IRS RELAXES 30-DAY NOTICE PERIOD FOR ROLLOVER DISTRIBUTIONS.

Notice 93-26

I. PURPOSE

This notice provides additional guidance concerning the time period for providing the written explanation required under section 402(f) of the Internal Revenue Code (Code), as amended by the Unemployment Compensation Amendments of 1992 (UCA), and the time period for satisfying the consent requirements of section 411(a)(11) of the Code. The notice permits a participant to waive the 30-day time period for consenting to a distribution under section 411(a)(11) of the Code and providing the written explanation required under section 402(f), as amended by the UCA. The notice also provides that amounts paid under an annuity contract purchased for and distributed to a participant by a qualified plan may be eligible rollover distributions under section 402(c), as amended by the UCA.

II. THE 90/30-DAY TIME PERIOD

A. Background

1. Changes made to the Code by the UCA

The UCA significantly expanded the types of distributions from qualified plans and section 403(b) annuities that are eligible rollover distributions. The UCA also added section 401(a)(31) to the Code, which requires plans to permit a participant to elect to have any eligible rollover distribution paid directly to an eligible retirement plan in a direct rollover. In addition, the UCA amended section 3405 of the Code to impose mandatory 20-percent income tax withholding on any designated distribution that is an eligible rollover distribution and that is not paid in a direct rollover.

The UCA also amended section 402(f) to require that the plan administrator provide a written explanation of the direct rollover provisions and other special tax rules (section 402(f) notice). Section 402(f), as amended, specifies that the plan administrator must provide the section 402(f) notice to a participant within a reasonable time period prior to an eligible rollover distribution.

2. Temporary and proposed regulations

Temporary and proposed regulations implementing the UCA changes were published in the Federal Register on October 22, 1992 (57 FR 48163, 48194). Those regulations include specific guidance on the reasonable time period requirement under section 402(f). The temporary and proposed regulations provide that the reasonable time period requirement of section 402(f) is the same time period required for obtaining consent to a distribution under section 411(a)(11). Under section 1.411(a)-11(c) of the Income Tax Regulations, a participant's consent to a distribution is not valid unless the participant receives a notice of his or her rights under the plan, including the right to defer the distribution by withholding consent, no more than 90 days and no less than 30 days prior to the annuity starting date. Thus, for example, where a plan permits distribution upon termination of employment and, after terminating employment and receiving a notice of his or her rights under the plan, a participant affirmatively elects to receive a distribution, the election does not become a valid consent under section 411(a)(11) until 30 days have elapsed after the notice was provided to the participant. Thus, the plan will violate section 411(a)(11) if the distribution is made before the 30-day time period has elapsed.

Under Q&A-12 of section 1.402(c)-2T of the temporary regulations, the reasonable time period requirement of section 402(f) is satisfied only if the section 402(f) notice is provided within this same 90/30-day time period. Thus, if an election to make or not make a direct rollover is implemented less than 30 days after the section 402(f) notice was provided, the reasonable time period requirement of section 402(f) is not satisfied.

For distributions to which the section 411(a)(11) consent rules do not apply (e.g., cashouts of vested benefits that do not exceed $3,500, distributions at or after normal retirement age, or distributions from governmental plans), a participant may waive the 30-day requirement for purposes of section 402(f) and, thus, need not wait 30 days after receipt of the section 402(f) notice for the distribution to be made. Under the temporary regulations, the participant is treated as having made such a waiver if, after receipt of the section 402(f) notice but before the 30-day period elapses, he or she affirmatively elects to make or not make a direct rollover. See Q6A-13 of section 1.402(c)-2T.

Although section 402(f) does not apply to distributions from section 403(b) annuities, the temporary regulations require the payor of a section 403(b) annuity to provide an explanation of the direct rollover provisions. The regulations require that this explanation be provided within a reasonable time before making an eligible rollover distribution but do not require that it be provided strictly within the 90/30-day period.

3. Comments received on the regulations

The preamble to the temporary regulations explains that the 90/30-day time period was adopted for the section 402(f) notice because the Service and Treasury believe that it is appropriate for the section 402(f) notice to be provided within the same time period in which plan administrators are required to provide other distribution information in order to satisfy section 411(a)(11). Recognizing, however, that this approach gives greater significance to the 90/30-day time period, the Service and Treasury requested comments on the appropriateness of this time period for section 411(a)(11) as well as section 402(f).

The vast majority of commentators requested that some modification be made to relax the 90/30-day rule. Some commentators suggested that the 90/30-day time period be eliminated altogether. These commentators noted that participants need to be informed of their options under the plan, including the tax consequences of taking a distribution of their retirement savings, but questioned whether it was necessary to require that the notice be contemporaneous with the distribution. For example, in lieu of the 90/30-day rule, some commentators suggested that an annual notice to all participants be treated as sufficient or that participants receiving a distribution be permitted to waive the 30-day period. However, one commentator suggested that, in order to discourage consumption of retirement savings, the 30-day period should be retained where participants do not elect a direct rollover.

B. Modifications to the 90/30-day notice requirement

In light of the comments received, the Service and Treasury have reexamined the 90/30-day rule and have determined that it should be modified for purposes of sections 402(f) and 411(a)(11) to allow a participant to waive the 30-day period in the manner discussed below. No change is being made with regard to the 90-day period. As modified, the 90/30-day rule will continue to ensure that participants receive timely notice of their options and the related tax consequences of taking a distribution before they make their election. However, the plan administrator will not be required to enforce a waiting period for a participant who has had the opportunity to make an informed decision. The Service and Treasury believe that this modification appropriately takes into account the information needs of the participant without overburdening plan administrators. In addition, the Service and Treasury believe that it is unnecessary to retain the 30-day period as a means of discouraging preretirement withdrawals of retirement savings. This goal is adequately achieved by the expansion of participants' opportunities to roll over distributions combined with the tax disincentives for early withdrawal.

1. Section 402(f)

Pursuant to this notice, if a participant, after having received the section 402(f) notice, affirmatively elects to make or not make a direct rollover, the reasonable time period requirement of section 402(f) will not be violated merely because the election is implemented less than 30 days after the section 402(f) notice was given, provided that two requirements are met. First, the participant must be given the opportunity to consider the decision of whether or not to elect a direct rollover for at least 30 days after the notice is provided. Second, the plan administrator must provide information to the participant clearly indicating that the participant has a right to this period for making the decision. The plan administrator may use any method to inform the participant of the relevant time period, provided that the method is reasonably designed to attract the attention of the participant. For example, this information could be either provided in the section 402(f) notice or stated in a separate document (e.g., attached to the election form) that is provided at the same time as the notice. This section II.B.1 applies to any distribution from a qualified plan, including one subject to section 411(a)(11).

The rule with respect to section 403(b) annuities is not being changed. Payors of section 403(b) annuities continue to be required to provide notice of the direct rollover option to participants within a reasonable time period prior to making a distribution but without regard to the 90/30-day rule that applies to distributions from qualified plans under section 401(a). However, a payor of a section 403(b) annuity will be deemed to have provided notice within a reasonable time period if the payor complies with the 90/30-day rule, including the modifications provided in this notice.

2. Section 411(a)(11)

Pursuant to this notice, the guidance provided above with respect to the reasonable time period requirement for providing the section 402(f) notice also applies to the time period for providing the notice of distribution rights required under section 1.411(a)- 11(c). Thus, if a participant, after having received the notice of distribution rights, affirmatively elects a distribution, the plan will not fail to satisfy the consent requirement of section 411(a)(11) merely because the distribution is made less than 30 days after the notice was provided to the participant. However, the participant must be given the opportunity to consider the decision of whether or not to elect a distribution (and if applicable, a particular distribution option) for at least 30 days after the notice is provided. In addition, the plan administrator must provide information to the participant clearly indicating that the participant has a right to this period for making the decision and using a method that is reasonably designed to attract the attention of the participant.

The other requirements of section 1.411(a)-11(c) are not being changed. Thus, for example, a distribution election does not constitute valid consent under section 411(a)(11) unless the notice of distribution rights informs the participant of his or her right to decide to delay a distribution by withholding consent (e.g., deferring distribution until normal retirement age). In addition, this notice does not affect the requirements imposed by sections 401(a)(11) and 417 and the regulations thereunder on distributions to which those sections apply.

C. Annuity Starting date

Because the 90-day and 30-day time periods for providing the notices required to satisfy sections 411(a)(11) and 402(f) are tied to the annuity starting date, commentators have requested additional guidance on how to determine the annuity starting date for nonperiodic distributions. The regulations under section 401(a)(11) provide that, for purposes of sections 401(a)(11), 411(a)(11), and 417, the annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. See Q&A- 10 of section 1.401(a)-20. Because nonperiodic distributions are not generally laid for a specified period, commentators have requested clarification as to what date is the annuity starting date for those distributions.

This notice clarifies that, for purposes of satisfying section 411(a)(11) and section 402(f), the plan administrator is permitted to treat the date of the distribution as the annuity starting date in the case of distributions that are not in the form of an annuity within the meaning of section 72 and that are also not subject to the requirements of section 401(a)(11).

III. DISTRIBUTED ANNUITY CONTRACTS

A. Background

Under section 402(c), as amended by the UCA, all distributions of the balance to the credit of an employee are eligible rollover distributions, except certain periodic payments, amounts required to satisfy section 401(a)(9), and amounts not includible in gross income (determined without regard to the exclusion for net unrealized appreciation). In addition, as described above, the UCA added section 401(a)(31) to the Code, which requires qualified plans to permit a participant to elect to have any eligible rollover distribution paid in a direct rollover and amended section 3405 of the Code to impose mandatory 20-percent income tax withholding on eligible rollover distributions not paid in a direct rollover.

Because the class of distributions that constitute eligible rollover distributions has been significantly expanded, commentators have requested clarification concerning whether amounts paid under an annuity contract purchased for a participant and distributed to the participant under a qualified plan can qualify as eligible rollover distributions. Commentators have expressed concern that the language in Rev. Rul. 81-107, 1981-1 C.B. 201, and Rev. Rul. 65-268, 1965-2 C.B. 143, for example, could be read to indicate that, for purposes of section 402(c), the distribution of the annuity contract itself is a distribution of the balance to the participant's credit and that amounts subsequently paid under the contract are not payments of the balance to the participant's credit and, thus, cannot be eligible rollover distributions.

B. Clarification that amounts paid under a distributed annuity contract can be eligible rollover distributions

Pursuant to this notice, if an annuity contract is purchased for a participant and distributed to the participant by a qualified plan, amounts paid under the annuity contract are nevertheless payments of the balance to the participant's credit in the qualified plan for purposes of section 402(c) and are eligible rollover distributions if they otherwise qualify as such. Thus, for example, if the participant surrenders the contract for a single sum payment of its cash surrender value, the payment would be an eligible rollover distribution to the extent it is includible in gross income and not a required distribution under section 401(a)(9). This rule applies even if the annuity contract is distributed in connection with a qualified plan termination.

In addition, if an amount is paid under an annuity contract purchased for, and distributed to, a participant by a qualified plan and the amount is an eligible rollover distribution, the requirements of sections 401(a)(31), 402(f), and 3405 must be satisfied with respect to the distribution. For purposes of satisfying these requirements, the payor under the contract is treated as the plan administrator. Thus, the payor under the contract must provide a written explanation to the participant that satisfies section 402(f), ensure that distributees of eligible rollover distributions are provided a direct rollover option as required under section 401(a)(31), and withhold amounts required under section 3405(c).

However, because the temporary and proposed regulations did not specifically address the application of the UCA changes to distributed annuity contracts, it would not have been unreasonable for payors to interpret prior guidance as indicating that payments under distributed annuity contracts could not be eligible rollover distributions. Accordingly, the effective date in section IV, below, delays the application of the guidance in this notice in order to give payors adequate time to comply. However, even if a direct rollover option is not provided for, and 20 percent is not withheld from, an amount paid under an annuity contract before January 1, 1994 that is an eligible rollover distribution under section 402(c) pursuant to this notice, the recipient can roll the amount over to an eligible retirement plan within the 60-day time period described in section 402(c)(3).

IV. EFFECTIVE DATE

The guidance in this notice is effective for distributions made on or after January 1, 1994. However, taxpayers, plan administrators, and payors may rely on this guidance for purposes of satisfying the requirements of sections 401(a)(31), 402(c), 402(f), 403(b)(8) and (10), 411(a)(11) and 3405 as though it were provided in the temporary and proposed regulations implementing the UCA changes and in the final regulations under section 411(a)(11).

V. RELIANCE ON THIS GUIDANCE

This document serves as an administrative pronouncement as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling, a revenue procedure, or a temporary regulation.

VI. COMMENTS

The Service and Treasury invite comments on the guidance in this notice. Comments will be considered in the development of final regulations under sections 401(a)(31), 402, 403(b), and 3405. Comments should be submitted in writing and addressed to --

     Internal Revenue Service

VII. DRAFTING INFORMATION

The principal author of this notice is Marjorie Hoffman of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information, contact Ms. Hoffman at 202- 622-4606 (not a toll-free number).