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EP Examination Process Guide - Section 9 - Participant Rights - Participant Events - Distributions

If a participant is to receive a distribution, the plan must provide the participant with a notice explaining the rollover rules. If the distribution is an eligible rollover distribution, the participant must receive an IRC section 402(f) notice.


What is a rollover distribution?

A rollover distribution occurs when a terminated participant takes a distribution from the plan or an active participant takes an in-service distribution that is eligible to be rolled over and moves it to another qualified plan or individual retirement arrangement. Consequently, the distribution is not taxed until it is distributed from the new qualified plan or individual retirement arrangement.

What should a rollover notice contain?

The notice, commonly known as an §402(f) Notice, generally explains the rollover rules, including the automatic 20% withholding. Notice 2009-68 contains two sample explanations that satisfy the requirements of the notice employers must provide to employees leaving with retirement assets. The sample explanations state, in plain language, an employee’s options when receiving an eligible rollover distribution. 
The sample explanations include information on distributions from a designated Roth account under an employer plan and explain rules that apply in special situations, such as when a distribution is made to a surviving spouse or other beneficiary.

Timing:

The notice must be provided to plan participants within a reasonable period of time. The notice should be provided no less than 30 days and no more than 90 days before the distribution is to be made. The participant may waive the 30-day period.

Who is responsible for sending it:

The administrator of the plan.


Distributions before attaining age 59 ½

If a participant takes a plan distribution before attaining age 59 ½, the participant may be subject to an IRC section 72(t) additional tax of 10% of the amount of the distribution. This is in addition to income tax on the taxable portion of the distribution. The plan administrator will automatically withhold 20% on the taxable portion of the distribution. The 10% additional tax can be avoided by making a rollover contribution into an IRA or another tax qualified plan within 60 days of the distribution. If a direct rollover is made into an IRA or another tax qualified plan within 60 days of the distribution, income taxes are postponed until distributions are received from the subsequent plan.

Distributions after attaining age 59 ½

If a participant takes a distribution after attaining age 59 ½, there is no additional tax, however, the plan administrator will automatically withhold 20% on the taxable portion of the distribution. If a direct rollover into an IRA or another tax qualified plan is made within 60 days of the distribution, taxes are once again deferred.

If a participant is to receive a distribution, the plan must provide the participant with a notice explaining the rollover rules. If the distribution is an eligible rollover distribution, the participant must receive an IRC section 402(f) notice.

Page Last Reviewed or Updated: 28-Mar-2014