On September 18, 2018, the Internal Revenue Service (IRS) released Notice 2018-74, which updated the safe harbor guidance that employers may use to comply with the notice requirements under section 402(f) of the Internal Revenue Code. Section 402(f) requires a written notice be provided in advance to participants receiving eligible rollover distributions under certain qualified retirement plans (generally, section 401(a), 403(a), 403(b) and certain 457(b) plans). The written notice must explain certain rules and information related to the eligible rollover distribution, such as the participant’s rights to transfer the distribution to another eligible retirement plan and the various tax implications involved. The updates in Notice 2018-74 – reflecting recent legislative changes and IRS guidance, and providing certain clarifications – further amend the safe harbor model notices issued nearly a decade ago in Notice 2009-68 and subsequently updated in Notice 2014-74.
Notice 2018-74 provides two methods that employers may use to implement the revised model safe harbor notices:
- A set of updated model notices in Appendix A to replace the prior safe harbor notices outright; or
- Alternatively, Appendix B provides for the first time instructions on how employers may update the safe harbor explanations in Notice 2014-74 by amendment, instead of by replacement.
Of course, employers may also provide a section 402(f) notice that is different from the safe harbor explanations.
The specific modifications discussed in Notice 2018-74 relate in part to recent legislation and IRS guidance including:
- The extended rollover deadline for qualified plan loan offset amounts under the Tax Cuts and Jobs Act of 2017 – a specific point on which the 2014 model notice is no longer accurate;
- Revised exceptions to the 10% premature distribution penalty tax under section 72(t) enacted in the Moving Ahead for Progress in the 21st Century Act (MAP-21, relating to phased retirement for federal employees) and the Defending Public Safety Employees Retirement Act (DPSERA, expanding the exception for qualified public safety workers receiving distributions from governmental plans); and
- Self-certification procedures for claiming eligibility for a waiver of the 60-day deadline for making rollovers under Revenue Procedure 2016-47.
The model notices also include clarifications, such as:
- Confirming that the 10% premature distribution penalty tax under section 72(t) for early distributions applies only to amounts includable in income, but the section 72(t) exception for qualified public safety employees does not apply to payments from IRAs;
- Explaining how the rollover rules apply to governmental section 457(b) plans that include designated Roth accounts; and
- Recognizing the possibility that the 60-day deadline for making rollovers may from time to time be extended for those taxpayers affected by certain events such as federally declared disasters.
The Notice does not state an effective date for implementing the updated safe harbor notices, and as usual disclaims the ongoing reliability of the 2018 model explanations in the event of subsequent changes in applicable law. Employers thus would be well-advised to:
- Update their section 402(f) notices as soon as administratively feasible, if they have not already done so. Employers making use of the safe harbor notices may continue to omit sections of the explanations that are inapplicable to their plans; and
- In the event of future changes in the law, consider at least interim updates to their existing notices even in advance of the IRS publishing updated models, particularly if the new law causes a statement in the existing notice to become affirmatively inaccurate.