sought ends.
For purposes of determining whether a plan provision is a disqualifying provision under Notice 2001–42, a plan sponsor will not fail to have adopted a timely good faith amendment with respect to section 662 solely because the amendment does not specifically address the guidance provided in this notice. For example, an amendment does not fail to be a timely good faith amendment solely because it does not address vesting of dividends with respect to which an election is provided. However, the plan must operate in accordance with this guidance, effective as of January 1, 2002. See Notice 2001–57, sec. III (In General).
Q–14 —The following examples illustrate the rules that appear in the questions and answers of this notice:
Example 1 (i) Corporation A is a calendar year C corporation that maintains an ESOP. The ESOP provided that dividends paid by the corporation during 2001 would be paid to the ESOP and accumulated for distribution within 90 days of plan year end. Corporation A pays quarterly dividends to its ESOP during 2001. The ESOP accumulates these dividends during 2001 for payment to participants
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within 90 days of the end of the plan year and invests the dividends in a short-term investment fund. The ESOP is amended to provide that participants can elect, in accordance with Q&A–2 and 3 of this notice, a distribution in cash of 2001 dividends within the first 90 days of 2002 or reinvestment of such dividends in employer securities within the first 90 days of 2002.
(ii) Because the 2001 dividends are distributed to participants or reinvested at the participant’s election in 2002, Corporation A is allowed a deduction with respect to the 2001 dividends for 2002. In taxable years beginning on or after January 1, 2003, the amount of this deduction cannot exceed the amount of the dividends available for distribution or reinvestment.
Example 2 (i) Corporation B is a calendar year C corporation that maintains an ESOP that accumulates dividends during the year for distribution within 90 days of the end of the plan year. In 2002, the ESOP is amended to provide participants with an election with respect to dividends paid by Corporation B in 2002. A participant’s election to have a dividend distributed or reinvested in employer securities becomes irrevocable when the dividend is paid to the ESOP. The ESOP provides that dividends are invested in employer securities as soon as possible after the dividend is paid to the ESOP for those participants who elect to have dividends reinvested in employer securities. All 2002 dividends that participants elect to reinvest are actually reinvested in employer securities during 2002. The ESOP also provides that the dividends to be distributed based on participant elections are invested in a short-term investment fund. This fund does not incur losses prior to the distribution of the dividends. Distributions are made to participants during the first 90 days of 2003.
(ii) Corporation B is entitled to a deduction for 2002 for the amount of the dividends reinvested in employer securities in 2002. Corporation B is also entitled to a deduction for 2003 for the amount of dividends distributed to participants in 2003. Because Corporation B did not incur any losses with respect to the dividends that were accumulated for distribution, Corporation B’s deduction is equal to the dividends paid by Corporation B.
Q–15 —By what date must a corporation have filed a valid election to be treated as an S corporation under § 1362(a) of the Code in order for the delayed effective date in section 656(d)(1) of EGTRRA to apply to an ESOP maintained by the corporation?
A–15 —Section 656(d)(1) provides that section 409(p) of the Code, as added by EGTRRA, applies to an ESOP for plan years beginning after December 31, 2004. Section 656(d)(2) of EGTRRA, however, provides that § 409(p) of the Code applies to plan years ending after March 14, 2001, if the ESOP is established after that date or, in the case of an ESOP established on or before March 14, 2001, the employer securities held by the plan consist of stock in a corporation with respect
to which an election under § 1362(a) to be an S corporation is not in effect on that date. For this purpose, a corporation does not have an election in effect on March 14, 2001, unless a valid election was actually filed on or before that date and is effective with respect to such corporation on or before that date. For example, a corporation that, on a date after March 14, 2001, files an election to be treated as an S corporation under § 1362(a) effective as of January 1, 2001, did not have an election under section 1362(a) in effect on March 14, 2001. Accordingly, § 409(p), as added by EGTRRA, applies to an ESOP maintained by such corporation beginning with the first plan year ending after March 14, 2001.
IV. Drafting Information
The principal drafters of this notice are Steven Linder of the Employee Plans, Tax Exempt and Government Entities Division and John Ricotta of the Office of Chief Counsel. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 (a tollfree number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Linder may be reached at (202) 283–9888; Mr. Ricotta may be reached at (202) 622–6060. The telephone numbers in the preceding sentence are not toll-free.
Safe Harbor Explanation— Certain Qualified Plan Distributions
Notice 2002–3
PURPOSE
This notice contains a “Safe Harbor Explanation” that plan administrators may provide to recipients of eligible rollover distributions from employer plans in order to satisfy § 402(f) of the Internal Revenue Code (the “Code”). It is an updated version of the Safe Harbor Explanation that was published in Notice 2000–11 (2000–6 I.R.B. 572) to reflect changes made by the Economic Growth
and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), P.L. 107–16. This notice also contains a Safe Harbor Explanation that administrators of “governmental 457 plans” may provide to recipients of eligible rollover distributions from a governmental 457 plan in order to satisfy § 402(f).
BACKGROUND
Section 402(f) requires a plan administrator of a plan qualified under § 401(a) or a § 403(a) annuity plan to provide a written explanation to any recipient of an “eligible rollover distribution.” In addition, as amended by EGTRRA, §§ 403 (b)(8)(B) and 457(e)(16)(B) require a plan administrator, or in the case of a § 403(b) tax-sheltered annuity, a payor, to provide the written explanation to the recipient of an “eligible rollover distribution.” An “eligible rollover distribution” is a payment that may be rolled over to an “eligible retirement plan.” An “eligible retirement plan” includes an individual retirement arrangement described in § 408(a) or (b) (“traditional IRA”) or an “eligible employer plan.” An “eligible employer plan” includes a plan qualified under § 401(a), including a profit-sharing plan or stock bonus plan (whether or not the plan includes a § 401(k) plan), a money purchase plan, or a defined benefit plan; a § 403(a) annuity plan; a § 403(b) tax-sheltered annuity; and an eligible § 457(b) plan maintained by a governmental employer (a “governmental 457 plan”). The written explanation must cover the direct rollover rules, the mandatory income tax withholding on distributions not directly rolled over, the tax treatment of distributions not rolled over (including the special tax treatment available for certain lump sum distributions), and when distributions may be subject to different restrictions and tax consequences after being rolled over. Section 402(f) provides that this explanation must be given within a reasonable period of time before the plan makes an eligible rollover distribution.
This notice is being issued to reflect recent changes made to the Code by EGTRRA that affect the information provided in the Safe Harbor Explanation. Sections 636, 641, 642, and 643 of EGTRRA amended provisions of the
January 14, 2002 289 2002-2 I.R.B.
would be appropriate for the paragraph headed “Employer Stock or Securities” to be eliminated. Other paragraphs that may not be relevant to a particular plan include, for example, “Payments Spread Over Long Periods,” “Direct Rollover of a Series of Payments,” “Special Tax Treatment,” “Hardship Distributions,” and “Repayment of Plan Loans.” In addition, a plan administrator may provide additional information with the Safe Harbor Explanation, if the information is not inconsistent with the Safe Harbor Explanation.
Alternatively, a plan administrator can satisfy § 402(f) by providing distributees with an explanation that is different from one of the Safe Harbor Explanations. Any explanation must contain the information required by § 402(f) and must be written in a manner designed to be easily understood.
If the law governing the tax treatment of distributions or the other provisions covered by the Safe Harbor Explanation is amended after publication of this notice, the Safe Harbor Explanations will not satisfy § 402(f) to the extent that the Safe Harbor Explanations no longer accurately describes the relevant law.
EFFECT ON OTHER DOCUMENT
Notice 2000–11 is obsoleted.
DRAFTING INFORMATION
The principal authors of this notice are Steven Linder of the Employee Plans, Tax Exempt and Government Entities Division and Cathy Vohs of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact the Employee Plans taxpayer assistance telephone service between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday by calling 1–877–829–5500 (a tollfree number). Mr. Linder can be reached at (202) 283–9888 (not a toll-free number). Ms. Vohs can be reached at (202) 622–6090 (not a toll-free number).
Code relating to eligible rollover distributions. These sections apply to distributions made on or after January 1, 2002. Section 643(a) of EGTRRA added Code § 402(c)(2) to permit the rollover of aftertax contributions. Section 636(b)(1) of EGTRRA amended Code § 402(c)(4)(C) to provide that hardship distributions are not eligible rollover distributions. Section 641(a)(1) of EGTRRA added section 457(e)(16) of the Code, which permits rollovers from a governmental 457 plan to an eligible retirement plan. Section 641(a)(2) of EGTRRA added Code § 402(c)(8)(B)(iv) to provide that a governmental 457 plan is an eligible retirement plan. Section 641(b)(2) of EGTRRA added Code § 402(c)(8)(B)(vi) to provide that a § 403(b) tax-sheltered annuity is an eligible retirement plan. Section 641(b)(1) of EGTRRA amended § 403(b)(8) to permit rollovers from a § 403(b) taxsheltered annuity to any eligible retirement plan. Finally, Section 641(d) of EGTRRA amended Code § 402(c)(9) to expand the plans to which surviving spouses may roll over distributions.
In addition, section 641(c) of EGTRRA specifically expanded the requirements for the explanation under § 402(f) by adding new subparagraph (E) to § 402(f)(1). The expanded explanation must include information regarding when a later distribution from an eligible retirement plan receiving an eligible rollover distribution may be subject to restrictions and tax consequences which are different from the plan that made the first distribution. Section 641(c) of EGTRRA provides that if a plan administrator makes reasonable efforts to comply with the requirement to provide the expanded explanation, no penalty will be imposed for failing to provide the information required under section 641(c) with respect to any distribution made before the date that is 90 days after the issuance of a safe harbor notice by the Secretary of the Treasury.
SAFE HARBOR AND ALTERNATIVE EXPLANATIONS
This notice contains two model written explanations (“Safe Harbor Explanations”), one for distributions from plans subject to § 402(f) other than governmental 457 plans and one for distributions from governmental 457 plans. The appropriate Safe Harbor Explanation meets the requirements of § 402(f) for distributions on or after January 1, 2002, if it is provided to the recipient of an eligible rollover distribution within a reasonable period of time before the distribution is made. In general, under § 1.402(f)–1 of the Income Tax Regulations, a reasonable period of time for providing an explanation is no less than 30 days (subject to waiver) and no more than 90 days before the date on which a distribution is made. Notice 2000–11 indicated that, if the law governing the tax treatment of distributions is amended, the Safe Harbor Explanation contained in that notice would no longer satisfy § 402(f) to the extent that the Safe Harbor Explanation no longer accurately describes the relevant law. Thus, because of the changes made by EGTRRA, for distributions on or after January 1, 2002 (the effective date of the relevant EGTRRA provisions), the explanation provided in Notice 2000–11 will not be considered a Safe Harbor Explanation. No penalty will be imposed, however, for any failure to provide the expanded explanation required by EGTRRA with respect to any distribution made before April 14, 2002, provided the plan administrator makes a reasonable attempt to comply with the expanded notice requirement of EGTRRA.
In using one of the Safe Harbor Explanations, a plan administrator may “customize” the Safe Harbor Explanation by omitting any portion that does not apply to the plan. For example, if the plan does not hold after-tax employee contributions, it would be appropriate for the paragraph headed “After-tax Contributions” to be eliminated. Similarly, if the plan does not provide for distributions of employer stock or other employer securities, it
2002-2 I.R.B 290 January 14, 2002
ment than it would be if you received a taxable distribution from this Plan.
If you choose to have a Plan payment that is eligible for rollover PAID TO YOU:
You will receive only 80% of the taxable amount of the payment, because the Plan Administrator is required to withhold 20% of that amount and send it to the IRS as income tax withholding to be credited against your taxes.
The taxable amount of your payment will be taxed in the current year unless you roll it over. Under limited circumstances, you may be able to use special tax rules that could reduce the tax you owe. However, if you receive the payment before age 59½, you may have to pay an additional 10% tax.
You can roll over all or part of the payment by paying it to your traditional IRA or to an eligible employer plan that accepts your rollover within 60 days after you receive the payment. The amount rolled over will not be taxed until you take it out of the traditional IRA or the eligible employer plan.
If you want to roll over 100% of the payment to a traditional IRA or an eligible employer plan, you must find other money to replace the 20% of the taxable portion that was withheld. If you roll over only the 80% that you received, you will be taxed on the 20% that was withheld and that is not rolled over. Your Right to Waive the 30–Day Notice Period. Generally, neither a direct rollover nor a payment can be made from the plan until at least 30 days after your receipt of this notice. Thus, after receiving this notice, you have at least 30 days to consider whether or not to have your withdrawal directly rolled over. If you do not wish to wait until this 30-day notice period ends before your election is processed, you may waive the notice period by making an affirmative election indicating whether or not you wish to make a direct rollover. Your withdrawal will then be processed in accordance with your election as soon as practical after it is received by the Plan Administrator.
SAFE HARBOR EXPLANATION FOR PLANS QUALIFIED UNDER SEC- TION 401(a), SECTION 403(a) ANNU- ITY PLANS, OR SECTION 403(b) TAX SHELETERED ANNUITIES
SPECIAL TAX NOTICE REGARDING
PLAN PAYMENTS
This notice explains how you can continue to defer federal income tax on your retirement savings in the [INSERT NAME OF PLAN] (the “Plan”) and contains important information you will need before you decide how to receive your Plan benefits.
This notice is provided to you by
[INSERT NAME OF THE PLAN ADMINISTRATOR OR, IN THE CASE OF A § 403(b) TAX-SHELTERED ANNUITY, THE PAYOR] (your “Plan Administrator”) because all or part of the payment that you will soon receive from the Plan may be eligible for rollover by you or your Plan Administrator to a traditional IRA or an eligible employer plan. A rollover is a payment by you or the Plan Administrator of all or part of your benefit to another plan or IRA that allows you to continue to postpone taxation of that benefit until it is paid to you. Your payment cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account (formerly known as an education IRA). An “eligible employer plan” includes a plan qualified under section 401(a) of the Internal Revenue Code, including a 401(k) plan, profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase plan; a section 403(a) annuity plan; a section 403(b) tax-sheltered annuity; and an eligible section 457(b) plan maintained by a governmental employer (governmental 457 plan).
An eligible employer plan is not legally required to accept a rollover. Before you decide to roll over your payment to another employer plan, you should find out whether the plan accepts rollovers and, if so, the types of distributions it accepts as a rollover. You should also find out about any documents that are required to be completed before the receiving plan will accept a rollover. Even if a plan accepts rollovers, it might not accept rollovers of certain types of distributions, such as after-tax amounts. If
this is the case, and your distribution includes after-tax amounts, you may wish instead to roll your distribution over to a traditional IRA or split your rollover amount between the employer plan in which you will participate and a traditional IRA. If an employer plan accepts your rollover, the plan may restrict subsequent distributions of the rollover amount or may require your spouse’s consent for any subsequent distribution. A subsequent distribution from the plan that accepts your rollover may also be subject to different tax treatment than distributions from this Plan. Check with the administrator of the plan that is to receive your rollover prior to making the rollover.
If you have additional questions after reading this notice, you can contact your plan administrator at [INSERT PHONE NUMBER OR OTHER CONTACT INFORMATION].
SUMMARY
There are two ways you may be able to receive a Plan payment that is eligible for rollover:
(1) Certain payments can be made
directly to a traditional IRA that you establish or to an eligible employer plan that will accept it and hold it for your benefit (“DIRECT ROLLOVER”); or
(2) The payment can be PAID TO YOU.
If you choose a DIRECT ROLLOVER:
Your payment will not be taxed in the current year and no income tax will be withheld.
You choose whether your payment will be made directly to your traditional IRA or to an eligible employer plan that accepts your rollover. Your payment cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account because these are not traditional IRAs.
The taxable portion of your payment will be taxed later when you take it out of the traditional IRA or the eligible employer plan. Depending on the type of plan, the later distribution may be subject to different tax treat
January 14, 2002 291 2002-2 I.R.B.
Hardship Distributions. A hardship distribution cannot be rolled over.
ESOP Dividends. Cash dividends paid to you on employer stock held in an employee stock ownership plan cannot be rolled over.
Corrective Distributions. A distribution that is made to correct a failed nondiscrimination test or because legal limits on certain contributions were exceeded cannot be rolled over.
Loans Treated as Distributions. The amount of a plan loan that becomes a taxable deemed distribution because of a default cannot be rolled over. However, a loan offset amount is eligible for rollover, as discussed in Part III below. Ask the Plan Administrator of this Plan if distribution of your loan qualifies for rollover treatment.
The Plan Administrator of this Plan should be able to tell you if your payment includes amounts which cannot be rolled over.
II. DIRECT ROLLOVER
A DIRECT ROLLOVER is a direct payment of the amount of your Plan benefits to a traditional IRA or an eligible employer plan that will accept it. You can choose a DIRECT ROLLOVER of all or any portion of your payment that is an eligible rollover distribution, as described in Part I above. You are not taxed on any taxable portion of your payment for which you choose a DIRECT ROLLOVER until you later take it out of the traditional IRA or eligible employer plan. In addition, no income tax withholding is required for any taxable portion of your Plan benefits for which you choose a DIRECT ROLLOVER. This Plan might not let you choose a DIRECT ROLLOVER if your distributions for the year are less than $200.
DIRECT ROLLOVER to a Traditional IRA. You can open a traditional IRA to receive the direct rollover. If you choose to have your payment made directly to a traditional IRA, contact an IRA sponsor (usually a financial institution) to find out how to have your payment made in a direct rollover to a traditional IRA at that institution. If you are unsure of how to invest your money, you can temporarily establish a traditional IRA to receive the
MORE INFORMATION I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER ....................................... [ ] II. DIRECT ROLLOVER .............. [ ] III. PAYMENT PAID TO YOU ................................... [ ] IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER BENEFICIARIES ...... [ ]
I. PAYMENTS THAT
CAN AND CANNOT BE ROLLED OVER
b) Rollover into an Employer Plan. You
can roll over after-tax contributions from an employer plan that is qualified under Code section 401(a) or a section 403(a) annuity plan to another such plan using a direct rollover if the other plan provides separate accounting for amounts rolled over, including separate accounting for the after-tax employee contributions and earnings on those contributions. You can also roll over after-tax contributions from a section 403(b) tax-sheltered annuity to another section 403(b) tax-sheltered annuity using a direct rollover if the other tax-sheltered annuity provides separate accounting for amounts rolled over, including separate accounting for the after-tax employee contributions and earnings on those contributions. You CANNOT roll over after-tax contributions to a governmental 457 plan. If you want to roll over your after-tax contributions to an employer plan that accepts these rollovers, you cannot have the after-tax contributions paid to you first. You must instruct the Plan Administrator of this Plan to make a direct rollover on your behalf. Also, you cannot first roll over after-tax contributions to a traditional IRA and then roll over that amount into an employer plan.
The following types of payments cannot be rolled over:
Payments Spread over Long Periods. You cannot roll over a payment if it is part of a series of equal (or almost equal) payments that are made at least once a year and that will last for:
your lifetime (or a period measured by your life expectancy), or
your lifetime and your beneficiary’s lifetime (or a period measured by your joint life expectancies), or
- a period of 10 years or more. Required Minimum Payments. Beginning when you reach age 70½ or retire, whichever is later, a certain portion of your payment cannot be rolled over because it is a “required minimum payment” that must be paid to you. Special rules apply if you own more than 5% of your employer.
Payments from the Plan may be “eligible rollover distributions.” This means that they can be rolled over to a traditional IRA or to an eligible employer plan that accepts rollovers. Payments from a plan cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account. Your Plan administrator should be able to tell you what portion of your payment is an eligible rollover distribution.
After-tax Contributions. If you made after-tax contributions to the Plan, these contributions may be rolled into either a traditional IRA or to certain employer plans that accept rollovers of the after-tax contributions. The following rules apply: a) Rollover into a Traditional IRA. You
can roll over your after-tax contributions to a traditional IRA either directly or indirectly. Your plan administrator should be able to tell you how much of your payment is the taxable portion and how much is the after-tax portion.
If you roll over after-tax contributions to a traditional IRA, it is your responsibility to keep track of, and report to the Service on the applicable forms, the amount of these after-tax contributions. This will enable the nontaxable amount of any future distributions from the traditional IRA to be determined.
Once you roll over your after-tax contributions to a traditional IRA, those amounts CANNOT later be rolled over to an employer plan.
2002-2 I.R.B 292 January 14, 2002
under Part I above, you can still decide to roll over all or part of it to a traditional IRA or to an eligible employer plan that accepts rollovers. If you decide to roll over, you must contribute the amount of the payment you received to a traditional IRA or eligible employer plan within 60 days after you receive the payment. The portion of your payment that is rolled over will not be taxed until you take it out of the traditional IRA or the eligible employer plan.
You can roll over up to 100% of your payment that can be rolled over under Part I above, including an amount equal to the 20% of the taxable portion that was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the traditional IRA or the eligible employer plan, to replace the 20% that was withheld. On the other hand, if you roll over only the 80% of the taxable portion that you received, you will be taxed on the 20% that was withheld. Example: The taxable portion of your payment that can be rolled over under Part I above is $10,000, and you choose to have it paid to you. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you may roll over the entire $10,000 to a traditional IRA or an eligible employer plan. To do this, you roll over the $8,000 you received from the Plan, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the traditional IRA or an eligible employer plan. If you roll over the entire $10,000, when you file your income tax return you may get a refund of part or all of the $2,000 withheld.
If, on the other hand, you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return, you may get a refund of part of the $2,000 withheld. (However, any refund is likely to be larger if you roll over the entire $10,000.)
Additional 10% Tax If You Are under Age 59½ . If you receive a payment before you reach age 59½ and you do not roll it over, then, in addition to the regular income tax, you may have to pay an extra tax equal to 10% of the taxable portion of the payment. The additional 10% tax generally does not apply to (1) payments that are paid after you separate from service with your employer during or after the year you reach age 55, (2) payments that are paid because you retire due to disability, (3) payments that are paid as equal (or
payment. However, in choosing a traditional IRA, you may wish to make sure that the traditional IRA you choose will allow you to move all or a part of your payment to another traditional IRA at a later date, without penalties or other limitations. See IRS Publication 590, Indi- vidual Retirement Arrangements, for more information on traditional IRAs (including limits on how often you can roll over between IRAs).
DIRECT ROLLOVER to a Plan. If you are employed by a new employer that has an eligible employer plan, and you want a direct rollover to that plan, ask the plan administrator of that plan whether it will accept your rollover. An eligible employer plan is not legally required to accept a rollover. Even if your new employer’s plan does not accept a rollover, you can choose a DIRECT ROLLOVER to a traditional IRA. If the employer plan accepts your rollover, the plan may provide restrictions on the circumstances under which you may later receive a distribution of the rollover amount or may require spousal consent to any subsequent distribution. Check with the plan administrator of that plan before making your decision.
DIRECT ROLLOVER of a Series of Payments. If you receive a payment that can be rolled over to a traditional IRA or an eligible employer plan that will accept it, and it is paid in a series of payments for less than 10 years, your choice to make or not make a DIRECT ROLLOVER for a payment will apply to all later payments in the series until you change your election. You are free to change your election for any later payment in the series.
Change in Tax Treatment Resulting from a DIRECT ROLLOVER. The tax treatment of any payment from the eligible employer plan or traditional IRA receiving your DIRECT ROLLOVER might be different than if you received your benefit in a taxable distribution directly from the Plan. For example, if you were born before January 1, 1936, you might be entitled to ten-year averaging or capital gain treatment, as explained below. However, if you have your benefit rolled over to a section 403(b) taxsheltered annuity, a governmental 457 plan, or a traditional IRA in a DIRECT ROLLOVER, your benefit will no longer
be eligible for that special treatment. See the sections below entitled “Additional 10% Tax if You Are under Age 59½” and “Special Tax Treatment if You Were Born before January 1, 1936.”
III. PAYMENT PAID TO YOU
If your payment can be rolled over (see Part I above) and the payment is made to you in cash, it is subject to 20% federal income tax withholding on the taxable portion (state tax withholding may also apply). The payment is taxed in the year you receive it unless, within 60 days, you roll it over to a traditional IRA or an eligible employer plan that accepts rollovers. If you do not roll it over, special tax rules may apply.
Income Tax Withholding:
Mandatory Withholding. If any portion of your payment can be rolled over under Part I above and you do not elect to make a DIRECT ROLLOVER, the Plan is required by law to withhold 20% of the taxable amount. This amount is sent to the IRS as federal income tax withholding. For example, if you can roll over a taxable payment of $10,000, only $8,000 will be paid to you because the Plan must withhold $2,000 as income tax. However, when you prepare your income tax return for the year, unless you make a rollover within 60 days (see “Sixty-Day Rollover Option” below), you must report the full $10,000 as a taxable payment from the Plan. You must report the $2,000 as tax withheld, and it will be credited against any income tax you owe for the year. There will be no income tax withholding if your payments for the year are less than $200.
Voluntary Withholding. If any portion of your payment is taxable but cannot be rolled over under Part I above, the mandatory withholding rules described above do not apply. In this case, you may elect not to have withholding apply to that portion. If you do nothing, an amount will be taken out of this portion of your payment for federal income tax withholding. To elect out of withholding, ask the Plan Administrator for the election form and related information.
Sixty-Day Rollover Option. If you receive a payment that can be rolled over
January 14, 2002 293 2002-2 I.R.B.
almost equal) payments over your life or life expectancy (or your and your beneficiary’s lives or life expectancies), (4) dividends paid with respect to stock by an employee stock ownership plan (ESOP) as described in Code section 404(k), (5) payments that are paid directly to the government to satisfy a federal tax levy, (6) payments that are paid to an alternate payee under a qualified domestic relations order, or (7) payments that do not exceed the amount of your deductible medical expenses. See IRS Form 5329 for more information on the additional 10% tax.
The additional 10% tax will not apply to distributions from a governmental 457 plan, except to the extent the distribution is attributable to an amount you rolled over to that plan (adjusted for investment returns) from another type of eligible employer plan or IRA. Any amount rolled over from a governmental 457 plan to another type of eligible employer plan or to a traditional IRA will become subject to the additional 10% tax if it is distributed to you before you reach age 59½, unless one of the exceptions applies.
Special Tax Treatment If You Were Born before January 1, 1936. If you receive a payment from a plan qualified under section 401(a) or a section 403(a) annuity plan that can be rolled over under Part I and you do not roll it over to a traditional IRA or an eligible employer plan, the payment will be taxed in the year you receive it. However, if the payment qualifies as a “lump sum distribution,” it may be eligible for special tax treatment. (See also “Employer Stock or Securities”, below.) A lump sum distribution is a payment, within one year, of your entire balance under the Plan (and certain other similar plans of the employer) that is payable to you after you have reached age 59½ or because you have separated from service with your employer (or, in the case of a self-employed individual, after you have reached age 59½ or have become disabled). For a payment to be treated as a lump sum distribution, you must have been a participant in the plan for at least five years before the year in which you received the distribution. The special tax treatment for lump sum distributions that may be available to you is described below.
Ten-Year Averaging. If you receive a lump sum distribution and you were born before January 1, 1936, you can make a one-time election to figure the tax on the payment by using “10–year averaging” (using 1986 tax rates). Ten-year averaging often reduces the tax you owe.
Capital Gain Treatment. If you receive a lump sum distribution and you were born before January 1, 1936, and you were a participant in the Plan before 1974, you may elect to have the part of your payment that is attributable to your pre-1974 participation in the Plan taxed as long-term capital gain at a rate of 20%.
There are other limits on the special tax treatment for lump sum distributions. For example, you can generally elect this special tax treatment only once in your lifetime, and the election applies to all lump sum distributions that you receive in that same year. You may not elect this special tax treatment if you rolled amounts into this Plan from a 403(b) taxsheltered annuity contract, a governmental 457 plan, or from an IRA not originally attributable to a qualified employer plan. If you have previously rolled over a distribution from this Plan (or certain other similar plans of the employer), you cannot use this special averaging treatment for later payments from the Plan. If you roll over your payment to a traditional IRA, governmental 457 plan, or 403(b) tax-sheltered annuity, you will not be able to use special tax treatment for later payments from that IRA, plan, or annuity. Also, if you roll over only a portion of your payment to a traditional IRA, governmental 457 plan, or 403(b) taxsheltered annuity, this special tax treatment is not available for the rest of the payment. See IRS Form 4972 for additional information on lump sum distributions and how you elect the special tax treatment.
Employer Stock or Securities. There is a special rule for a payment from the Plan that includes employer stock (or other employer securities). To use this special rule, 1) the payment must qualify as a lump sum distribution, as described above, except that you do not need five years of plan participation, or 2) the employer stock included in the payment must be attributable to “after-tax” employee contributions, if any. Under this special rule, you may have the option of
not paying tax on the “net unrealized appreciation” of the stock until you sell the stock. Net unrealized appreciation generally is the increase in the value of the employer stock while it was held by the Plan. For example, if employer stock was contributed to your Plan account when the stock was worth $1,000 but the stock was worth $1,200 when you received it, you would not have to pay tax on the $200 increase in value until you later sold the stock.
You may instead elect not to have the special rule apply to the net unrealized appreciation. In this case, your net unrealized appreciation will be taxed in the year you receive the stock, unless you roll over the stock. The stock can be rolled over to a traditional IRA or another eligible employer plan, either in a direct rollover or a rollover that you make yourself. Generally, you will no longer be able to use the special rule for net unrealized appreciation if you roll the stock over to a traditional IRA or another eligible employer plan.
If you receive only employer stock in a payment that can be rolled over, no amount will be withheld from the payment. If you receive cash or property other than employer stock, as well as employer stock, in a payment that can be rolled over, the 20% withholding amount will be based on the entire taxable amount paid to you (including the value of the employer stock determined by excluding the net unrealized appreciation). However, the amount withheld will be limited to the cash or property (excluding employer stock) paid to you.
If you receive employer stock in a payment that qualifies as a lump sum distribution, the special tax treatment for lump sum distributions described above (such as 10-year averaging) also may apply. See IRS Form 4972 for additional information on these rules.
Repayment of Plan Loans. If your employment ends and you have an outstanding loan from your Plan, your employer may reduce (or “offset”) your balance in the Plan by the amount of the loan you have not repaid. The amount of your loan offset is treated as a distribution to you at the time of the offset and will be taxed unless you roll over an amount equal to the amount of your loan offset to
2002-2 I.R.B 294 January 14, 2002
employer plan” includes a plan qualified under section 401(a) of the Internal Revenue Code, including a 401(k) plan, profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase plan; a section 403(a) annuity plan; a section 403(b) tax-sheltered annuity; and an eligible section 457(b) plan maintained by a governmental employer (governmental 457 plan). The Plan is a governmental 457 plan. An eligible employer plan is not legally required to accept a rollover. Before you decide to roll over your payment to another employer plan, you should find out whether the plan accepts rollovers and, if so, the types of distributions it accepts as a rollover. You should also find out about any documents that are required to be completed before the receiving plan will accept a rollover. Even if a plan accepts rollovers, it might not accept rollovers of certain types of distributions. If this is the case, you may wish instead to roll your distribution over to a traditional IRA or to split your rollover amount between the employer plan in which you will participate and a traditional IRA. If an employer plan accepts your rollover, the plan may restrict subsequent distributions of the rollover amount or may require your spouse’s consent for any subsequent distribution. A subsequent distribution from the plan that accepts your rollover may also be subject to different tax treatment than distributions from this Plan. Check with the administrator of the plan that is to receive your rollover prior to making the rollover.
If you have additional questions after reading this notice, you can contact your plan administrator at [INSERT PHONE NUMBER OR OTHER CONTACT INFORMATION].
SUMMARY
There are two ways you may be able to receive a Plan payment that is eligible for rollover:
(1) certain payments can be made
directly to a traditional IRA that you establish or to an eligible employer plan that will accept it and hold it for your benefit (“DIRECT ROLLOVER”), or
another qualified employer plan or a traditional IRA within 60 days of the date of the offset. If the amount of your loan offset is the only amount you receive or are treated as having received, no amount will be withheld from it. If you receive other payments of cash or property from the Plan, the 20% withholding amount will be based on the entire amount paid to you, including the amount of the loan offset. The amount withheld will be limited to the amount of other cash or property paid to you (other than any employer securities). The amount of a defaulted plan loan that is a taxable deemed distribution cannot be rolled over.
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND
OTHER BENEFICIARIES
In general, the rules summarized above that apply to payments to employees also apply to payments to surviving spouses of employees and to spouses or former spouses who are “alternate payees.” You are an alternate payee if your interest in the Plan results from a “qualified domestic relations order,” which is an order issued by a court, usually in connection with a divorce or legal separation.
If you are a surviving spouse or an alternate payee, you may choose to have a payment that can be rolled over, as described in Part I above, paid in a DIRECT ROLLOVER to a traditional IRA or to an eligible employer plan or paid to you. If you have the payment paid to you, you can keep it or roll it over yourself to a traditional IRA or to an eligible employer plan. Thus, you have the same choices as the employee.
If you are a beneficiary other than a surviving spouse or an alternate payee, you cannot choose a direct rollover, and you cannot roll over the payment yourself.
If you are a surviving spouse, an alternate payee, or another beneficiary, your payment is generally not subject to the additional 10% tax described in Part III above, even if you are younger than age 59½. If you are a surviving spouse, an alternate payee, or another beneficiary, you may be able to use the special tax treatment for lump sum distributions and the special rule for payments that include employer stock, as described in Part III
above. If you receive a payment because of the employee’s death, you may be able to treat the payment as a lump sum distribution if the employee met the appropriate age requirements, whether or not the employee had 5 years of participation in the Plan.
HOW TO OBTAIN ADDITIONAL INFORMATION
This notice summarizes only the federal (not state or local) tax rules that might apply to your payment. The rules described above are complex and contain many conditions and exceptions that are not included in this notice. Therefore, you may want to consult with the Plan Administrator or a professional tax advisor before you take a payment of your benefits from your Plan. Also, you can find more specific information on the tax treatment of payments from qualified employer plans in IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements. These publications are available from your local IRS office, on the IRS’s Internet Web Site at www.irs. gov, or by calling 1–800–TAX–FORMS.
SAFE HARBOR EXPLANATION FOR GOVERNMENTAL 457 PLANS
SPECIAL TAX NOTICE REGARDING
PLAN PAYMENTS
This notice explains how you can continue to defer federal income tax on your retirement savings in the [INSERT NAME OF PLAN] (the “Plan”) and contains important information you will need before you decide how to receive your Plan benefits.
This notice is provided to you by (your “Plan Administrator”) because all or part of the payment that you will soon receive from the Plan may be eligible for rollover by you or your Plan Administrator to a traditional IRA or an eligible employer plan. A rollover is a payment by you or the Plan Administrator of all or part of your benefit to another plan or IRA that allows you to continue to postpone taxation of that benefit until it is paid to you. Your payment cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account (formerly known as an education IRA). An “eligible
January 14, 2002 295 2002-2 I.R.B.
(2) the payment can be PAID TO
YOU.
Your Right to Waive the 30-Day Notice Period. Generally, neither a direct rollover nor a payment can be made from the plan until at least 30 days after your receipt of this notice. Thus, after receiving this notice, you have at least 30 days to consider whether or not to have your withdrawal directly rolled over. If you do not wish to wait until this 30-day notice period ends before your election is processed, you may waive the notice period by making an affirmative election indicating whether or not you wish to make a direct rollover. Your withdrawal will then be processed in accordance with your election as soon as practical after it is received by the Plan Administrator.
MORE INFORMATION
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER ....................................... [ ]
II. DIRECT ROLLOVER .............. [ ]
III. PAYMENT PAID TO YOU....... [ ]
IV. SURVIVING SPOUSES, ALTERNATE PAYEES, AND OTHER BENEFICIARIES ...... [ ]
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
Payments from the Plan may be “eligible rollover distributions.” This means that they can be rolled over to a traditional IRA or to an eligible employer plan that accepts rollovers. Payments from a plan cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account. Your Plan administrator should be able to tell you whether your payment is an eligible rollover distribution.
The following types of payments can- not be rolled over:
Payments Spread over Long Periods. You cannot roll over a payment if it is part of a series of equal (or almost equal) payments that are made at least once a year and that will last for:
your lifetime (or a period measured by your life expectancy), or
your lifetime and your beneficiary’s lifetime (or a period measured by your joint life expectancies), or
a period of 10 years or more. Required Minimum Payments. Beginning when you reach age 70½ or retire,
whichever is later, a certain portion of your payment cannot be rolled over because it is a “required minimum payment” that must be paid to you.
Unforeseeable Emergency Distribu- tions. A distribution on account of an unforeseeable emergency cannot be rolled over.
Distributions of Excess Contributions. A distribution that is made because legal limits on certain contributions were exceeded cannot be rolled over.
Loans Treated as Distributions. The amount of a plan loan that becomes a taxable deemed distribution because of a default cannot be rolled over. However, a loan offset amount is eligible for rollover, as discussed in Part III below. Ask the Plan Administrator of this Plan if distribution of your loan qualifies for rollover treatment.
The Plan Administrator of this Plan should be able to tell you if your payment includes amounts which cannot be rolled over.
II. DIRECT ROLLOVER
A DIRECT ROLLOVER is a direct payment of the amount of your Plan benefits to a traditional IRA or an eligible employer plan that will accept it. You can choose a DIRECT ROLLOVER of all or any portion of your payment that is an eligible rollover distribution, as described in Part I above. You are not taxed on any taxable portion of your payment for which you choose a DIRECT ROLLOVER until you later take it out of the traditional IRA or eligible employer plan. In addition, no income tax withholding is required for any taxable portion of your Plan benefits for which you choose a DIRECT ROLLOVER. This Plan might not let you choose a DIRECT ROLLOVER if your distributions for the year are less than $200.
DIRECT ROLLOVER to a Traditional IRA. You can open a traditional IRA to receive the direct rollover. If you choose to have your payment made directly to a traditional IRA, contact an IRA sponsor (usually a financial institution) to find out how to have your payment made in a direct rollover to a traditional IRA at that institution. If you are unsure of how to invest your money, you can temporarily establish a traditional IRA to receive the
If you choose a DIRECT ROLLOVER:
Your payment will not be taxed in the current year and no income tax will be withheld.
You choose whether your payment will be made directly to your traditional IRA or to an eligible employer plan that accepts your rollover. Your payment cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account because these are not traditional IRAs.
Your payment will be taxed later when you take it out of the traditional IRA or the eligible employer plan. Depending on the type of plan, the later distribution may be subject to different tax treatment than it would be if you received a taxable distribution from this Plan.
If you choose to have a Plan payment that is eligible for rollover PAID TO YOU:
You will receive only 80% of the taxable amount of the payment, because the Plan Administrator is required to withhold 20% of that amount and send it to the IRS as income tax withholding to be credited against your taxes.
The taxable amount of your payment will be taxed in the current year unless you roll it over.
You can roll over all or part of the payment by paying it to your traditional IRA or to an eligible employer plan that accepts your rollover within 60 days after you receive the payment. The amount rolled over will not be taxed until you take it out of the traditional IRA or the eligible employer plan.
If you want to roll over 100% of the payment to a traditional IRA or an eligible employer plan, you must find other money to replace the 20% of the taxable portion that was with- held. If you roll over only the 80% that you received, you will be taxed on the 20% that was withheld and that is not rolled over.
2002-2 I.R.B 296 January 14, 2002
of the traditional IRA or the eligible employer plan.
You can roll over up to 100% of your payment that can be rolled over under Part I above, including an amount equal to the 20% of the taxable portion that was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the traditional IRA or the eligible employer plan, to replace the 20% that was withheld. On the other hand, if you roll over only the 80% of the taxable portion that you received, you will be taxed on the 20% that was withheld. Example: Your payment that can be rolled over under Part I above is $10,000, and you choose to have it paid to you. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you may roll over the entire $10,000 to a traditional IRA or an eligible employer plan. To do this, you roll over the $8,000 you received from the Plan, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the traditional IRA or an eligible employer plan. If you roll over the entire $10,000, when you file your income tax return you may get a refund of part or all of the $2,000 withheld.
If, on the other hand, you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return, you may get a refund of part of the $2,000 withheld. (However, any refund is likely to be larger if you roll over the entire $10,000.)
Additional 10% Tax May Apply to Cer- tain Distributions. Distributions from this Plan are generally not subject to the additional 10% tax that applies to pre-age59½ distributions from other types of plans. However, any distribution from the Plan that is attributable to an amount you rolled over to the Plan (adjusted for investment returns) from another type of eligible employer plan or IRA amount is subject to the additional 10% tax if it is distributed to you before you reach age 59½, unless an exception applies. Exceptions to the additional 10% tax generally include (1) payments that are paid as equal (or almost equal) payments over your life or life expectancy (or your and your beneficiary’s lives or life expectancies), (2) payments that are paid from an eligible employer plan after you separate from service with your employer during or after the year you reach age 55, (3) payments that are paid because you retire due to disability, (4) payments that
payment. However, in choosing a traditional IRA, you may wish to make sure that the traditional IRA you choose will allow you to move all or a part of your payment to another traditional IRA at a later date, without penalties or other limitations. See IRS Publication 590, Indi- vidual Retirement Arrangements, for more information on traditional IRAs (including limits on how often you can roll over between IRAs).
DIRECT ROLLOVER to a Plan. If you are employed by a new employer that has an eligible employer plan, and you want a direct rollover to that plan, ask the plan administrator of that plan whether it will accept your rollover. An eligible employer plan is not legally required to accept a rollover. Even if your new employer’s plan does not accept a rollover, you can choose a DIRECT ROLLOVER to a traditional IRA. If the employer plan accepts your rollover, the plan may provide restrictions on the circumstances under which you may later receive a distribution of the rollover amount or may require spousal consent to any subsequent distribution. Check with the plan administrator of that plan before making your decision.
DIRECT ROLLOVER of a Series of Payments. If you receive a payment that can be rolled over to a traditional IRA or an eligible employer plan that will accept it, and it is paid in a series of payments for less than 10 years, your choice to make or not make a DIRECT ROLLOVER for a payment will apply to all later payments in the series until you change your election. You are free to change your election for any later payment in the series.
Change in Tax Treatment Resulting from a DIRECT ROLLOVER. The tax treatment of any payment from the eligible employer plan or traditional IRA receiving your DIRECT ROLLOVER might be different than if you received your benefit in a taxable distribution directly from the Plan. See the sections below entitled “Additional 10% Tax May Apply to Certain Distributions.”
III. PAYMENT PAID TO YOU
If your payment can be rolled over (see Part I above) and the payment is made to you in cash, it is subject to 20%
federal income tax withholding on the taxable portion (state tax withholding may also apply). The payment is taxed in the year you receive it unless, within 60 days, you roll it over to a traditional IRA or an eligible employer plan that accepts rollovers. If you do not roll it over, special tax rules may apply.
Income Tax Withholding:
Mandatory Withholding. If any portion of your payment can be rolled over under Part I above and you do not elect to make a DIRECT ROLLOVER, the Plan is required by law to withhold 20% of the taxable amount. This amount is sent to the IRS as federal income tax withholding. For example, if you can roll over a taxable payment of $10,000, only $8,000 will be paid to you because the Plan must withhold $2,000 as income tax. However, when you prepare your income tax return for the year, unless you make a rollover within 60 days (see “Sixty-Day Rollover Option” below) you must report the full $10,000 as a taxable payment from the Plan. You must report the $2,000 as tax withheld, and it will be credited against any income tax you owe for the year. There will be no income tax withholding if your payments for the year are less than $200.
Voluntary Withholding. If any portion of your payment is taxable but cannot be rolled over under Part I above, the mandatory withholding rules described above do not apply. In this case, you may elect not to have withholding apply to that portion. If you do nothing, an amount will be taken out of this portion of your payment for federal income tax withholding. To elect out of withholding, ask the Plan Administrator for the election form and related information.
Sixty-Day Rollover Option. If you receive a payment that can be rolled over under Part I above, you can still decide to roll over all or part of it to a traditional IRA or to an eligible employer plan that accepts rollovers. If you decide to roll over, you must contribute the amount of the payment you received to a traditional IRA or eligible employer plan within 60 days after you receive the payment. The portion of your payment that is rolled over will not be taxed until you take it out
January 14, 2002 297 2002-2 I.R.B.
are paid directly to the government to satisfy a federal tax levy, (5) payments that are paid to an alternate payee under a qualified domestic relations order, or (6) payments that do not exceed the amount of your deductible medical expenses. These exceptions may be different for distributions from a traditional IRA. See IRS Form 5329 for more information on the additional 10% tax.
The additional 10% tax does not apply to distributions from the Plan or any other governmental 457 plan, except to the extent the distribution is attributable to an amount you rolled over to the governmental 457 plan (adjusted for investment returns) from another type of eligible employer plan or IRA.
In addition, any amount rolled over from the Plan to another type of eligible employer plan or to a traditional IRA will be subject to the additional 10% tax if it is distributed to you before you reach age 59½, unless an exception applies. Repayment of Plan Loans. If your employment ends and you have an outstanding loan from your Plan, your employer may reduce (or “offset”) your balance in the Plan by the amount of the loan you have not repaid. The amount of your loan offset is treated as a distribution to you at the time of the offset and will be taxed unless you roll over an amount equal to the amount of your loan offset to another qualified employer plan or a traditional IRA within 60 days of the date of the offset. If the amount of your loan offset is the only amount you receive or are treated as having received, no amount will be withheld from it. If you receive other payments of cash or property from the Plan, the 20% withholding amount will be based on the entire amount paid to you, including the amount of the loan offset. The amount withheld will be limited to the amount of other cash or property paid to you. The amount of a defaulted plan loan that is a taxable deemed distribution cannot be rolled over.
IV. SURVIVING SPOUSES, ALTER- NATE PAYEES, AND OTHER BENEFI- CIARIES
In general, the rules summarized above that apply to payments to employees also apply to payments to surviving spouses of employees and to spouses or
former spouses who are “alternate payees.” You are an alternate payee if your interest in the Plan results from a “qualified domestic relations order,” which is an order issued by a court, usually in connection with a divorce or legal separation.
If you are a surviving spouse or an alternate payee, you may choose to have a payment that can be rolled over, as described in Part I above, paid in a DIRECT ROLLOVER to a traditional IRA or to an eligible employer plan or paid to you. If you have the payment paid to you, you can keep it or roll it over yourself to a traditional IRA or to an eligible employer plan. Thus, you have the same choices as the employee.
If you are a beneficiary other than a surviving spouse or an alternate payee, you cannot choose a direct rollover, and you cannot roll over the payment yourself.
If you are a surviving spouse, an alternate payee, or another beneficiary, your payment is generally not subject to the additional 10% tax described in Part III above, even if you are younger than age 59½.
HOW TO OBTAIN ADDITIONAL INFORMATION
This notice summarizes only the federal (not state or local) tax rules that might apply to your payment. The rules described above are complex and contain many conditions and exceptions that are not included in this notice. Therefore, you may want to consult with the Plan Administrator or a professional tax advisor before you take a payment of your benefits from your Plan. Also, you can find more specific information on the tax treatment of payments from qualified employer plans in IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements . These publications are available from your local IRS office, on the IRS’s Internet Web Site at www.irs. gov, or by calling 1–800–TAX–FORMS.
Guidance on Certain Provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001
Notice 2002–4
I. PURPOSE
This notice provides guidance with respect to the effect on distributions from a section 401(k) plan of §§ 636(a) and 646 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), Pub. L. 107–16. Section 636(a) of EGTRRA provides that the Secretary shall revise the regulations relating to hardship distributions under § 401(k)(2)(B)(i)(IV) of the Internal Revenue Code. Section 646 of EGTRRA amends the provisions of Code § 401(k)(2) and (10) to permit a plan to provide for distributions on severance from employment. This notice also provides guidance under Code § 414(v), added by § 631 of EGTRRA, on the application of the universal availability requirement under Code § 414(v)(4) in the case of an applicable employer plan (within the meaning of § 414(v)(6)(A)) that is also qualified under Puerto Rico law and provides a transition rule for satisfying the universal availability requirement for 2002.
Specifically this notice provides that:
A plan may be amended to provide for distributions on severance from employment under § 401(k)(2) (B)(i)(I), as amended by EGTRRA, on or after January 1, 2002, regardless of whether the severance from employment occurred before, on, or after January 1, 2002.
Beginning in 2002, for a plan that uses the safe harbor hardship provisions of § 1.401(k)–1(d)(2)(iv)(B) of the Income Tax Regulations, the amount of elective contributions that a participant is permitted to make in the year following a hardship distribution is no longer required to be limited to the amount of elective contributions permitted under Code § 402(g) for that year minus the amount of the elective contributions made in the year of the hardship.
2002-2 I.R.B 298 January 14, 2002
A plan will not be treated as failing to satisfy the requirements of § 414 (v)(4) for 2002 solely because different plans maintained by the same employer (as defined in Regulations § 1.410(b)–9) adopt catch-up contributions beginning on different dates during 2002, provided that all such plans begin offering catch-up contributions no later than October 1, 2002.
Until the issuance of further guidance, an applicable employer plan that permits catch-up contributions will not fail to satisfy the requirements of Code § 414(v)(4) or § 1.414(v)–1(e) of the Proposed Income Tax Regulations solely because another applicable employer plan maintained by the employer that is qualified under Puerto Rico law does not provide for catch-up contributions.
II. BACKGROUND
A. Distributions from a Section 401(k) Plan
Code § 401(k)(2) as in effect prior to EGTRRA provides that elective contributions under a qualified cash or deferred arrangement subject to § 401(k) may not be distributed prior to the occurrence of certain events, including the employee’s separation from service, the occurrence of an event described in § 401(k)(10), and in the event of a hardship. The events listed in § 401(k)(10) are the termination of the plan without establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in § 4975(e)(7)), the disposition by a corporation of substantially all of the assets used by the corporation in a trade or business of such corporation, and the disposition by a corporation of such corporation’s interest in a subsidiary. Distributions may be made in connection with a sale of assets or interest in a subsidiary only with respect to an employee who continues employment with the corporation acquiring the assets or with the subsidiary, as applicable, and only if the seller continues to maintain the plan.
Section 646 of EGTRRA amended Code § 401(k)(2)(B)(i)(I) by replacing “separation from service” with “severance from employment.” In addition,
§ 646 of EGTRRA amended Code § 401(k)(10) by deleting disposition by a corporation of substantially all of the assets of a trade or business and disposition of a corporation’s interest in a subsidiary, leaving termination of a plan as the only distributable event described in § 401(k)(10). The amendments made by § 646 apply to distributions made after December 31, 2001.
Under Regulations § 1.401(k)– 1(d)(2)(iv), a distribution is treated as made on account of hardship if it is made on account of an immediate and heavy financial need and is necessary to satisfy the financial need. Section 1.401(k)– 1(d)(2)(iv)(B) provides that a distribution is deemed necessary to satisfy an immediate and heavy financial need if certain requirements are met. One such requirement is that, after receipt of the hardship distribution, a participant is prohibited from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for a period of at least 12 months (the “elective contribution prohibition period”). Another requirement is that the plan, and all other plans maintained by the employer, limit the employee’s elective contributions for the next taxable year to the applicable limit under Code § 402(g) for that year minus the employee’s elective contributions for the year of the hardship distribution (the “posthardship contribution limit”).
Section 636(a) of EGTRRA directs the Secretary of the Treasury to revise the regulations relating to distributions under Code § 401(k)(2)(B)(i)(IV) to provide that the period during which an employee is prohibited from making elective and employee contributions following a hardship distribution is 6 months, instead of 12 months, as required under Regulations § 1.401(k)–1(d)(2)(iv)(B)( 4 ). Section 636(a) is effective for years beginning after December 31, 2001. Notice 2001–56 (2001–38 I.R.B. 277) provides guidance on § 636(a) of EGTRRA.
Code §§ 401(k)(12) and 401(m)(11) provide design-based safe harbor methods for satisfying the actual deferral percentage (“ADP”) test contained in § 401(k)(3)(A)(ii) and the actual contribution percentage (“ACP”) test contained in § 401(m)(2) based on matching contributions that meet certain conditions and
that satisfy certain notice requirements. Section V.B.1.c.iv of Notice 98–52 (1998–2 C.B. 632) provides that a plan will not fail to satisfy the ADP matching contribution safe harbor merely because an eligible employee’s ability to make elective contributions is suspended for 12 months following a hardship distribution. Section VI.B.3 of Notice 98–52 provides that a plan will not fail to satisfy the ACP matching contribution safe harbor merely because an eligible employee’s ability to make employee contributions is suspended for 12 months following a hardship distribution. Notice 2001–56 provides that, in order to continue to rely on the matching contribution safe harbors, a plan must reduce the period during which elective contributions and employee contributions are suspended following a hardship distribution from 12 months to 6 months for calendar years beginning after December 31, 2001.
B. Universal Availability of Catch-up Contributions under § 414(v)
Section 631 of EGTRRA added § 414(v) to the Code. Under § 414(v), an individual age 50 or over is permitted to make catch-up contributions (up to a dollar limit provided in § 414(v)(2)) under an applicable employer plan if certain requirements provided in § 414(v) are satisfied. Section 414(v) also provides that a plan generally will not violate any provision of the Code by permitting these catch-up contributions to be made. Proposed regulations under § 414(v) were published in the Federal Register on October 23, 2001 (66 FR 53555). Section 414(v) is effective for contributions in taxable years beginning after December 31, 2001. The regulations are proposed to apply as of this effective date.
Section 414(v)(4)(A) provides that an applicable employer plan shall be treated as failing to meet the nondiscrimination requirements under § 401(a)(4) with respect to benefits, rights, and features unless the plan allows all eligible participants to make the same election with respect to catch-up contributions. Section 414(v)(4)(B) provides that, for this purpose, all plans maintained by employers who are treated as a single employer under subsection (b), (c), (m), or (o) of § 414 shall be treated as one plan.
January 14, 2002 299 2002-2 I.R.B.
an employee’s severance from employment must amend the plan to substitute severance from employment for separation from service. A plan may provide for distributions on severance from employment under Code § 401(k)(2)(B)(i)(I), as amended, on or after January 1, 2002, regardless of whether the severance from employment occurred before, on, or after January 1, 2002, and regardless of whether the distribution would satisfy the requirements of pre-EGTRRA § 401(k) (2)(B) and the regulations thereunder (including the 2-year rule in Regulations § 1.401(k)–1(d)(4)(iii)). Alternatively, the plan could provide for distributions on or after January 1, 2002, to participants who have a severance from employment on or after January 1, 2002 (or on or after another date specified in the plan). For the rules regarding the timing of the adoption of such an amendment, see Notices 2001–42 and 2001–57.
A section 401(k) plan will not fail to comply with Code § 401(k)(2)(B), as amended by § 646 of EGTRRA, merely because it does not permit distributions in all situations in which a participant has a severance from employment. Thus, for example, a plan could limit distributions to situations in which a participant has a separation from service or following a disposition of assets or disposition of a subsidiary under circumstances under which a distribution is permitted under Code § 401(k)(2)(B)(i)(II) and § 401(k) (10)(A)(ii) and (iii) as in effect prior to the EGTRRA amendments (see Rev. Rul. 2000–27, 2000–21 I.R.B. 1016). Accordingly, a section 401(k) plan need not be amended to provide for distributions upon severance from employment. However, if the plan is not amended to provide for distributions following a severance from employment, elective contributions can be distributed only to the extent permitted by the plan.
IV. DISTRIBUTIONS ON HARDSHIP
In response to the direction in § 636(a) of EGTRRA, the safe harbor provisions of Regulations § 1.401(k)–1(d)(2)(iv)(B) will be revised. The requirement in § 1.401(k)–1(d)(2)(iv)(B)( 4 ) will be revised to reduce the elective contribution prohibition period from a period of at least 12 months to a period of at least 6 months. In addition, the post-hardship
Proposed Regulations § 1.414(v)–1(e) provides that an applicable employer plan that offers catch-up contributions will not satisfy the requirements of Code § 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with the effective opportunity to make the same dollar amount of catch-up contributions. Proposed Regulations § 1.414(v)–1(a)(4) provides that a catch-up eligible participant is an employee who is eligible to make elective deferrals during the plan year under an applicable employer plan (without regard to Code § 414(v) or the proposed regulations) and is age 50 or over (or is treated as age 50 as of January 1 of a year in accordance with Proposed Regulations § 1.414(v)–1(a)(4)(ii)). An applicable employer plan is a section 401(k) plan, a SIMPLE IRA plan, a simplified employee pension, a plan or contract that satisfies the requirements of Code § 403(b), or a § 457 eligible governmental plan. The term “employer” under the proposed regulations has the same meaning as this term under Regulations § 1.410(b)–9. Under § 1.410(b)–9, the definition of employer includes the employer maintaining the plan and those employers required to be aggregated with the employer under Code § 414(b), (c), (m), or (o).
C. Remedial Amendment Period for EGTRRA
Notice 2001–42 (2001–30 I.R.B. 70) provides a remedial amendment period under Code § 401(b) ending not prior to the last day of the first plan year beginning on or after January 1, 2005, in which any needed retroactive remedial amendment with regard to EGTRRA may be adopted. The availability of this remedial amendment period is conditioned on the adoption of a good faith EGTRRA plan amendment no later than the later of: (i) the end of the plan year in which the EGTRRA change in the qualification requirement is required to be, or is optionally, put into effect under the plan; or (ii) the end of the GUST remedial amendment period for the plan. Notice 2001–57 (2001–38 I.R.B. 279) provides sample good faith amendments with
respect to several provisions of EGTRRA, including §§ 631, 636(a), and 646.
III. DISTRIBUTIONS ON SEVERANCE FROM EMPLOYMENT
Under Code § 401(k)(2)(B)(i)(I), as amended by § 646 of EGTRRA, amounts attributable to elective contributions may be distributed upon the employee’s severance from employment with the employer maintaining the plan. For this purpose, the employer includes all corporations and other entities treated as the same employer under Code § 414(b), (c), (m), or (o). An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains the section 401(k) plan with respect to the employee (for example, by assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of Code § 414(l)) with respect to the employee). Thus, for example, if all employees of a controlled group of corporations (within the meaning of § 414(b)) are covered by a section 401(k) plan and a transaction occurs such that one subsidiary corporation in the group is no longer aggregated with other members in the group under § 414(b), (c), (m), or (o), and in connection with the transaction no assets are transferred from the section 401(k) plan to a plan maintained by the former subsidiary corporation, then, participants in the section 401(k) plan who continue employment with the subsidiary corporation will have a severance from employment with the employer maintaining the section 401(k) plan and may receive a distribution of amounts attributable to elective contributions from that plan. However, if the subsidiary corporation maintained a section 401(k) plan for its employees before the transaction and continues to maintain the section 401(k) plan following the transaction, the employees who continue employment with the subsidiary do not have a severance from employment with the employer maintaining the plan.
The amendments to Code §§ 401(k)(2) and 401(k)(10) made by § 646 of EGTRRA are effective for distributions made after December 31, 2001. A plan sponsor of a section 401(k) plan that intends to permit distributions following
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provisions, and that, as a result, plans maintained by the same employer may adopt and implement catch-up contributions as of different dates.
The Service has also received comments regarding compliance with Code § 414(v)(4) by an employer that maintains a plan that is qualified under Puerto Rico tax law as well as under the Code (pursuant to § 1022(i)(2) of ERISA). Puerto Rico law does not provide for catch-up contributions. If an employer maintains a plan qualified both under Puerto Rico law and under the Code, the employer could be effectively prohibited from offering catch-up contributions to catch-up eligible participants in other applicable employer plans maintained by the employer.
In response to these concerns and to ease the administrative burden of the initial implementation of Code § 414(v), this notice provides that a plan will not be treated as failing to satisfy the requirements of § 414(v)(4) for 2002 solely because different plans maintained by the same employer (as defined in Regulations § 1.410(b)–9) adopt catch-up contributions beginning on different dates during 2002, provided that all such plans begin offering catch-up contributions no later than October 1, 2002.
In addition, until the issuance of further guidance, an applicable employer plan (within the meaning of Code § 414(v)(6)(A)) that permits catch-up contributions will not fail to satisfy the requirements of Code § 414(v)(4) or Proposed Regulations § 1.414(v)–1(e) solely because another applicable employer plan maintained by the employer that is qualified under Puerto Rico law does not provide for catch-up contributions.
DRAFTING INFORMATION
The principal author of this notice is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Kuehnle can be reached at 1–202–283–9888 (not a toll-free number).
contribution limit in § 1.401(k)– 1(d)(2)(iv)(B)( 3 ) will be eliminated. Until the issuance of further guidance, taxpayers can rely on the rules in this section IV.
This revised safe harbor will be effective for calendar years beginning after December 31, 2001. Accordingly, the requirement that a participant’s elective contributions under a plan (and all other plans maintained by the employer) be limited to the post-hardship contribution limit is permitted to be eliminated effective for calendar years beginning after December 31, 2001, for participants who received hardship distributions during 2001. A section 401(k) plan will not fail to comply with the hardship distribution safe harbor provisions under Regulations § 1.401(k)–1(d)(2)(iv)(B) solely because it retains its existing post-hardship contribution limit. However, in order to continue to rely on the matching contribution safe harbor under Code § 401(k)(12) or § 401(m)(11), a plan must eliminate the post-hardship contribution limit, effective for calendar years beginning after December 31, 2001, for participants who receive a hardship distribution after December 31, 2000.
Amendments related to the changes in the safe harbor for hardship distributions addressed in this notice are integral to a qualification requirement that has been changed by EGTRRA. For purposes of determining whether a plan provision is a disqualifying provision under Notice 2001–42, a plan sponsor will not fail to have adopted a timely good faith amendment with respect to the hardship distribution safe harbor even though the amendment does not specifically eliminate the post-hardship contribution limit. However, if the plan sponsor does not adopt a good faith amendment changing the elective contribution prohibition period (or adopts such a change effective for a year different from the year in which the post-hardship contribution limit is eliminated under the plan), the plan sponsor must adopt a timely good faith amendment eliminating the post-hardship contribution limit in order for the provision to be a disqualifying provision for purposes of the remedial amendment period under Notice 2001–42.
For example, a plan (other than a plan that relies on the matching contribution safe harbor under Code § 401(k)(12) or
§ 401(m)(11)) will not fail to comply with the revised safe harbor if it continues to prohibit elective and employee contributions for 12 months following a hardship distribution and, therefore, there is no requirement that a good faith amendment be adopted changing this period from 12 months to 6 months. However, in such case, a timely good faith amendment eliminating the post-hardship contribution limit is required for there to be a remedial amendment period with respect to the elimination of the limit.
V. CATCH-UP CONTRIBUTIONS UNDER § 414(v)
Under Code § 414(v)(4), a plan will not satisfy § 401(a)(4) unless all the catch-up eligible participants in any applicable employer plan maintained by the employer are provided with the effective opportunity to make the same dollar amount of catch-up contributions. Under the proposed regulations, an applicable employer plan would fail to comply with this provision unless all other applicable employer plans maintained by the same employer begin offering catch-up contributions as of the same effective date. Otherwise, there will be a period during which catch-up contributions are offered to some catch-up eligible participants but not to all. In contrast, a plan does not fail to satisfy the requirements of § 414(v)(4) and the proposed regulations solely because catch-up contributions are administered differently under different plans, provided that the administrative method under each plan satisfies the basic requirement that it provide the catch-up eligible participants in that plan with the effective opportunity to make the same dollar amount of catch-up contributions as the catch-up eligible participants in other plans maintained by the same employer.
The Service has received comments since the issuance of the proposed regulations indicating that it will be difficult for employers to comply with the universal availability requirement as of the beginning of 2002. These comments point out that this is a new section of the Code, so that plan administrative systems must be modified to allow for catch-up contributions. In addition, employers have expressed concern that there may be some plans that have difficulty with these new
January 14, 2002 301 2002-2 I.R.B.
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