Retirement Plan Sponsor LetterMarch 2002
RE: New EGTRRA Rollover Notice
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) significantly enhances pension portability by expanding rollover opportunities among various types of retirement plans and arrangements.
The New EGTRRA Rollover Rules
EGTRRA provides that eligible rollover distributions from qualified retirement plans described in Section 401(a) of the Internal Revenue Code (the Code), Code Section 403(b) annuities, and governmental Code Section 457(b) plans generally may be rolled over to any of such plans or arrangements. Similarly, eligible rollover distributions from IRAs generally may be rolled over into Code Section 401(a) qualified plans, Code Section 403(b) annuities, or governmental Code Section 457(b) plans.
EGTRRA also extended the direct rollover and withholding rules to distributions from governmental Code Section 457(b) plans, and expanded rollover opportunities for surviving spouses.
EGTRRA's new rollover rules are effective for distributions made on or after January 1, 2002. On or after that date, hardship distributions may not be rolled over into any plan, and after-tax employee contributions may be rolled over into traditional IRAs or into certain employer plans that will accept them.
The New EGTRRA Rollover Notice
The Internal Revenue Service (IRS) recently issued two "safe harbor" rollover notices, each reflecting EGTRRA changes, which plan administrators may provide to recipients of eligible rollover distributions from employer plans. One notice applies to plans other than governmental Code Section 457(b) plans, and the other notice applies to governmental Code Section 457(b) plans. A copy of the notice which applies to your plan(s) is enclosed.
The new EGTRRA safe harbor rollover notice explains 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. The rollover notice must be given within a reasonable period of time before the plan makes an eligible rollover distribution. Under applicable rules, a reasonable period of time for providing the rollover notice is no less than 30 days (subject to waiver) and no more than 90 days before the date on which a distribution is made.
The changes made by EGTRRA apply to eligible rollover distributions made on or after January 1, 2002. No penalty will be imposed by the IRS, however, for any failure to provide the new EGTRRA safe harbor rollover notice with respect to any distribution made before April 14, 2002, as long as the plan administrator makes a reasonable attempt to comply with EGTRRA's rollover notice requirements. The IRS has stated that use of the pre-EGTRRA safe harbor rollover notice is acceptable for distributions made prior to April 14, 2002.
The EGTRRA safe harbor rollover notice must be provided, however, with respect to any eligible rollover distribution made on or after April 14, 2002. For example, the EGTRRA safe harbor rollover notice relating to an eligible rollover distribution made on April 14, 2002 must be provided no later than March 15, 2002 (subject to waiver). In using the EGTRRA safe harbor rollover notice, you may customize it by omitting any portion that does not apply to your plan. For example, if your plan does not hold after-tax employee contributions, you may eliminate the paragraph in the notice headed "After-tax Contributions." Similarly, if your plan does not provide for distributions of employer stock or other employer securities, you may eliminate the paragraph headed "Employer Stock or Securities." 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 rollover notice, as long as the information is not inconsistent with the notice.
If you have any questions about the new EGTRRA safe harbor rollover notice, please contact any of the following members of our Employee Benefits Practice Group: In Milwaukee (At 414-273-3500)