The IRS has released long-awaited guidance on the required content of the written explanation (often referred to as the “Special Tax Notice”) that must be provided to a plan participant who is eligible to receive a distribution that can be rolled over to another eligible retirement plan or an IRA. These explanations must be provided within a “reasonable” period of no more than 180 days before payment of an eligible rollover distribution from a 401(k) or other qualified plan, 403(a) or 403(b) annuity plan, or governmental 457(b) plan.

Notice 2009-68 contains two model explanations that employers can rely on as “safe harbors” for explaining the various distribution options and their tax consequences. The IRS last released model explanations in 2002, and the new guidance simplifies and updates the previous models to reflect interim changes in the law, including certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Pension Protection Act of 2006 (PPA). Of the two new safe harbor explanations, one is to be used for distributions from designated Roth accounts, and the other for distributions from all other types of accounts, regardless of the type of plan. The statutory changes addressed in the new model explanations include:

  • The tax rules governing rollovers to Roth IRAs;
  • Rollovers from employer plans to IRAs inherited by non-spouse designated beneficiaries; and
  • The exemption from the 10 percent penalty tax for early withdrawals by certain military reservists who have been called to active duty.

Employers should take immediate action to update their written explanations to conform with the new models within the coming months, as the IRS has indicated that the old models cannot be relied on as safe harbors after December 31, 2009. In doing so, the IRS has stated that:

  • Employers are encouraged to omit those portions of the models that do not pertain to their plans. For example, the portions that discuss employer stock should not be included by an employer whose plan does not hold such stock; and
  • A participant should only receive the explanation (Roth vs. non-Roth) that applies to his or her plan accounts (a participant with Roth and non-Roth accounts should receive both).

Finally, it bears noting that the IRS anticipates releasing Spanish translations of the new model explanations.