The Treasury Department and Internal Revenue Service provided
guidance Jan. 10 in the form of questions and answers for sponsors of
tax-qualified retirement plans who were seeking clarity on changes to
plan distribution rules enacted in the Pension Protection Act of 2006
(Notice 2007-7).
The notice, is expected to be published in the Jan. 29 issue of
Internal Revenue Bulletin 2007-5, also addresses many questions
on PPA provisions, including Sections:
• 303,
relating to interest rate assumptions to be used to value benefits for
certain distributions from defined benefit plans, which are effective
for plan years beginning after Dec. 31, 2005, except for plans that
terminated before the PPA was enacted. Plans may be amended
retroactively without violating anti-cutback rules, and there are
methods for dealing with excess distributions.
• 826,
relating to Section 401(k) and 403(b) plans that may treat
beneficiaries the same as participants for hardship distributions for
medical, tuition, or funeral expenses.
• 828,
relating to early distributions to public safety employees;
• 829,
relating to rollovers for nonspouse beneficiaries;
• 845,
relating to distributions to pay for accident or health insurance for
public safety officers;
• 904,
relating to vesting of nonelective contributions;
• 1102,
relating to the notice and consent period for distributions; and
• 1201,
relating to distributions from IRAs to charitable
organizations.
“The notice also clarifies several issues concerning the
provision permitting individual retirement account owners age 70 1/2
or older to directly transfer, tax-free, up to $100,000 per year to an
eligible charity,” Treasury said in a news release. “For
example, a check from an IRA made payable to an eligible charity but
delivered by the IRA holder still qualifies for tax-free treatment.
IRAs held on behalf of beneficiaries, as well as IRAs held by the
original owners, are eligible to use this provision. Additionally, the
$100,000 annual limit applies separately for each spouse of a married
couple. If both spouses have IRAs and are at least age 70 1/2, the
couple can transfer a combined total of $200,000.”
Attorney Thomas G. Schendt, a partner in the Washington office of
Alston & Bird, told BNA in a Jan. 10 interview that two issues in
the notice were significant. First, from a priority standpoint, he
said he was pleased that officials addressed the issues they did up
front, because the issues had the potential to impact a wider universe
of plans. Guidance clearly was needed in the listed areas, he said,
adding, “I think it addressed a lot of what was
questioned.”
Schendt called the timing of the notice “exceptional”
because the rules will impact how employers must code improper
distributions for plan year 2006.
Schendt said officials addressed a significant amount of
outstanding questionable issues under Section 72(t) that were on the
table, rather than one or two components. He added that the notice
also coordinated with the Employee Plans Compliance Resolution System
(EPCRS) as slightly modified to accommodate distribution rule
problems. That showed a true understanding of the realities of these
excess benefits that occurred and the ability to modify a
well-established correction process to handle them, he added.
Jan Jacobson, director of retirement policy for the American
Benefits Council, told BNA Jan. 10 that guidance in the notice
relating to tax code Section 415 limitations, which is retroactive to
plan year 2006, provided plan sponsors with three methods for
restoring excess lump sum distributions that were made from their
plans prior to the PPA. She said two of the methods require employers
to request repayment of the excess amount from the participant back to
the plan, or failing that, either the employer or a third party would
be required to pay the excess, plus interest.
But, according to Jacobson, the third method allowed under the
notice, which applies for distributions made prior to Sept. 1, 2006,
does not require an actual repayment. Instead, she said, it requires
the plan sponsor to file on behalf of the participant two Forms 1099R,
one showing what could have been distributed under the PPA limits, and
the other using coding that shows the excess amount is not eligible to
roll over. Plan sponsors should notify the affected participants who
received excessive lump sums, she advised, pointing out that the
excess amounts will be included in the participants' income.
Jacobson said guidance related to hardship distributions clarified
that the rules are permissive, not mandatory, and are allowed under
the existing safe harbor provisions, expanded to included the new
beneficiary hardship distributions.
Rules governing nonspouse beneficiary rollovers, as discussed in
the notice, clarified that it too was not required, and not subject to
either mandatory rollovers or a 20 percent withholding requirement,
according to Jacobson. She said the guidance showed that officials are
generally not changing the minimum distribution requirements, but are
treating the distributions as inherited individual retirement
accounts.
Jacobson also discussed the notice's explanation of the PPA's
treatment of vesting schedules for employer contributions, other than
matching contributions. She said the new rules say that plan sponsors
can establish separate vesting schedules for contributions from plan
years beginning after Dec. 31, 2006. The old vesting schedule can
still apply for prior years.
In addition, Jacobson said contributions that are made for a plan
year that begins before the start of calendar 2007 will not be subject
to the new vesting schedule, provided the allocation is made under the
terms of the 2006 plan year and is not subject to any conditions that
were not satisfied by the end of that plan year.
Tony Andrews, a vice president in the Tax & ERISA Group in the
Winston-Salem, N.C., office of Aon Consulting, also commended the
timeliness of the guidance. “It certainly beats operating in the
dark,” he told BNA in an e-mail statement. “At first
glance, I would say that a couple of changes, in particular, will be
quite helpful,” Andrews said.
First, there's the matter of some 2006 distributions that may not
have complied with the new PPA rules. “Under this new IRS
guidance, you'll be able to fix these distributions fairly
easily,” he said. For pre-Sept. 1, 2006 distributions, the
guidance permits the use of EPCRS correction methods. “Plus you
can give the individual two tax forms rather than asking to get the
excess distribution back,” he said.
“Second, the guidance on the new vesting requirements for
employer nonelective contributions in defined contribution plans will
be helpful since it clarifies which contributions are subject to the
new rules and allows a plan to maintain bifurcated vesting
schedules,” Andrews said.
Martha L. Hutzelman, of the McLean, Va., office of the firm Kruchko
and Fries, said that overall, the guidance was very timely, since many
of the distribution changes were effective upon enactment of the
legislation or as of the beginning of 2007. “The guidance is
also very clear and addresses many of the practical questions about
how to handle specific distribution situations,” she added.
According to Hutzelman, the guidance dealing with permitted
distributions to nonspouse beneficiaries with respect to hardship
distributions (PPA Section 826) and direct rollovers to inherited IRAs
was very helpful, particularly with respect to inherited IRAs. The
Q&A 13 that discussed the required titling of the IRA was helpful
in both the hardship section and the rollover section, she said. She
said the notice clarified that the provisions were not required
benefits, but discretionary benefits that the plan has the option to
offer.
Hutzelman said it helped that Q&A 14 specified that if the plan
offers nonspouse rollovers, they must be offered on a
nondiscriminatory basis. “I think it will be unexpected to many
practitioners that the distribution notice requirements and mandatory
withholding requirements will not apply to nonspouse beneficiaries--as
noted under Q and A 15,” she said. But, a best practice may be
to provide some type of notice to nonspouse beneficiaries anyway, she
advised.
Hutzelman commended the guidance on the ability to exclude from
income, distributions used to pay qualified health insurance premiums
of eligible retired public safety officers (PPA Section 845).
“The legislation was rather vague in its description of this
provision and many governmental entities have been interested in
offering this benefit,” she said. “The guidance clarifies
many of the open issues and will be useful in enabling governments to
set up their plans to offer this benefit,” she said.
By Sheila R. Cherry
This notice is scheduled to be published in Internal Revenue
Bulletin 2007-5, dated Jan. 29,
2007.
IRS, Treasury Issue Guidance on New Distribution Provisions of the
Pension Protection Act
IR-2007-7, Jan. 10, 2007
WASHINGTON -- The Treasury Department and the IRS issued a notice
today providing extensive guidance on several Pension Protection Act
rules relating to distributions from tax-qualified retirement
plans.
The guidance addresses many questions on PPA provisions,
including:
• interest rate assumptions for lump sum
distributions
• hardship distributions from a 401(k) and similar
plans
• early distributions from qualified plans to
terminated public safety employees
• rollovers from qualified plans to IRAs for non-spouse
beneficiaries
• distributions to pay for health insurance for retired
public safety officers
• earlier vesting of certain employer
contributions
• new rules for the notice and consent period for
distributions
The notice also clarifies several issues concerning the provision
permitting IRA owners age 70 1/2 or older to directly transfer
tax-free, up to $100,000 per year to an eligible charity. For example,
a check from an IRA made payable to an eligible charity but delivered
by the IRA holder still qualifies for tax-free treatment. IRAs held on
behalf of beneficiaries, as well as IRAs held by the original owners,
are eligible to use this provision. Additionally, the $100,000 annual
limit applies separately for each spouse of a married couple. If both
spouses have IRAs and are at least age 70 1/2, the couple can transfer
a combined total of $200,000.
Part III. Administrative, Procedural, and
Miscellaneous
Miscellaneous Pension Protection Act
Changes
Notice 2007-7
I. PURPOSE
This notice provides guidance in the form of questions and answers
with respect to certain provisions of the Pension Protection Act of
2006, P.L. 109-280 (“PPA ’06”), that are effective
in 2007 or earlier. The sections of PPA ’06 addressed in this
notice, which are primarily related to distributions, are § 303
(relating to interest rate assumptions for lump sum distributions),
§ 826 (relating to hardship distributions), § 828 (relating
to early distributions to public safety employees), § 829
(relating to rollovers for nonspouse beneficiaries), § 845
(relating to distributions to pay for accident or health insurance for
public safety officers), § 904 (relating to vesting of
nonelective contributions), § 1102 (relating to the notice and
consent period for distributions), and § 1201 (relating to
distributions from IRAs to charitable
organizations).
II. SECTION 303 OF PPA ’06
Section 415(b) of the Code provides limitations on annual benefits
under a defined benefit plan. Under § 415(b)(2)(B), if a benefit
is payable in a form other than a straight life annuity, the benefit
is adjusted to an actuarially equivalent straight life annuity for
purposes of determining whether the limitations of § 415(b) have
been satisfied. Section 415(b)(2)(E) provides limitations on the
actuarial assumptions that can be used in making the adjustment under
§ 415(b)(2)(B). Prior to the enactment of PPA '06, for purposes
of adjusting a benefit payable in a form that is subject to the
minimum present value requirements of § 417(e)(3), §
415(b)(2)(E)(ii) provided that the interest rate assumption must not
be less than the greater of the applicable interest rate as defined in
§ 417(e)(3) or the rate specified in the plan. However, §
101(b)(4) of the Pension Funding Equity Act of 2004, P.L. 108-218,
amended § 415(b)(2)(E)(ii) to provide that, for plan years
beginning in 2004 and 2005, 5.5% must be used in lieu of the
applicable interest rate (as defined in § 417(e)(3)) for purposes
of adjusting the benefit.
Section 303(a) of PPA ’06 amended § 415(b)(2)(E)(ii) to
provide that the interest rate assumption for purposes of adjusting a
benefit payable in a form that is subject to the minimum present value
requirements of § 417(e)(3) must not be less than the greatest of
(i) 5.5%, (ii) the rate that provides a benefit of not more than 105%
of the benefit that would be provided if the applicable interest rate
(as defined in § 417(e)(3)) were the interest rate assumption, or
(iii) the rate specified under the
plan.
Q-1. What is the effective date of the changes made to § 415
of the Code by § 303(a) of PPA
'06?
A-1. The changes to § 415 of the Code made by § 303(a) of
PPA '06 apply to distributions made in plan years beginning after
December 31, 2005. However, the changes do not apply to a plan with a
termination date that is on or before August 17, 2006, the date of
enactment of PPA '06.
Q-2. May a plan be amended retroactively to comply with the
requirements of § 303(a) of PPA '06 without violating the
anti-cutback rules provided in § 411(d)(6) of the
Code?
A-2. Yes. Under § 1107 of PPA ’06, a plan does not
violate the anti-cutback rules of § 411(d)(6) of the Code if it
is amended retroactively to comply with §303(a) of PPA ’06,
provided the amendment is adopted on or before the last day of the
first plan year beginning on or after January 1, 2009 (2011 in the
case of a governmental plan), and the plan is operated as if such
amendment were in effect as of the first date the amendment is
effective.
Q-3. If a plan made a distribution in a plan year beginning in 2006
that satisfied the limitations of § 415(b) prior to the enactment
of PPA ’06 but which is in excess of the limitations of §
415(b) taking into account the amendments to § 415 made by §
303(a) of PPA ’06 (a “§ 303 excess
distribution”), does the distribution violate the requirements
of § 415(b)?
A-3. Yes. However, three methods are available for correcting a
§ 303 excess distribution. First, Q&A-4 of this notice sets
forth a special correction method that is available for a § 303
excess distribution made prior to September 1, 2006, provided that the
correction is completed by March 15, 2007. Second, if correction is
completed by December 31, 2007 (even if the § 303 excess
distribution occurs after September 1, 2006), a plan may correct a
§ 303 excess distribution by using the correction method for a
§ 415(b) excess distribution described in the Employee Plans
Compliance Resolution System (“EPCRS”) (see section
2.04(1) in Appendix B in Rev. Proc. 2006-27, 2006-22 IRB 945) even if
the plan does not meet the requirements specified in Rev. Proc.
2006-27, including the special requirements for self correction under
Part IV of Rev. Proc. 2006-27. Finally, a plan that meets the
requirements of Rev. Proc. 2006-27 may correct § 303 excess
distributions by using the correction method for § 415(b) excess
distributions under EPCRS even after December 31, 2007. A plan that is
amended retroactively to comply with § 303(a) of PPA ’06
will not fail to satisfy the requirement in § 1107(b)(2)(A) of
PPA ’06 (that the plan be operated in accordance with the terms
of the amendment) merely because it made a § 303 excess
distribution, provided the § 303 excess distribution is corrected
using one of these three correction
methods.
Q-4. What special correction method is available to correct a
§ 303 excess distribution made prior to September 1,
2006?
A-4. A special correction method is available for a § 303
excess distribution made prior to September 1, 2006, provided the
correction is completed by March 15, 2007. Under the special
correction method, a plan may use the EPCRS correction method for a
§ 415(b) excess distribution (as described in section 2.04(1) in
Appendix B in Rev. Proc. 2006-27, even if the plan does not otherwise
meet the requirements of Rev. Proc. 2006-27, including the special
requirements for self correction) with the following modifications.
The excess amount (i.e., the amount by which the distribution actually
made exceeds the distribution permitted using the interest assumption
specified in § 415(b) as amended by PPA ’06) is not
required to be returned to the plan (as otherwise required under the
EPCRS correction method). Instead, a plan must issue two Forms 1099-R
(Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.) to a participant who has
received a § 303 excess distribution. The first Form 1099-R
should include only the amount that would have been distributed had
the benefit payable been adjusted using the interest assumptions
specified in § 415(b) as amended by PPA '06. The second Form
1099-R should include only the excess amount that was distributed, and
should include code “E” in box 7 to identify the amount as
an excess distribution. As provided in the EPCRS correction, this
excess amount is not an eligible rollover distribution, and therefore
must be included in gross income in the year distributed from the
plan.
III. SECTION 826 OF PPA
’06
An employee's elective contributions under a cash or deferred
arrangement can only be distributed upon the occurrence of certain
events, one of which is the employee's hardship. A distribution is
made on account of hardship only if the distribution both is made on
account of an immediate and heavy financial need of the employee and
is necessary to satisfy the financial need. A distribution made for
any of the expenses listed in Regulation §
1.401(k)-1(d)(3)(iii)(B) is deemed to be on account of an immediate
and heavy financial need of the employee. Several of these listed
expenses can be expenses of the employee's spouse or
dependents.
Section 826 of PPA ’06 directs the Secretary of the Treasury
to modify the rules relating to distributions from § 401(k),
§ 403(b), § 409A, and § 457(b) plans on account of a
participant's hardship or unforeseeable financial emergency to permit
such plans to treat a participant's beneficiary under the plan the
same as the participant's spouse or dependent in determining whether
the participant has incurred a hardship or unforeseeable financial
emergency.
Q-5. What changes are being made pursuant to § 826 of PPA
’06 in the rules relating to hardship distributions from §
401(k) plans and § 403(b) plans and relating to distributions on
account of an unforeseeable financial emergency from a plan described
in § 457(b) or § 409A?
A-5. (a) Hardship distributions from § 401(k) plans and
§ 403(b) plans. A § 401(k) plan that permits hardship
distributions of elective contributions to a participant only for
expenses described in § 1.401(k)-1(d)(3)(iii)(B) may, beginning
August 17, 2006, permit distributions for expenses described in §
1.401(k)-1(d)(3)(iii)(B)(1), (3), or (5)
(relating to medical, tuition, and funeral expenses, respectively) for
a primary beneficiary under the plan. For this purpose, a
“primary beneficiary under the plan” is an individual who
is named as a beneficiary under the plan and has an unconditional
right to all or a portion of the participant's account balance under
the plan upon the death of the participant. A plan that adopts these
expanded hardship provisions must still satisfy all the other
requirements applicable to hardship distributions, such as the
requirement that the distribution be necessary to satisfy the
financial need. These rules also apply to § 403(b)
plans.
(b) Distributions on account of an unforeseeable financial
emergency from a plan described in § 457(b) or § 409A.
In applying § 457(d)(1)(A)(iii), § 1.457-6(c)(2)(i), §
409A(a)(2)(A)(vi), and Proposed Regulation § 1.409A-3(g)(3)(i), a
plan described in § 457(b) or § 409A may treat a
participant's beneficiary under the plan the same as the participant's
spouse or dependent in determining whether the participant has
incurred an unforeseeable financial emergency. This will be reflected
in the upcoming final regulations under §
409A.
IV. SECTION 828 OF PPA ’06
Section 72(t)(1) of the Code provides for a 10% additional tax on
an early distribution from a qualified retirement plan (as defined in
§4974(c)), unless the early distribution qualifies for one of the
exceptions listed in § 72(t)(2). For example, §
72(t)(2)(A)(v) provides an exception to the 10% additional tax for
distributions made to an employee who separates from service after
attainment of age 55. Under § 72(t)(3)(A), § 72(t)(2)(A)(v)
does not apply to individual retirement
plans.
Section 828 of PPA ’06 amended § 72 of the Code by
adding § 72(t)(10), which provides that in the case of a
distribution to a qualified public safety employee from a governmental
defined benefit plan, § 72(t)(2)(A)(v) is applied by substituting
age 50 for age 55. Thus, the 10% additional tax on early distributions
under § 72(t)(1) does not apply to a distribution from a
governmental defined benefit plan made to a qualified public safety
employee who separates from service after attainment of age 50. This
exception to the 10% additional tax applies to distributions made
after August 17, 2006 (the date of enactment of PPA
’06).
Q-6. Who is a qualified public safety
employee?
A-6. For purposes of § 72(t)(10), the term “qualified
public safety employee” means an employee of a State or of a
political subdivision of a State (such as a county or city) whose
principal duties include services requiring specialized training in
the area of police protection, firefighting services, or emergency
medical services for any area within the jurisdiction of the State or
the political subdivision of the
State.
Q-7. How does a qualified public safety employee qualify for the
exception to the 10% additional tax under §
72(t)(10)?
A-7. In order to qualify for the exception to the 10% additional
tax under § 72(t)(10), a qualified public safety employee (i)
must have received the distribution from a governmental defined
benefit plan after separating from service with the employer
maintaining the plan and (ii) the separation from service must have
occurred during or after the calendar year in which the qualified
public safety employee attained age 50. For example, a qualified
public safety employee who separated from service on June 30, 2006,
and attained age 50 on December 12, 2006, is eligible for the
exception under § 72(t)(10) with respect to distributions made
after August 17, 2006.
Q-8. What are the consequences if, before August 18, 2006, a
qualified public safety employee began receiving substantially equal
periodic payments that qualify for the exception to the 10% additional
tax described in § 72(t)(2)(A)(iv) and then modified the periodic
payments after August 17, 2006?
A-8. If the payments satisfy the requirements in Q&A-7 of this
notice, payments received by the qualified public safety employee
after August 17, 2006, would qualify for the exception to the 10%
additional tax under § 72(t)(10). However, if the modification
would result in the imposition of the recapture tax under the rules of
§ 72(t)(4), then the recapture tax applies to the payments made
before August 18, 2006.
Q-9. Does the exception to the 10% additional tax under §
72(t)(10) apply if the qualified public safety employee rolls over
distributions from a governmental defined benefit plan into an IRA or
a defined contribution plan and subsequently takes an early
distribution from the IRA or defined contribution
plan?
A-9. No. The exception to the 10% additional tax under §
72(t)(10) applies only to amounts distributed from a governmental
defined benefit plan and does not apply to distributions from a
defined contribution plan or an individual retirement
plan.
Q-10. How does a payer report distributions that qualify for the
exception to the 10% additional tax under § 72(t)(10) on Form
1099-R?
A-10. A payer is permitted to use distribution code 2 (early
distribution, exception applies) in box 7 of Form 1099-R. However, a
payer is also permitted to use distribution code 1 (early
distribution, no known exception) in box 7 of Form 1099-R, if the
payer does not know whether the exception under § 72(t)(10)
applies. For further information on reporting, see Instructions for
Forms 1099-R and 5498.
V. SECTION 829 OF PPA ’06
Under §402(c)(11) of the Code, which was added by § 829
of PPA '06, if a direct trustee-to-trustee transfer of any portion of
a distribution from an eligible retirement plan is made to an
individual retirement plan described in § 408(a) or (b) (an
“IRA”) that is established for the purpose of receiving
the distribution on behalf of a designated beneficiary who is a
nonspouse beneficiary, the transfer is treated as a direct rollover of
an eligible rollover distribution for purposes of § 402(c). The
IRA of the nonspouse beneficiary is treated as an inherited IRA within
the meaning of § 408(d)(3)(C). Section 402(c)(11) applies to
distributions made after December 31,
2006.
Q-11. Can a qualified plan described in § 401(a) offer a
direct rollover of a distribution to a nonspouse
beneficiary?
A-11. Yes. Under § 402(c)(11), a qualified plan described in
§ 401(a) can offer a direct rollover of a distribution to a
nonspouse beneficiary who is a designated beneficiary within the
meaning of § 401(a)(9)(E), provided that the distributed amount
satisfies all the requirements to be an eligible rollover distribution
other than the requirement that the distribution be made to the
participant or the participant's spouse. (See § 1.401(a)(9)4 for
rules regarding designated beneficiaries.) The direct rollover must be
made to an IRA established on behalf of the designated beneficiary
that will be treated as an inherited IRA pursuant to the provisions of
§ 402(c)(11). If a nonspouse beneficiary elects a direct
rollover, the amount directly rolled over is not includible in gross
income in the year of the distribution. See § 1.401(a)(31)1,
Q&A-3 and-4, for procedures for making a direct
rollover.
Q-12. Can other types of plans offer a direct rollover of a
distribution to a nonspouse
beneficiary?
A-12. Yes. Section 402(c)(11) also applies to annuity plans
described in § 403(a) or (b) and to eligible governmental plans
under § 457(b).
Q-13. How must the IRA be established and
titled?
A-13. The IRA must be established in a manner that identifies it as
an IRA with respect to a deceased individual and also identifies the
deceased individual and the beneficiary, for example, “Tom Smith
as beneficiary of John Smith.”
Q-14. Is a plan required to offer a direct rollover of a
distribution to a nonspouse beneficiary pursuant to §
402(c)(11)?
A-14. No. A plan is not required to offer a direct rollover of a
distribution to a nonspouse beneficiary. If a plan does offer direct
rollovers to nonspouse beneficiaries of some, but not all,
participants, such rollovers must be offered on a nondiscriminatory
basis because the opportunity to make a direct rollover is a benefit,
right, or feature that is subject to § 401(a)(4). In the case of
distributions from a terminated defined contribution plan pursuant to
29 C.F.R. § 2550.404a-3(d)(1)(ii), the plan will be considered to
offer direct rollovers pursuant to § 402(c)(11) with respect to
such distributions without regard to plan
terms.
Q-15. For what purposes is the direct rollover of a distribution by
a nonspouse beneficiary treated as a rollover of an eligible rollover
distribution?
A-15. Section 402(c)(11) provides that a direct rollover of a
distribution by a nonspouse beneficiary is a rollover of an eligible
rollover distribution only for purposes of § 402(c). Accordingly,
the distribution is not subject to the direct rollover requirements of
§ 401(a)(31), the notice requirements of § 402(f), or the
mandatory withholding requirements of § 3405(c). If an amount
distributed from a plan is received by a nonspouse beneficiary, the
distribution is not eligible for
rollover.
Q-16. If the named beneficiary of a decedent is a trust, is a plan
permitted to make a direct rollover to an IRA established with the
trust as beneficiary?
A-16. Yes. A plan may make a direct rollover to an IRA on behalf of
a trust where the trust is the named beneficiary of a decedent,
provided the beneficiaries of the trust meet the requirements to be
designated beneficiaries within the meaning of § 401(a)(9)(E).
The IRA must be established in accordance with the rules in Q&A-13
of this notice, with the trust identified as the beneficiary. In such
a case, the beneficiaries of the trust are treated as having been
designated as beneficiaries of the decedent for purposes of
determining the distribution period under § 401(a)(9), if the
trust meets the requirements set forth in § 1.401(a)(9)-4,
Q&A-5, with respect to the IRA.
Q-17. How is the required minimum distribution (an amount not
eligible for rollover) determined with respect to a nonspouse
beneficiary if the employee dies before his or her required beginning
date within the meaning of §
401(a)(9)(C)?
A-17. (a) General rule. If the employee dies before his or
her required beginning date, the required minimum distributions for
purposes of determining the amount eligible for rollover with respect
to a nonspouse beneficiary are determined under either the 5year rule
described in § 401(a)(9)(B)(ii) or the life expectancy rule
described in § 401(a)(9)(B)(iii). See Q&A-4 of §
1.401(a)(9)-3 to determine which rule applies to a particular
designated beneficiary. Under either rule, no amount is a required
minimum distribution for the year in which the employee dies. The rule
in Q&A-7(b) of § 1.402(c)2 (relating to distributions before
an employee has attained age 701/2) does not apply to nonspouse
beneficiaries.
(b) Five-year rule. Under the 5-year rule described in
§ 401(a)(9)(B)(ii), no amount is required to be distributed until
the fifth calendar year following the year of the employee's death. In
that year, the entire amount to which the beneficiary is entitled
under the plan must be distributed. Thus, if the 5-year rule applies
with respect to a nonspouse beneficiary who is a designated
beneficiary within the meaning of § 401(a)(9)(E), for the first 4
years after the year the employee dies, no amount payable to the
beneficiary is ineligible for direct rollover as a required minimum
distribution. Accordingly, the beneficiary is permitted to directly
roll over the beneficiary's entire benefit until the end of the fourth
year (but, as described in Q&A-19 of this notice, the 5-year rule
must also apply to the IRA to which the rollover contribution is
made). On or after January 1 of the fifth year following the year in
which the employee died, no amount payable to the beneficiary is
eligible for rollover.
(c) Life expectancy rule. (1) General rule. If the
life expectancy rule described in § 401(a)(9)(B)(iii) applies, in
the year following the year of death and each subsequent year, there
is a required minimum distribution. See Q&A-5(c)(1) of §
1.401(a)(9)-5 to determine the applicable distribution period for the
nonspouse beneficiary. The amount not eligible for rollover includes
all undistributed required minimum distributions for the year in which
the direct rollover occurs and any prior year (even if the excise tax
under § 4974 has been paid with respect to the failure in the
prior years). See the last sentence of § 1.402(c)-2,
Q&A-7(a).
(2) Special rule.If, under paragraph (b) or (c) of Q&A-4
of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse
designated beneficiary may determine the required minimum distribution
under the plan using the life expectancy rule in the case of a
distribution made prior to the end of the year following the year of
death. However, in order to use this rule, the required minimum
distributions under the IRA to which the direct rollover is made must
be determined under the life expectancy rule using the same designated
beneficiary.
Q-18. How is the required minimum distribution with respect to a
nonspouse beneficiary determined if the employee dies on or after his
or her required beginning date?
A-18. If an employee dies on or after his or her required beginning
date, within the meaning of § 401(a)(9)(C), for the year of the
employee's death, the required minimum distribution not eligible for
rollover is the same as the amount that would have applied if the
employee were still alive and elected the direct rollover. For the
year after the year of the employee's death and subsequent years, see
Q&A-5 of § 1.401(a)(9)-5 to determine the applicable
distribution period to use in calculating the required minimum
distribution. As in the case of death before the employee's required
beginning date, the amount not eligible for rollover includes all
undistributed required minimum distributions for the year in which the
direct rollover occurs and any prior year, including years before the
employee's death.
Q-19. After a direct rollover by a nonspouse designated
beneficiary, how is the required minimum distribution determined with
respect to the IRA to which the rollover contribution is
made?
A-19. Under § 402(c)(11), an IRA established to receive a
direct rollover on behalf of a nonspouse designated beneficiary is
treated as an inherited IRA within the meaning of § 408(d)(3)(C).
The required minimum distribution requirements set forth in §
401(a)(9)(B) and the regulations thereunder apply to the inherited
IRA. The rules for determining the required minimum distributions
under the plan with respect to the nonspouse beneficiary also apply
under the IRA. Thus, if the employee dies before his or her required
beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied
to the nonspouse designated beneficiary under the plan making the
direct rollover, the 5-year rule applies for purposes of determining
required minimum distributions under the IRA. If the life expectancy
rule applied to the nonspouse designated beneficiary under the plan,
the required minimum distribution under the IRA must be determined
using the same applicable distribution period as would have been used
under the plan if the direct rollover had not occurred. Similarly, if
the employee dies on or after his or her required beginning date, the
required minimum distribution under the IRA for any year after the
year of death must be determined using the same applicable
distribution period as would have been used under the plan if the
direct rollover had not occurred.
VI. SECTION 845 OF PPA ’06
Code § 402(l), which was added by § 845(a) of PPA
’06, provides for an exclusion from gross income for
distributions from certain retirement plans (referred to in this
notice as “Eligible Government Plans”) used to pay
qualified health insurance premiums of an eligible retired public
safety officer. The exclusion applies with respect to an eligible
retired public safety officer who elects to have qualified health
insurance premiums deducted from amounts distributed from an Eligible
Government Plan and paid directly to the insurer. Qualified health
insurance premiums include premiums for accident and health insurance
or qualified long-term care insurance contracts for the eligible
retired public safety officer and his or her spouse and dependents.
The distribution is excluded from gross income to the extent that the
aggregate amount of the distributions does not exceed the amount used
to pay the qualified health insurance premiums of the eligible retired
public safety officer and his or her spouse and dependents. An
“Eligible Government Plan” is a governmental plan
described in § 414(d) that is either: a § 401(a), §
403(a), or § 403(b) plan; or an eligible governmental plan under
§ 457(b). Section 402(l) applies to distributions in taxable
years beginning after December 31,
2006.
Q-20. Who is an eligible retired public safety officer for purposes
of the exclusion under § 402(l)?
A-20. An employee is an eligible retired public safety officer for
purposes of the exclusion under § 402(l) only if the employee is
an individual who separated from service, either by reason of
disability or after attainment of normal retirement age, as a public
safety officer with the employer who maintains the Eligible Government
Plan from which the distributions to pay qualified health insurance
premiums are made. Thus, a public safety officer who retires before
attainment of normal retirement age is not an eligible retired public
safety officer unless the public safety officer retires by reason of
disability. The terms of the Eligible Government Plan from which the
participant will be receiving the distributions apply in determining
whether a public safety officer has separated from service by reason
of disability or after attainment of normal retirement
age.
Q-21. Who is a public safety
officer?
A-21. For purposes of § 402(l), the term “public safety
officer” means an individual serving a public agency in an
official capacity, with or without compensation, as a law enforcement
officer, a firefighter, a chaplain, or as a member of a rescue squad
or ambulance crew. See § 1204(9)(A) of the Omnibus Crime Control
and Safe Streets Act of 1968 (42 U.S.C.
3796b(9)(A)).
Q-22. Under what circumstances are the provisions of § 402(l)
available for eligible retired public safety
officers?
A-22. The favorable tax treatment under § 402(l) is available
only when an eligible retired public safety officer elects to have an
amount subtracted from his or her distributions from an Eligible
Government Plan and such amount is used to pay qualified health
insurance premiums. The employer sponsoring the Eligible Government
Plan is not required to offer such an
election.
Q-23. Can the accident or health plan receiving the payments of
qualified health insurance premiums be a self-insured
plan?
A-23. No. The accident or health plan must be an accident or health
insurance plan. Thus, the plan must be providing insurance issued by
an insurance company regulated by a State (including a managed care
organization that is treated as issuing
insurance).
Q-24. Will an eligible retired public safety officer be entitled to
favorable tax treatment under § 402(l) with respect to benefits
attributable to service other than as a public safety
officer?
A-24. Yes. Benefits attributable to service other than as a public
safety officer are eligible for favorable tax treatment under §
402(l), as long as the individual separates from service as a public
safety officer, by reason of disability or after attainment of normal
retirement age, with the employer maintaining the Eligible Government
Plan.
Q-25. If an eligible retired public safety officer dies, are
amounts subtracted from distributions made to the decedent's surviving
spouse or dependents eligible for favorable tax treatment under §
402(l)?
A-25. No. Section 402(l) provides that the distribution is not
includible in the gross income of an employee who is an eligible
retired public safety officer. Thus, the exclusion would not extend to
amounts subtracted from distributions to other
distributees.
Q-26. Is an eligible retired public safety officer limited in the
amount that the officer can exclude from gross income for
distributions from an Eligible Government Plan used to pay qualified
health insurance premiums?
A-26. Yes. The aggregate amount that is permitted to be excluded,
with respect to any taxable year, from an eligible retired public
safety officer's gross income by reason of § 402(l) is limited to
$3,000. For purposes of applying this $3,000 limitation, distributions
with respect to the eligible retired public safety officer that are
used to pay for qualified health insurance premiums from all Eligible
Government Plans are aggregated.
Q-27. Are amounts used to pay qualified health insurance premiums
that are excluded from gross income under § 402(l) taken into
account for purposes of determining the itemized deduction for medical
care expenses under § 213?
A-27. No. Amounts used to pay qualified health insurance premiums
that are excluded from gross income under § 402(l) are not taken
into account in determining the itemized deduction for medical care
expenses under § 213.
VII. SECTION 904 OF PPA
’06
Prior to the effective date of PPA '06 § 904, a defined
contribution plan satisfied the minimum vesting requirements of Code
§ 411(a) with respect to employer nonelective contributions if it
maintained a 5-year vesting schedule or a 3 to 7 year vesting
schedule. Section 904 of PPA '06 amended the minimum vesting
requirements to require faster vesting of employer nonelective
contributions to a defined contribution plan. Under Code §
411(a)(2)(B) as amended by § 904 of PPA '06, a defined
contribution plan satisfies the minimum vesting requirements with
respect to employer nonelective contributions if it has a 3-year
vesting schedule or a 2 to 6 year vesting schedule. Code §
411(a)(2)(B) as amended by § 904 of PPA '06 generally applies to
contributions for plan years beginning after December 31,
2006.
Q-28. If a plan amendment changes the plan's vesting schedule to
satisfy Code § 411(a)(2)(B) as amended by § 904 of PPA '06,
is the plan amendment required to satisfy §
411(a)(10).?
A-28. Yes. A plan amendment that changes the vesting schedule must
satisfy Code § 411(a)(10). Although § 411(a)(10)(B) would
require a participant with at least 3 years of service to elect to
have the nonforfeitable percentage of his accrued benefit determined
without regard to the amendment, the plan must ensure that any such
election satisfies the vesting requirements of § 411(a)(2)(B), as
amended by § 904 of PPA '06. Thus, such a participant must be
provided, at all times, a vesting percentage that is no less than the
minimum under a vesting schedule that satisfies § 904 and the
vesting percentage determined under the plan without regard to the
amendment. Under Temporary Regulation § 1.411(a)-8T, no election
need be provided for any participant whose nonforfeitable percentage
under the plan, as amended, at any time cannot be less than such
percentage determined without regard to such
amendment.
Q-29. Can a plan have separate vesting schedules for employer
nonelective contributions that are and are not subject to Code §
411(a)(2)(B), as amended by § 904 of PPA
'06?
A-29. Yes. A plan can have a vesting schedule for employer
nonelective contributions for plan years beginning after December 31,
2006, and another vesting schedule for other employer nonelective
contributions under the plan, provided that the plan separately
accounts for the contributions made under the vesting schedule in
effect prior to the first day of the first plan year beginning after
December 31, 2006, and the vesting schedule for employer nonelective
contributions for plan years beginning after December 31, 2006,
satisfies Code § 411(a)(2)(B), as amended by § 904 of PPA
'06.
Q-30. If a plan maintains a bifurcated vesting schedule, how is it
determined whether a contribution is for a plan year beginning before
January 1, 2007?
A-30. A contribution is for a plan year that begins before January
1, 2007, if it is allocated under the terms of the plan as of a date
in that plan year and is not subject to any conditions that have not
been satisfied by the end of that plan year. This applies even if the
contribution is not made until the next plan year. Thus, for example,
if a plan with a calendar-year plan year makes a contribution as of
December 31, 2006, based on compensation and service in 2006, and the
contribution is not contingent on the occurrence of an event after
2006, then the contribution is treated as made for the 2006 plan year
and is not subject to Code § 411(a)(2)(B), as amended by §
904 of PPA '06, even if it is not contributed until 2007. Forfeitures
and ESOP allocations from a suspense account are treated in the same
manner for this purpose.
VIII. SECTION 1102 OF PPA
’06
Section 1102 of PPA '06 makes certain changes to the notice
requirements related to distributions. Section 1102(a) provides that a
notice required to be provided under § 402(f), § 411(a)(11),
or § 417 may be provided to a participant as much as 180 days
before the annuity starting date. Section 1102(b) directs the
Secretary to modify the regulations under § 411(a)(11) of the
Code and §205 of ERISA to provide that the description of a
participant's right to defer a distribution must also include a
description of the consequences of failing to defer receipt of a
distribution. The modifications made by § 1102 apply to years
beginning after December 31, 2006. However, § 1102(b)(2)(B)
provides that a plan will not be treated as failing to meet the new
requirements under § 1102(b) if the plan administrator makes a
reasonable attempt to comply with the new requirements under that
section during the period that is within 90 days of the issuance of
regulations required by §
1102(b).
Q-31. How does the effective date of § 1102
operate?
A-31. The provisions of § 1102 apply to plan years that begin
after December 31, 2006. This means that the new rules relating to the
content of the notices apply only to notices issued in those plan
years, without regard to the annuity starting date for the
distributions. Similarly, the 180-day period for distributing notices
applies to notices distributed in a plan year that begins after
December 31, 2006. This change to the 180-day period also modifies the
definition of the maximum QJSA explanation period under §
1.411(d)-3(g), which is used in applying the timing rules for the
effective date of a plan amendment under the rules of §
1.411(d)-3(c) and (f) in the case of an amendment that is adopted in a
plan year that begins after December 31,
2006.
Q-32. Is a plan required to revise the notice under § 411
pursuant to the modifications made by § 1102(b) before the
regulations are amended to reflect the
requirement?
A-32. Yes. A plan administrator is required to revise the notice
under § 411 to reflect the modifications to the requirements made
by § 1102(b) for notices provided in plan years beginning after
December 31, 2006. However, pursuant to § 1102(b)(2)(B) of PPA
’06, a plan will not be treated as failing to meet the new
requirements under § 1102(b) if the plan administrator makes a
reasonable attempt to comply with the new requirements under that
section in the case of a notice that is provided prior to the 90th day
after the issuance of regulations reflecting the modifications
required by § 1102(b).
Q-33. Is there a safe harbor available to a plan administrator that
would be considered a reasonable attempt to comply with the
requirement in § 1102(b)(1) that a description of a participant's
right to defer receipt of a distribution include a description of the
consequences of failing to defer?
A-33. Yes. A description that is written in a manner reasonably
calculated to be understood by the average participant and that
includes the following information is a reasonable attempt to comply
with the requirements of § 1102(b)(2)(B): (a) in the case of a
defined benefit plan, a description of how much larger benefits will
be if the commencement of distributions is deferred; (b) in the case
of a defined contribution plan, a description indicating the
investment options available under the plan (including fees) that will
be available if distributions are deferred; and (c) the portion of the
summary plan description that contains any special rules that might
materially affect a participant's decision to defer. For purposes of
clause (a), a plan administrator can use a description that includes
the financial effect of deferring distributions, as described in
§ 1.417(a)(3)-1(d)(2)(i), based solely on the normal form of
benefit.
IX. SECTION 1201 OF PPA
’06
Section 1201(a) of PPA '06 adds § 408(d)(8) to the Code, which
is applicable to distributions made in taxable years 2006 and 2007.
Under § 408(d)(8), generally, if a distribution from an IRA owned
by an individual after the individual has attained age 701/2 is made
directly by the trustee to certain organizations described in §
170(b)(1)(A), the distribution is excluded from gross income. The
exclusion is only available to the extent that the distribution would
otherwise have been includible in gross income, and §
408(d)(8)(D) provides a special rule for determining the amount that
would otherwise be includible in gross income. In addition, the
exclusion applies only if the contribution would otherwise qualify for
a charitable contribution deduction under § 170 (without regard
to the percentage limitations of § 170(b)). A distribution that
is eligible for this exclusion is called a qualified charitable
distribution.
Q-34. Is there an overall limit on the amount that may be excluded
from gross income for qualified charitable distributions that are made
in a year?
A-34. Yes. The income exclusion for qualified charitable
distributions only applies to the extent that the aggregate amount of
qualified charitable distributions made during any taxable year with
respect to an IRA owner does not exceed $100,000. Thus, if an IRA
owner maintains multiple IRAs in a taxable year, and qualified
charitable distributions are made from more than one of these IRAs,
the maximum total amount that may be excluded for that year by the IRA
owner is $100,000. For married individuals filing a joint return, the
limit is $100,000 per individual IRA
owner.
Q-35. Is the exclusion for qualified charitable distributions
available for a distribution made to any organization eligible to
receive charitable contributions that are deductible by the donor for
income tax purposes?
A-35. No. Qualified charitable distributions may be made to an
organization described in § 170(b)(1)(A), other than supporting
organizations described in § 509(a)(3) or donor advised funds
that are described in §
4966(d)(2).
Q-36. Is the exclusion for qualified charitable distributions
available for distributions from any type of
IRA?
A-36. Generally, the exclusion for qualified charitable
distributions is available for distributions from any type of IRA
(including a Roth IRA described in § 408A and a deemed IRA
described in § 408(q)) that is neither an ongoing SEP IRA
described in § 408(k) nor an ongoing SIMPLE IRA described in
§ 408(p). For this purpose, a SEP IRA or a SIMPLE IRA is treated
as ongoing if it is maintained under an employer arrangement under
which an employer contribution is made for the plan year ending with
or within the IRA owner's taxable year in which the charitable
contributions would be made.
Q-37. Is the exclusion for qualified charitable distributions
available for distributions from an IRA maintained for a beneficiary
if the beneficiary has attained age 701/2 before the distribution is
made?
A-37. Yes. The exclusion from gross income for qualified charitable
distributions is available for distributions from an IRA maintained
for the benefit of a beneficiary after the death of the IRA owner if
the beneficiary has attained age 701/2 before the distribution is
made.
Q-38. If a 2006 distribution satisfies all the requirements under
§ 408(d)(8), but it was made before August 17, 2006 (the date PPA
’06 was enacted), is the amount distributed excludable as a
qualified charitable distribution?
A-38. Yes. Section 408(d)(8) is applicable to distributions made at
any time in 2006. Thus, a distribution made in 2006 that satisfies the
requirements under § 408(d)(8) is a qualified charitable
distribution even if it was made before August 17,
2006.
Q-39. Is the amount of a qualified charitable distribution
deductible as a charitable contribution under §
170?
A-39. No. For purposes of determining the amount of charitable
contributions that may be deducted under § 170, qualified
charitable distributions which are excluded from income under §
408(d)(8) are not taken into account. However, qualified charitable
distributions must still satisfy the requirements to be deductible
charitable contributions under § 170 (other than the percentage
limits of § 170(b)), including the substantiation requirements
under § 170(f)(8).
Q-40. Is a qualified charitable distribution subject to withholding
under § 3405?
A-40. No. A qualified charitable distribution is not subject to
withholding under § 3405 because an IRA owner that requests such
a distribution is deemed to have elected out of withholding under
§ 3405(a)(2). For purposes of determining whether a distribution
requested by an IRA satisfies the requirements under § 408(d)(8),
the IRA trustee, custodian, or issuer may rely upon reasonable
representations made by the IRA
owner.
Q-41. Is a check from an IRA made payable to a charitable
organization described in § 408(d)(8) and delivered by the IRA
owner to the charitable organization a direct payment to such
organization?
A-41. Yes. If a check from an IRA is made payable to a charitable
organization described in § 408(d)(8) and delivered by the IRA
owner to the charitable organization, the payment to the charitable
organization will be considered a direct payment by the IRA trustee to
the charitable organization for purposes of §
408(d)(8)(B)(i).
Q-42. Will a qualified charitable distribution be taken into
account in determining whether the required minimum distribution
requirements of §§ 408(a)(6), 408(b)(3), and 408A(c)(5) have
been satisfied?
A-42. Yes. The amount distributed in a qualified charitable
distribution is an amount distributed from the IRA for purposes of
§§ 408(a)(6), 408(b)(3), and
408A(c)(5).
Q-43. What are the tax consequences of a direct payment of an
amount from an IRA to a charity where the transaction is intended to
satisfy the requirements of § 408(d)(8) but fails to do
so?
A-43. If an amount intended to be a qualified charitable
distribution is paid to a charitable organization but fails to satisfy
the requirements of § 408(d)(8), the amount paid is treated as
(1) a distribution from the IRA to the IRA owner that is includible in
gross income under the rules of § 408 or § 408A, as
applicable; and (2) a contribution from the IRA owner to the
charitable organization that is subject to the rules under § 170
(including the percentage limits of §
170(b)).
Q-44. Will a distribution made directly by the trustee to a §
170(b)(1)(A) organization (as permitted by § 408(d)(8)(B)(i)) be
treated as a receipt by the IRA owner under §
4975(d)(9)?
A-44. Yes. The Department of Labor, which has interpretive
jurisdiction with respect to § 4975(d), has advised Treasury and
the IRS that a distribution made by an IRA trustee directly to a
§ 170(b)(1)(A) organization (as permitted by §
408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under
§ 4975(d)(9), and thus would not constitute a prohibited
transaction. This would be true even if the individual for whose
benefit the IRA is maintained had an outstanding pledge to the
receiving charitable organization.
DRAFTING INFORMATION
The principal author of this notice is Angelique V. Carrington 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 (877) 829-5500 (a
toll-free number) between the hours of 8:30 am and 4:30 pm Eastern
Time, Monday through Friday. Ms. Carrington may be reached at (202)
283-9888 (not a toll-free number).