The IRS has finally updated the model “rollover notice” it issued in 2002. In fact, we now have two new models. Plan administrators will want to start using these new notices on or before January 1, 2010.
When Congress created the “direct rollover” concept in 1993, it also mandated that each recipient of a rollover-eligible distribution receive an explanation of the options available to that recipient, including the tax treatment of each option. The IRS issued a “model” of such a rollover notice in 2002, but that model was soon rendered obsolete by a series of statutory changes broadening the rollover rules.
For instance, the direct rollover option was made available to more types of plans (including Section 403(b) tax-sheltered annuities, governmental Section 457(b) plans, and Roth IRAs), additional recipients (including non-spousal beneficiaries), and more types of distributions (including Roth and other after-tax amounts).
The IRS has finally rectified this problem by issuing updated rollover notices. One such notice applies only to distributions made from Roth accounts, while the other applies to all other types of distributions. According to the IRS, any recipient of a distribution from both a Roth and a non-Roth account should receive both notices.
These new notices are not just updated. They have also been simplified. Moreover, they are organized in a way that should make it fairly easy to delete language that does not apply to a particular plan, recipient, or distribution. For instance, plan administrators might consider deleting the portions of the notice dealing with after-tax amounts, employer stock, governmental 457(b) plans, outstanding participant loans, nonresident aliens, and/or non-spousal beneficiaries. Deleting such language (where appropriateto do so) can substantially shorten the rollover notice.
As of January 1, 2010, these new notices will replace the 2002 model as the “safe-harbor” method of satisfying the rollover notice requirement. Most plan administrators will therefore want to move to these new notices by no later than that date. Both of these model notices are posted on the IRS website.