Direct Rollover and 20-Percent Withholding Regs Released

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains Temporary Income Tax Regulations relating to eligible rollover distributions from tax-qualified retirement plans and section 403(b) annuities. These temporary regulations reflect the changes made by the Unemployment Compensation Amendments of 1992. These temporary regulations affect the administrators, sponsors, payors of, and participants in, tax- qualified retirement plans and section 403(b) annuities. The text of the temporary regulations set forth in this document also serves as the text of the notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: These temporary regulations are effective on January 1, 1993.

 FOR FURTHER INFORMATION CONTACT: John Tolleris, (202) 622-4606 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information requirement contained in these temporary regulations has been reviewed, and pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under control number 1545-l341. The estimated annual burden per plan administrator/payor/recordkeeper varies from .05 hour to 330 hours depending upon individual employers' circumstances, with an estimated annual average of .50 hour.

 These estimates are an approximation of the average time expected to be necessary to collect required information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on their particular circumstances.

 For further information concerning this collection of information, and where to submit comments on this collection of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross- reference notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

STATUTORY AUTHORITY

 This document contains temporary regulations under sections 401(a)(31), 402(c), 402(f), 403(b), and 3405(c) of the Internal Revenue Code of 1986 (Code). The temporary regulations reflect the enactment of sections 521 and 522 of the Unemployment Compensation Amendments of 1992 (UCA), Public Law No. 102-318, 106 Stat 290.

NEED FOR TEMPORARY REGULATIONS

 The provisions contained in this Treasury Decision are needed immediately to provide guidance to the public concerning the direct rollover and 20-percent income tax withholding provisions of UCA because these provisions apply to eligible rollover distributions made after December 31, 1992. Therefore, it is found impracticable and contrary to the public interest to issue this Treasury decision with prior notice under section 553(b) of title 5 of the United States Code.

EXPLANATION OF PROVISIONS

BACKGROUND

The Unemployment Compensation Amendments of 1992 (UCA), which was signed into law on July 3, 1992, significantly changed the treatment of distributions from qualified plans and section 403(b) annuities. First, UCA amended section 402 to expand the types of distributions with regard to which income tax can be deferred by a rollover to an individual retirement account or annuity (IRA), another qualified plan, or a section 403(b) annuity. Under prior law, a distribution could be rolled over only if it was a "qualified total distribution" or a partial distribution equal to at least 50 percent of the balance to the credit of the employee. Under UCA, all taxable distributions from qualified plans and section 403(b) annuities are "eligible rollover distributions," except (1) annuities paid over life or life expectancy, (2) installments for a period spanning ten years or more, and (3) required minimum distributions under section 401(a)(9).

 Second, UCA added a new plan qualification provision under section 401(a)(31) that requires qualified plans to provide employees with a direct rollover option. Similarly, section 403(b)(10), as amended by UCA, requires that section 403(b) annuities also provide a direct rollover option. Under a direct rollover option, a employee may elect to have an eligible rollover distribution paid directly to an IRA, or, as applicable, to another qualified plan or a section 403(b) annuity that accepts rollovers (collectively referred to as eligible retirement plans). The direct rollover option is provided in addition to the regular rollover provisions under section 402. Thus, an employee who does not elect a direct rollover still has the option to subsequently roll over the distribution to an eligible retirement plan within 60 days of receipt.

 Third, UCA amended section 3405 to impose mandatory 20-percent income tax withholding on any eligible rollover distribution that the employee does not elect to have paid in a direct rollover. This withholding applies even if the employee receives a distribution and then rolls it over within the 60-day period. In the case of a taxable distribution (or any portion of a distribution) that is not an eligible rollover distribution, the elective withholding rules under section 3405 and section 35.3405-1 continue to apply.

 Finally, in conjunction with the changes described above, UCA amended section 402(f), which previously required that the plan administrator provide a employee with a written explanation of the special tax rules applicable to certain distributions. As amended, section 402(f) now requires that, within a reasonable time before making a distribution, the plan administrator give a written explanation to the employee of 1) the availability of the direct rollover option; 2) the rules that require income tax withholding on distributions; 3) the rules under which the employee may roll over the distribution within 60 days of receipt; and 4) if applicable, the other special tax rules (e.g., five-year averaging) that may apply to the distribution.

 UCA requirements generally apply to distributions from qualified plans and section 403(b) annuities that are made after December 31, 1992. Thus, if a series of payments began prior to the effective date, any payments that are made after December 31, 1992, generally are subject to the new requirements. A special delayed effective date applies to certain section 403(b) annuities sponsored by state or local governments.

 Given the general 1993 effective date and the significance of the changes made by UCA, these regulations are being issued as soon as practicable, and in question and answer format, in order to provide employers and administrators with immediate guidance. Because these regulations are intended primarily to address the important issues that require resolution in order to facilitate compliance by the effective date, the regulations are not comprehensive. While the Service and Treasury intend to issue final regulations as soon as practicable, employers and administrators must follow reasonable, good faith interpretations of the statutory provisions to the extent that an issue is not covered by these regulations.

OVERVIEW OF REGULATIONS

 These regulations include guidance on the items discussed below.

DETERMINATION OF ELIGIBLE ROLLOVER DISTRIBUTIONS

 The regulations provide that the principles that apply in interpreting section 72(t)(2)(A)(iv) also generally apply in determining whether a distribution is part of a series of substantially equal payments for a specified period that would exclude the distribution from being an eligible rollover distribution. Thus, the principles set forth in Notice 89-25, 1989-1 C.B. 662, for purposes of section 72(t), generally apply.

 The regulations also provide that the determination of whether payments are substantially equal for a specified period is made at the time distributions commence and without regard to any contingencies or modifications that have not yet occurred (such as the employee's death). If a contingency or modification occurs that causes subsequent payments to fail to be substantially equal to prior payments, however, a new determination must be made as to whether the subsequent payments are eligible rollover distributions, without regard to any payments prior to the contingency or modification. In addition, the regulations provide that social security supplements and other "social security leveling options" do not cause distributions to fail to be substantially equal.

EXCEPTIONS FOR CORRECTIVE PAYMENTS AND DEEMED DISTRIBUTIONS

The regulations except certain corrective payments and deemed distributions from the definition of an eligible rollover distribution. These exceptions include returns of excess contributions and excess deferrals under section 401(k) plans; deemed distributions of "P.S. 58" costs; and deemed distributions upon the default of an employee loan. Because these amounts are not eligible rollover distributions, they are not subject to the direct rollover option, they cannot be rolled over by the employee, and they are not subject to the 20-percent withholding requirement.

EXCEPTION FOR DISTRIBUTIONS UNDER $200

 Employers and administrators may find it impractical to make a direct rollover of small distributions. The regulations provide that an employer may, but need not, exclude eligible rollover distributions that are less than $200 from the direct rollover option. This $200 de minimis rule is consistent with the exception currently provided in the voluntary withholding regulations under section 3405 and applies to the new mandatory 20-percent withholding requirement. However, because the $200 de minimis rule is not a general exception from the definition of an eligible rollover distribution, these amounts may still be eligible for rollover by the employee within 60 days after receipt.

PROCEDURES FOR PROVIDING SECTION 402(f) NOTICE

 As discussed above, section 402(f) requires that the plan administrator give a written explanation of the direct rollover option and related tax rules. In conjunction with these regulations, the Service is publishing a notice which includes a model section 402(f) notice that employers can use as a safe harbor.

 The statute provides that the section 402(f) notice must be provided within "a reasonable period of time before making an eligible rollover distribution." Final regulations under section 411(a)(11) already prescribe a time period for providing notices to employees regarding their distribution options and other rights. Those regulations require that a general description of distribution options must be given no less than 30 days and no more than 90 days before the annuity starting date. Therefore, this same time frame will apply to section 402(f) notices relating to distributions that are subject to the section 411(a)(11) consent requirements. These regulations provide that a plan administrator satisfies the section 402(f) reasonable time period requirement only if an employee receives the section 402(f) notice within the same time period in which the plan administrator also must provide the general description of the employee's distribution options and other rights under the plan.

 In the case of distributions not subject to section 411(a)(11), such as a distribution to a participant who has reached the plan's normal retirement age (if not less than 62) or a cashout of a benefit that does not exceed $3,500, these regulations provide that the time period under section 411(a)(11) also will apply to the section 402(f) notice. In these cases, employees may waive the application of the 30-day time period by affirmatively electing to make or not make a direct rollover.

 The approach taken in the regulations is intended to ensure that employees will receive the section 402(f) notice before making an election to receive a distribution and, thus, will have adequate information upon which to base a considered decision concerning the disposition of their retirement savings. This approach is also intended to ensure that employees have adequate time after receiving the notice to consider their options and, if desired, consult with a professional tax advisor or other parties. In addition, the Service and Treasury believe that it is appropriate to establish a time period for the section 402(f) notice that is consistent with the section 411(a)(11) time period in which employers are required to provide other distribution information to employees. Because this approach gives greater significance to the time period provided in the section 411(a)(11) regulations, however, the Service and Treasury are considering whether the 90/30-day time period continues to be appropriate for purposes of section 411(a)(11). Comments on this time-period requirement are specifically requested with regard to both the section 411(a)(11) consent requirements and the section 402(f) notice.

 The regulations also clarify that the payor of a section 403(b) annuity must provide an explanation of the direct rollover option and the income tax withholding rules within a reasonable period of time prior to making an eligible rollover distribution. Comments are specifically requested as to whether this requirement presents special compliance issues for section 403(b) annuities subject to the seven-day redemption rule of section 22(e) of the Investment Company Act of 1940.

PROCEDURES FOR ACCOMPLISHING A DIRECT ROLLOVER

 The regulations permit the employer to accomplish an employee's direct rollover by any reasonable means of delivery to the eligible retirement plan. The regulations specifically provide that a reasonable means of delivery includes delivery of a check to the eligible retirement plan by the employee, provided that the payee line of the check is made out in a manner that will ensure that the check is negotiable solely by the trustee of the recipient plan. Comments are specifically requested on the potential benefits and burdens of a possible requirement that a standard notation, such as "Direct Rollover", appear on the face of any check provided to an employee for delivery.

 The Service and the Treasury believe that allowing a direct rollover to be accomplished via the employee's delivery of a check will, in certain circumstances, simplify the administration of the direct rollover option and reduce the likelihood of errors. Moreover, because the check must be negotiable only by the trustee of the eligible retirement plan, the Service and the Treasury do not anticipate that allowing delivery by the employee will result in significant noncompliance.

DIVISION OF A DIRECT ROLLOVER DISTRIBUTION

 The regulations clarify that an employer cannot preclude an employee from dividing an eligible rollover distribution by electing to make a direct rollover of a portion of the distribution and to receive a distribution of the remaining portion. For purposes of administrative convenience, however, the regulations provide that an employer may preclude an employee from electing to have a portion of an eligible rollover distribution paid in a direct rollover if that portion is less than $500.

PAYMENT OF A DIRECT ROLLOVER TO MORE THAN ONE RECIPIENT PLAN

The regulations provide that an employer need not allow employees to have a direct rollover paid to more than one recipient plan. If an employee wishes to diversify an IRA investment, for example, the employee can subsequently roll over a distribution to another IRA or utilize an IRA trustee-to-trustee transfer.

WITHHOLDING ON PROPERTY AND EMPLOYER SECURITIES

 The regulations confirm that the special rules for withholding on property, including the special rules for employer securities, that are provided in the voluntary withholding regulations under section 3405 also apply under the 20-percent mandatory withholding requirement. Under these rules, if property (other than employer securities) is distributed and the cash in the distribution will not satisfy the withholding obligation, an employer must either sell the property or receive cash from the employee in amounts sufficient to pay the withholding. The regulations also confirm that, as under prior law, employer securities need not be sold to satisfy income tax withholding.

RELIANCE ON "ADEQUATE INFORMATION"

 The regulations provide that a plan administrator will not be liable for failing to withhold on an eligible rollover distribution that is not in fact paid to an eligible retirement plan if the plan administrator reasonably relied on adequate information provided by the employee who elected the direct rollover. For this purpose, adequate information includes the name of the recipient plan, a representation that the recipient plan is an eligible retirement plan, and any other information necessary to accomplish the direct rollover by the means selected for delivery. For example, where the direct rollover is to be accomplished by mailing a check to an IRA, adequate information also would include the name and address of the IRA trustee.

REPORTING OF DIRECT ROLLOVER DISTRIBUTIONS

 The regulations apply the same reporting requirements to direct rollovers that are currently in effect for distributions made by a qualified plan and paid directly by the plan to an IRA. Thus, the regulations provide that a distributing plan making a direct rollover will report the amount paid in the direct rollover on Form 1099-R. The Service currently anticipates that a new code on the Form 1099-R will identify the distribution as either a direct rollover to an IRA or a direct rollover to a qualified plan or section 403(b) annuity. If the distribution is paid to an IRA, the IRA trustee will file a corresponding Form 5498. As under current rules, no Form 5498 will be required of a qualified plan that receives a direct rollover.

TRANSITION RELIEF

 To facilitate compliance, the regulations provide transition relief for purposes of complying with section 402(f) and for purposes of complying with the new mandatory withholding requirements. In the case where the regulations would require a section 402(f) notice during 1992 for a distribution that will be made in 1993, the regulations provide that employers and administrators may rely on a reasonable, good faith interpretation of section 402(f).

 In addition, under certain circumstances, the regulations provide that an employer need not withhold 20 percent of any distribution that is made during the first three months of 1993, provided that the withholding is "made up" prior to December 31, 1993. This withholding transition relief is available only to the extent that, under the same principles stated in the voluntary withholding regulations under Q&A G-6 of section 31.3405-1, immediate compliance with the new mandatory withholding would result in undue hardship for the payor. Also, this transition relief applies only if there Is reason to expect that there will be subsequent distributions made to the employee during 1993 from which the additional amounts can be withheld.

 Any penalties for failure to withhold income taxes required by section 3405(c), as amended by UCA, from eligible rollover distributions made after December 31, 1992, and before July 1, 1993, will automatically be abated if the plan administrator or payor has acted diligently and in good faith in attempting to comply with the requirements of section 3405(c) and section 31.3405(c)-1T.

DEPOSITS OF INCOME TAX WITHHELD

 UCA did not change the requirements for depositing income tax withholding on distributions from qualified plans. Thus, the payor or plan administrator must continue to deposit amounts withheld in accordance with section 6302 and the regulations thereunder, regardless whether the elective or mandatory withholding rules apply. However, payors and plan administrators should be aware that, as described in Announcement 84-40, 1984-17 I.R.B. 31, there are three alternative methods of depositing withholding on distributions. First, the payor or plan administrator may aggregate the withholding with all other amounts under its control and report the withholding on the same report that it uses for the wages of its employees. Second, the payor or plan administrator may request a separate Employer Identification Number (EIN) solely for the purpose of reporting the withholding on all plan distributions under its control. Third, the payor or plan administrator may use the EIN of each plan to report separately the withholding on distributions from each plan.

MODEL PLAN AMENDMENT

 The Service intends to publish additional guidance that will assist plan sponsors in amending their plans to comply with the direct rollover requirement of section 401(a)(31). This guidance will contain a model amendment that, if adopted, will not require a new opinion or determination letter as to whether the plan, as amended, satisfies the qualification requirements of section 401(a).

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this document and the associated cross-reference notice of proposed rulemaking for the regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

 The principal authors of these regulations are Marjorie Hoffman and John A. Tolleris, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, other personnel from the Service and the Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR 1.401-0 through 1.419A-2T

 Bonds, Employee benefit plans, Income taxes, Pensions, Reporting and recordkeeping requirements, Securities, Trusts and trustees.

26 CFR 31

 Employment taxes, Fishing vessels, Gambling, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

26 CFR 602

 Reporting and recordkeeping requirements.

Treasury Decision 8443

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1, 31, and 602 are amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *

Par. 2. Section 1.401(a)(31)-1T is added to read as follows:

SECTION 1.401(a)(31)-1T OPTIONAL DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS (TEMPORARY).

The following questions and answers concern the qualification requirement provided in section 401(a)(31) of the Internal Revenue Code of 1986, relating to eligible rollover distributions from pension, profit-sharing, and stock bonus plans qualified under section 401(a). Section 401(a)(31) was added by section 522(a) of the Unemployment Compensation Amendments of 1992, Public Law No. 102-318 (UCA). See section 1.402(c)-2T, section 1.403(b)-2T, and section 31.3405(c)-1T for guidance concerning amendments to sections 402, 403, and 3405 by UCA.

Q-1: How did the Unemployment Compensation Amendments of 1992 (UCA) change the qualification requirements for pension, profit- sharing, and stock bonus plans qualified under section 401(a)?

A-1: (a) GENERAL RULE. Section 401(a)(31) contains an additional qualification requirement for pension, profit sharing, and stock bonus plans. To satisfy section 401(a)(31), a plan must provide that if the distributee of any eligible rollover distribution elects to have the distribution paid directly to an eligible retirement plan, and specifies the eligible retirement plan to which the distribution is to be paid, then the distribution will be paid to that eligible retirement plan in a direct rollover described in Q&A-3 and Q&A-4 of this section. Thus, the plan must give the distributee the option of having his or her distribution paid in a direct rollover to an eligible retirement plan specified by the distributee. See section 402(c)(8)(B) and Q&A-2 of this section for the definition of an eligible retirement plan. See section 402(c)(4) and Q&A-3 through Q&A-8 of section 1.402(c)-2T for provisions concerning what constitutes an eligible rollover distribution under the expanded rollover rules of section 402, after amendment by section 521 of UCA.

(b) RELATED CODE PROVISIONS -- (1) MANDATORY WITHHOLDING. If a distributee of an eligible rollover distribution does not elect to have the eligible rollover distribution paid directly from the plan to an eligible retirement plan in a direct rollover under section 401(a)(31), the eligible rollover distribution is subject to 20- percent income tax withholding under section 3405(c), as enacted by section 522(b) of UCA. See section 31.3405(c)-1T of this chapter for provisions relating to the withholding requirements applicable to eligible rollover distributions.

(2) NOTICE REQUIREMENT. Section 402(f), as amended by section 521 of UCA, requires the plan administrator of a qualified plan to provide, within a reasonable time before making an eligible rollover distribution, a written explanation to the distributee of the distributee's right to elect a direct rollover and the withholding consequences of not making the election. The explanation also is required to provide certain other relevant information. See Q&A-11 through Q&A-15 of section 1.402(c)-2T for further guidance concerning the written explanation required under section 402(f).

(3) SECTION 403(b) ANNUITIES. Section 403(b)(10), as amended by section 522(a)(3) of UCA, provides that requirements similar to those provided in section 401(a)(31) apply to annuities described in section 403(b). See section 1.403(b)-2T for provisions relating to eligible rollover distributions from annuities described in section 403(b).

(c) EFFECTIVE DATE. Section 401(a)(31) and this section 1.401(a)(31)-1T are applicable to eligible rollover distributions made after December 31, 1992. Consequently, a distributee must be given the option to have any eligible rollover distribution made after December 31, 1992, paid to an eligible retirement plan in a direct rollover, even if the event giving rise to the distribution occurs on or before January 1, 1993 (e.g. termination of the employee's employment with the employer maintaining the plan before January 1, 1993), and even if the eligible rollover distribution is part of a series of payments that began before January 1, 1993.

Q-2: What is an "eligible retirement plan"?

A-2: An eligible retirement plan, as defined under section 402(c)(8)(B), means an individual retirement plan or a qualified plan. An individual retirement plan is an individual retirement account (IRA) described in section 408(a) or an individual retirement annuity (other than an endowment contract) described in section 408(b). A qualified plan is a qualified trust described in section 401(a) (with the limitations described in section 401(a)(31)(D)) or an annuity plan described in section 403(a).

Q-3: What is a "direct rollover" that satisfies section 401(a)(31), and how is it accomplished?

A-3: A direct rollover that satisfies section 401(a)(31) is an eligible rollover distribution that is paid directly to an eligible retirement plan for the benefit of the distributee. A direct rollover may be accomplished by any reasonable means of direct payment to an eligible retirement plan. Reasonable means of direct payment include, for example, a wire transfer or the mailing of a check to the eligible retirement plan. If payment is made by check, the check must be negotiable only by the trustee of the eligible retirement plan. If the payment is made by wire transfer, the wire transfer must be directed only to the trustee of the eligible retirement plan. In the case of an eligible retirement plan that does not have a trustee (such as an individual retirement annuity), the custodian of the plan or issuer of the contract under the plan, as appropriate, should be substituted for the trustee for purposes of this Q&A-3 and Q&A-4 of this section.

Q-4: Is providing a distributee with a check for delivery to an eligible retirement plan a reasonable means of accomplishing a direct rollover?

A-4: Providing the distributee with a check and instructing the distributee to deliver the check to the eligible retirement plan is a reasonable means of direct payment, provided that the check is made payable as follows: [Name of the trustee] as trustee of [name of the eligible retirement plan]. For example, if the name of the eligible retirement plan is "Individual Retirement Account of John Q. Smith," and the name of the trustee is "ABC Bank," the payee line of a check would read "ABC Bank as trustee of Individual Retirement Account of John Q. Smith." Unless the name of the distributee is included in the name of the eligible retirement plan, the check also must indicate that it is for the benefit of the distributee. If the eligible retirement plan is not an individual retirement account or an individual retirement annuity, the payee line of the check need not identify the trustee by name. For example, the payee line of a check for the benefit of distributee Jane Doe might read, "Trustee of XYZ Corporation Savings Plan FBO Jane Doe."

Q-5: Is an eligible rollover distribution that is paid to an eligible retirement plan in a direct rollover includible in gross income?

A-5: No. An eligible rollover distribution that is paid to an eligible retirement plan in a direct rollover is excludible from the distributee's gross income under section 402 and is exempt from the 20-percent withholding imposed under section 3405(c)(2). However, when any portion of the eligible rollover distribution is subsequently distributed from the eligible retirement plan, that portion will be includible in gross income to the extent required under sections 402, 403, or 408.

Q-6: What procedures may a plan administrator prescribe for electing a direct rollover, and what information may the plan administrator require a distributee electing a direct rollover to provide?

A-6: The plan administrator may prescribe any procedure for a distributee to elect a direct rollover under section 401(a)(31), provided that the procedure is reasonable. The procedure may include any reasonable requirement for information or documentation from the distributee in addition to the items of "adequate information" specified in Q&A-7 of section 31.3405(c)-1T. For example, it would be reasonable for the plan administrator to require the distributee to provide a statement from the plan designated by the distributee that it is, or is intended to be, an individual retirement account, an individual retirement annuity, a qualified trust described in section 401(a) (with the limitations described in section 401(a)(31)(D)), or a qualified annuity plan described in section 403(a) as applicable, and that it will accept the direct rollover for the benefit of the distributee. It would not be reasonable, however, for the plan administrator to require information or documentation or to establish procedures that effectively eliminate the distributee's ability to elect a direct rollover. For example, it would not be reasonable for the plan administrator to require the distributee to obtain an opinion from his or her lawyer that the eligible retirement plan receiving the rollover is a qualified plan or individual retirement account.

Q-7: May the plan administrator treat a distributee as having made an election under a default procedure where the distributee does not affirmatively elect to make or not make a direct rollover within a certain time period?

A-7: Yes, the plan administrator may establish a default procedure whereby a distributee who fails to make an affirmative election is treated as having either made or not made a direct rollover election. However, the plan administrator may not make a distribution under any default procedure unless the distributee has received an explanation of the direct rollover option required under section 402(f) and Q&A-11 of section 1.402(c)-2T, and the "reasonable time" requirements described in Q&A-12 through Q&A-15 have been satisfied.

Q-8: May the plan administrator establish a deadline after which the distributee may not revoke an election to make or not make a direct rollover?

A-8: Yes, but the plan administrator is not permitted to prescribe any deadline or time period that is more restrictive for the distributee than that which otherwise applies under the plan to revocation of the form of distribution elected by the distributee.

Q-9: Must the plan administrator permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder of that distribution paid to the distributee?

A-9: Yes, the plan administrator must permit a distributee to elect to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder paid to the distributee. However, the plan administrator is permitted to require that, if the distributee elects to have only a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover, that portion be equal to at least $500. If the entire amount of the eligible rollover distribution is $500 or less, the plan administrator need not allow the distributee to divide the distribution.

Q-10: Must the plan administrator allow a distributee to divide an eligible rollover distribution into two or more separate distributions to be paid in direct rollovers to two or more eligible retirement plans?

A-10: No. The plan administrator is not required (but is permitted) to allow the distributee to divide an eligible rollover distribution into separate distributions to be paid to two or more eligible retirement plans in direct rollovers. Instead, the plan administrator is permitted to limit the distributee to a single direct rollover for each eligible rollover distribution. Thus, the plan administrator may require that the eligible rollover distribution (or portion thereof) to be distributed in a direct rollover be paid to a single eligible retirement plan selected by the distributee.

Q-11: Will a plan satisfy section 401(a)(31) if the plan does not permit a distributee to elect a direct rollover if his or her eligible rollover distributions during a year are reasonably expected to total less than $200?

A-11: Yes. A plan will satisfy section 401(a)(31) even though the plan does not permit a distributee to elect a direct rollover with respect to eligible rollover distributions during a year that are reasonably expected to total less than $200 or any lower minimum amount specified by the plan administrator. The criteria described in Q&A-10 of section 31.3405(c)-1T of this chapter (relating to whether withholding under section 3405(c) applies to an eligible rollover distribution that is less than $200) also apply for purposes of determining whether a direct rollover election under section 401(a)(31) must be provided for an eligible rollover distribution that is less than $200.

Q-12: Is a plan permitted to treat a distributee's election to make or not make a direct rollover with respect to one payment in a series of periodic payments as applying to all subsequent payments in the series?

A-12: Yes. A plan is permitted to treat a distributee's election to make or not make a direct rollover with respect to one payment in a series of periodic payments as applying to all subsequent payments in the series, provided that:

(a) The employee is permitted at any time to change, with respect to subsequent payments, a previous election to make or not make a direct rollover; and

(b) The written explanation provided under section 402(f) explains that the election to make or not make a direct rollover will apply to all future payments unless the employee subsequently changes the election.

Q-13: Is the eligible retirement plan designated by a distributee to receive a direct rollover distribution required to accept the distribution?

A-13: No. Although section 401(a)(31) requires qualified plans to provide distributees the option to make a direct rollover of their eligible rollover distributions to an eligible retirement plan, it imposes no requirement that any eligible retirement plan accept rollovers. Thus, a plan can refuse to accept rollovers. Alternatively, a plan can limit the circumstances under which it will accept rollovers. For example, a plan can limit the types of plans from which it will accept a rollover or limit the types of assets it will accept in a rollover (such as only cash or its equivalent).

Q-14: For purposes of applying the plan qualification requirements of section 401(a), is an eligible rollover distribution that is paid to an eligible retirement plan in a direct rollover a distribution and rollover or is it a transfer of assets and liabilities?

A-14: For purposes of applying the qualification requirements of section 401(a), a direct rollover is a distribution and rollover of the eligible rollover distribution and not a transfer of assets and liabilities. For example, if the consent requirements under section 411(a)(11) or sections 401(a)(11) and 417(a)(2) apply to the distribution, they must be satisfied before the eligible rollover distribution may be distributed in a direct rollover. Similarly, the direct rollover is not a transfer of assets and liabilities that must satisfy the requirements of section 414(l). Finally, a direct rollover is not a transfer of benefits for purposes of applying the requirements under section 411(d)(6), as described in Q&A-3 of section 1.411(d)-4. Therefore, for example, the eligible retirement plan is not required to provide, with respect to amounts paid to it in a direct rollover, the same optional forms of benefits that were provided under the plan that made the direct rollover. The enactment of UCA and the direct rollover requirements of section 401(a)(31) do not affect the ability of a qualified plan to make an elective or nonelective transfer of assets and liabilities to another qualified plan in accordance with applicable law (such as section 414(l)).

Q-15: When must a qualified plan be amended to comply with section 401(a)(31)?

A-15: Under section 523 of UCA, even though section 401(a)(31) applies to distributions from qualified plans made after December 31, 1992, a qualified plan is not required to be amended before the last day of the first plan year beginning on or after January 1, 1994, (or, if later, the last day by which amendments must be made to comply with the Tax Reform Act of 1986 and related provisions, as permitted in other administrative guidance of general applicability), provided that:

(a) In the interim period between January 1, 1993, and the date on which the plan is amended, the plan is operated in compliance with the requirements of section 401(a)(31); and

(b) The amendment applies retroactively to January 1, 1993.

Par. 3. Section 1.402(c)-2T is added to read as follows:

SECTION 1.402(c)-2T ELIGIBLE ROLLOVER DISTRIBUTIONS; QUESTIONS AND ANSWERS (TEMPORARY).

The following questions and answers relate to eligible rollover distributions under section 402(c) of the Internal Revenue Code of 1986, as amended by sections 521 and 522 of the Unemployment Compensation Amendments of 1992 (Public Law 102-318). Q&A-1 through Q&A-10 relate to rules for eligible rollover distributions. Q&A-11 through Q&A-15 relate to rules for the written explanation required under section 402(f).

Q-1: How did the Unemployment Compensation Amendments of 1992 (UCA) change the law regarding distributions from qualified plans that may be rolled over to an eligible retirement plan?

A-1: (a) GENERAL RULE. Section 402(c), as amended by section 521 of UCA, expands the range of distributions from qualified plans (including qualified annuities under section 403(a)) that are eligible to be rolled over. Under section 402(c), as amended, any portion of an eligible rollover distribution, described in section 402(c)(4), may be rolled over to an eligible retirement plan described in section 402(c)(8)(B). See Q&A-2 of this section concerning what is an eligible retirement plan. See Q&A-3 through Q&A-8 of this section concerning distributions that are eligible rollover distributions. See Q&A-9 of this section for rules that apply when a distributee receives an eligible rollover distribution and then rolls over the distribution and Q&A-10 of this section concerning an eligible rollover distribution to a distributee who is not an employee.

(b) RELATED CODE PROVISIONS -- (1) DIRECT ROLLOVER OPTION. Section 401(a)(31), added by section 522(a) of UCA, requires qualified plans to provide a distributee of an eligible rollover distribution the option to elect to have the distribution paid directly to an eligible retirement plan in a direct rollover. See section 1.401(a)(31)-1T for further guidance concerning this direct rollover option.

(2) MANDATORY INCOME TAX WITHHOLDING. If a distributee of an eligible rollover distribution does not elect to have the eligible rollover distribution paid directly from the plan to an eligible retirement plan in a direct rollover under 401(a)(31), the eligible rollover distribution is subject to 20-percent income tax withholding under section 3405(c), as enacted by section 522(b) of UCA. See section 31.3405(c)-1T of this chapter for provisions relating to the withholding requirements applicable to eligible rollover distributions.

(3) SECTION 403(b) ANNUITIES. See section 1.403(b)-2T for similar provisions relating to eligible rollover distributions from section 403(b) annuities.

(c) EFFECTIVE DATE. Section 402(c), as amended by section 521 of UCA, and this section 1.402(c)-2T apply to eligible rollover distributions made after December 31, 1992. Consequently, section 402(c), as amended by section 521 of UCA, and this section 1.402(c)- 2T apply to any eligible rollover distribution made after December 31, 1992, even if the event giving rise to the distribution occurs on or before January 1, 1993 (e.g. termination of the employee's employment with the employer maintaining the plan before January 1, 1993), and even if the eligible rollover distribution is part of a series of payments that began before January 1, 1993.

Q-2: What is an "eligible retirement plan"?

A-2: An eligible retirement plan, as defined under section 402(c)(8)(B), means an individual retirement plan or a qualified plan. An individual retirement plan is an individual retirement account (IRA) described in section 408(a) or an individual retirement annuity (other than an endowment contract) described in section 408(b). A qualified plan is a qualified trust described in section 401(a) or an annuity plan described in section 403(a).

Q-3: What is an "eligible rollover distribution"?

A-3: (a) GENERAL RULE. Except as otherwise provided in paragraph (b), an "eligible rollover distribution" means any distribution of all or any portion of the balance to the credit of the employee in a qualified plan.

(b) EXCEPTIONS. An eligible rollover distribution does not include the following:

(1) Any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made over any one of the following periods: the life of the employee (or the joint lives of the employee and the employee's designated beneficiary), the life expectancy of the employee (or the joint life and last survivor expectancy of the employee and the employee's designated beneficiary), or a specified period of ten years or more;

(2) Any distribution to the extent the distribution is required under section 401(a)(9), relating to the minimum distribution requirements; or

(3) The portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation described in section 402(e)(4)). Thus, for example, an eligible rollover distribution does not include the portion of any distribution that is excludible from gross income under section 72 as a return of the employee's investment in the contract (e.g., a return of the employee's after-tax contributions), but an eligible rollover distribution does include net unrealized appreciation.

Q-4: Are there other amounts that are not eligible rollover distributions?

A-4: Yes. The following amounts are not eligible rollover distributions:

(a) Returns of section 401(k) elective deferrals described in section 1.415-6(b)(6)(iv) that are returned as a result of the section 415 limitations;

(b) Corrective distributions of excess contributions and excess deferrals under qualified cash-or-deferred arrangements as described in sections 1.401(k)-1(f)(4) and 1.402(g)-l(e)(3), respectively, and corrective distributions of excess aggregate contributions as described in section 1.401(m)-1(e)(3), together with the income allocable to these corrective distributions;

(c) Loans treated as distributions under section 72(p) and not excepted by section 72(p)(2);

(d) Loans in default that are deemed distributions (by contrast to the amounts allowed in Q&A-8);

(e) Dividends paid on employer securities as described in section 404(k);

(f) The costs of life insurance coverage ("P.S. 58" costs); and

(g) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance of general applicability.

Q-5: For purposes of determining whether a distribution is an eligible rollover distribution, how is it determined whether a series of payments is a series of substantially equal periodic payments over a period specified in paragraph (b)(1) of Q&A-3 of this section?

A-5: (a) GENERAL RULE. Whether a series of payments is a series of substantially equal periodic payments over a specified period is generally determined at the time payments begin without regard to contingencies or modifications that have not yet occurred. Thus, for example, a joint and survivor annuity with a 50-percent survivor annuity to the employee's spouse will be treated as a series of substantially equal payments at the time payments commence, as will a joint and survivor annuity that provides for increased payments to the participant if the participant's spouse dies before the participant. Whether a series of payments is a series of substantially equal periodic payments generally is determined by following the principles of 72(t)(2)(A)(iv).

(b) CERTAIN SUPPLEMENTS DISREGARDED. For purposes of determining whether a distribution is one of a series of payments that are substantially equal, social security supplements described in section 411(a)(9) are disregarded. For example, if a distributee receives a life annuity of $500 per month, plus a social security supplement consisting of payments of $200 per month until the distributee reaches the age at which social security benefits begin, the $200 supplemental payments are disregarded and, therefore, each monthly payment of $700 made before the social security age and each monthly payment of $500 made after the social security age is treated as one of a series of substantially equal periodic payments for life. Similarly, a series of payments that is not substantially equal but that generally produces a series of substantially equal payments when expected social security payments are taken into account, is treated as substantially equal for purposes of determining whether a distribution is an eligible rollover distribution.

(c) CHANGES IN THE AMOUNT OF PAYMENTS. If the amount (or, if applicable, the method of calculating the amount) of the payments changes so that subsequent payments are not substantially equal to prior payments, a new determination must be made as to whether the remaining payments are a series of substantially equal periodic payments over a period specified in paragraph (b)(1) of Q&A-3 of this section. This determination is made without taking into account payments made prior to the change.

(d) SERIES OF PAYMENTS BEGINNING BEFORE JANUARY 1, 1993. Except as provided in paragraph (c) of this Q&A, if a series of periodic payments began before January 1, 1993, the determination of whether the post-December 31, 1992 payments are a series of substantially equal periodic payments over a specified period is made by taking into account all payments made, including payments made before January 1, 1993. For example, if a series of substantially equal periodic payments beginning on January 1, 1983, is scheduled to be paid over a period of 15 years, payments in the series that are made after December 31, 1992 will not be eligible rollover distributions even though they will continue for only five years after December 31, 1992, because the pre-January 1, 1993 payments are taken into account in determining the specified period.

Q-6: If a payment is independent of a series of substantially equal periodic payments that are not eligible rollover distributions, is that payment an eligible rollover distribution?

A-6: Yes. For this purpose, a payment is treated as independent of the payments in a series if the payment is substantially larger or smaller than the other payments in the series. Thus, an independent payment is an eligible rollover distribution if it is not otherwise excepted from the definition of eligible rollover distribution. This is the case regardless whether the payment is made before, with, or after payments in the series. For example, if a distributee elects a single payment of half of the account balance with the remainder of the account balance paid over the life expectancy of the distributee, the single payment is treated as independent of the payments in the series and is an eligible rollover distribution unless otherwise excepted. Similarly, if a participant's surviving spouse receives a survivor life annuity of $1,000 per month plus a single payment of $5,000, the single payment is treated as independent of the payments in the annuity and is an eligible rollover distribution unless otherwise excepted.

Q-7: When is a distribution from a plan a required distribution under section 401(a)(9) and thus not an eligible rollover distribution?

A-7: (a) GENERAL RULE. If a minimum distribution is required for a calendar year, all amounts distributed during that calendar year are treated as required distributions under section 401(a)(9) (and thus are not eligible rollover distributions) as long as the total required minimum distribution under section 401(a)(9) for that calendar year has not been made. If the total amount that is required to be distributed for a calendar year in order to satisfy section 401(a)(9) is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required distribution.

(b) DETERMINATION OF DESIGNATED BENEFICIARY. For purposes of satisfying section 401(a)(31) and section 3405(c), the plan administrator is permitted to determine the amount of the minimum distribution required to satisfy section 401(a)(9)(A) for any calendar year by assuming that there is no designated beneficiary. If the employee determines that the amount required to be distributed to satisfy section 401(a)(9) is less than the amount determined by the plan administrator under this paragraph (b) (for example by taking into account the beneficiary's life expectancy), the employee may roll over the difference to an eligible retirement plan.

Q-8. Can an eligible rollover distribution include an amount equal to the employee's unpaid loan balance that is treated as distributed when there is a termination of employment with the employer maintaining the plan?

A-8. Yes. An amount equal to the employee's unpaid loan balance is an eligible rollover distribution, if it otherwise qualifies, where the plan offsets the account balance and treats the distributee as having been distributed an amount equal to the unpaid loan balance.

Q-9: If an eligible rollover distribution is paid to a distributee instead of being paid directly to an eligible retirement plan in a direct rollover under section 401(a)(31), and the distributee contributes the eligible rollover distribution (or any portion of the eligible rollover distribution) to an eligible retirement plan, is the amount contributed excluded from gross income?

A-9: Yes, the amount contributed is excluded from gross income, provided that it is contributed to the eligible retirement plan no later than the 60th day following the day on which the distributee received the distribution. Because the amount withheld as income tax under section 3405(c) is considered an amount distributed under section 402 (c), an amount equal to all or any portion of the amount withheld can be contributed as a rollover to an eligible retirement plan within the 60-day period, in addition to the net amount actually received by the distributee. However, if all or any portion of an amount equal to the amount withheld is not contributed as a rollover, it is included in the distributee's gross income to the extent required under section 402(a), and also may be subject to the 10- percent additional income tax under section 72(t).

Q-10: How do the provisions of sections 402(c) and 401(a)(31) apply to a distributee who is not the employee?

A-10: (a) SPOUSAL DISTRIBUTEE. If any distribution attributable to an employee is paid to the employee's surviving spouse, section 402(c) applies to the distribution in the same manner as if the spouse were the employee. The same rule applies if any distribution attributable to an employee is paid to a spouse or former spouse by reason of being an alternate payee under a qualified domestic relations order. Therefore, a distribution to the surviving spouse of an employee (or to a spouse or former spouse by reason of being an alternate payee under a qualified domestic relations order) is an eligible rollover distribution if it meets the requirements of section 402(c)(2) and (4) and Q&A-3 through Q&A-8 of this section. However, a qualified plan (as defined in Q&A-2 of this section) is not treated as an eligible retirement plan with respect to the distribution to a surviving spouse. Only an individual retirement plan (as defined in Q&A-2 of this section) is treated as an eligible retirement plan with respect to the surviving spouse's eligible rollover distribution.

(b) NON-SPOUSAL DISTRIBUTEE. A distributee other than the employee or the employee's surviving spouse (or spouse or former spouse by reason of being an alternate payee under a qualified domestic relations order) is not permitted to roll over distributions from a qualified plan. Therefore, those distributions do not constitute eligible rollover distributions under section 402(c)(4) and, thus, are not subject to the 20-percent income tax withholding under section 3405(c).

Q-11: What are the requirements for a written explanation under section 402(f), as amended by section 521 of UCA?

A-11: (a) GENERAL RULE. Under section 402(f), as amended by section 521 of UCA, the plan administrator of a qualified plan is required, within a reasonable period of time before making an eligible rollover distribution, to provide the distributee with the written explanation described in section 402(f) (section 402(f) notice). The section 402(f) notice must be designed to be easily understood and must explain the following: the rules under which the distributee may have the distribution paid in a direct rollover to an eligible retirement plan; the rules that require the withholding of tax on the distribution if it is not paid in a direct rollover; the rules under which the distributee will not be subject to tax if the distribution is contributed in a rollover to an eligible retirement plan within 60 days of the distribution; and if applicable, certain special rules regarding the taxation of the distribution as described in section 402(d) and (e). In addition, if, as permitted under Q&A-12 of section 1.401(a)(31)-1T, the plan administrator intends to treat a distributee's election to make or not make a direct rollover with respect to one payment in a series of periodic payments as applicable to all subsequent payments in the series unless the distributee subsequently changes the election, this treatment must be explained in the section 402(f) notice.

(b) MODEL SECTION 402(f) NOTICE. The plan administrator will be deemed to have complied with the requirements of section 402(f) if the plan administrator provides the model section 402(f) notice published by the Service for this purpose in a revenue ruling, notice, or other guidance of general applicability.

Q-12: When must the plan administrator provide the section 402(f) notice to a distributee?

A-12: Section 402(f) provides that the plan administrator must provide the section 402(f) notice to a distributee within a reasonable period of time before making an eligible rollover distribution. This "reasonable time" requirement is satisfied only if the plan administrator provides the section 402(f) notice within the same time period in which the plan is required under the consent requirements section 1.411(a)-11(c) to provide the general description of the distributee's distribution options and notice of the distributee's other rights, if any, under the plan to defer receipt of the distribution.

Q-13: How does the "reasonable time" requirement described in Q&A-12 of this section apply in the case of a distribution for which the plan administrator is not required to provide the general description of the distributee's distribution options and other rights under the plan?

A-13: In the case of a distribution for which the plan administrator is not required under section 1.411(a)-11(c) to provide the general description of the distributee's distribution options and other rights under the plan (for example, a cashout of a vested benefit that does not exceed $3,500), the plan administrator must provide the section 402(f) notice to the distributee no earlier than 90 days and no later than 30 days before the distribution is made. However, if, after receiving the section 402(f) notice, the distributee affirmatively elects to make or not make a direct rollover, the distribution may be made immediately without causing a violation of the "reasonable time" requirement.

Q-14: Must the plan administrator provide a separate section 402(f) notice for each distribution in a series of periodic payments that are eligible rollover distributions?

A-14: No. In the case of a series of periodic payments that are eligible rollover distributions, the plan administrator is permitted to satisfy section 402(f) with respect to each payment in the series by providing the section 402(f) notice prior to the first payment in the series, in accordance with the rules in Q&A-12 and Q&A-13 of this section, and also by providing the notice at least once annually for as long as the payments continue.

Q-15: How does the plan administrator comply with section 402(f) with respect to a section 402(f) notice that would be required to be provided prior to January 1, 1993, with respect to a distribution on or after that date, pursuant to Q&A-12 and Q&A-13 of this section?

A-15: In the case of a section 402(f) notice that would be required to be provided prior to January 1, 1993, pursuant to Q&A-12 and Q&A-13 of this section, the plan administrator may comply with section 402(f) on the basis of a reasonable, good faith interpretation of section 402(f).

Par. 4. Section 1.402(f)-2T is added to read as follows:

SECTION 1.402(f)-2T REQUIRED EXPLANATION OF ELIGIBLE ROLLOVER DISTRIBUTIONS QUESTIONS AND ANSWERS (TEMPORARY).

See Q&A-11 through Q&A-15 of section 1.402(c)-2T for guidance concerning the written explanation required under section 402(f), as amended by section 521 of the Unemployment Compensation Amendments of 1992 (Public Law 102-318) (UCA), including guidance concerning when the explanation must be provided and what information must be included in the explanation.

Par. 5. Section 1.403(b)-2T is added to read as follows:

SECTION 1.403(b)-2T ELIGIBLE ROLLOVER DISTRIBUTION; QUESTIONS AND ANSWERS (TEMPORARY).

The following questions and answers relate to eligible rollover distributions from annuities, custodial accounts, and retirement income accounts described in section 403(b) of the Internal Revenue Code of 1986, as amended by sections 521 and 522 of the Unemployment Compensation Amendments of 1992 (Public Law 102-318) (UCA)

Q-1: How did the "Unemployment Compensation Amendments of 1992" (UCA) change the rollover requirements for certain distributions from annuities, custodial accounts, and retirement income accounts described in section 403(b)?

A-1: Section 403(b)(8), as amended by sections 521 and 522 of UCA, expands the range of distributions from annuity contracts, custodial accounts, and retirement income accounts described in section 403(b)(section 403(b) annuities) that are eligible for rollover by providing rules that are similar to the rollover rules for qualified plans in section 402(c), as amended by section 521(a) of UCA. Under section 403(b)(8), as amended, any eligible rollover distribution is permitted to be rolled over to an eligible retirement plan. For purposes of section 403(b)(8) and this section, an eligible retirement plan means another section 403(b) annuity or an individual retirement plan (as defined in Q&A-2 of section 1.401(a)(31)-1T) and does not include qualified plan (as defined in Q&A-2 of section 1.402(c)-2T). An eligible rollover distribution from a section 403(b) annuity is an eligible rollover distribution described in section 402(c)(2) and (4) and Q&A-3 through Q&A-8 of section 1.402(c)-2T, except that the distribution is from a section 403(b) annuity rather than a qualified plan. The rules with respect to rollovers in sections 402(c)(1), (c)(3), and (c)(9) and Q&A-9 and Q&A-10 of section 1.402(c)-2T also apply to eligible rollover distributions from section 403(b) annuities.

Q-2: Is a section 403(b) annuity required to provide the direct rollover option described in section 401(a)(31) as a distribution option?

A-2: (a) GENERAL RULE. Yes. Pursuant to section 403(b)(10), as amended by section 522 of UCA, section 403(b) does not apply to an annuity contract, custodial account or retirement income account unless the annuity contract, custodial account, or retirement income account provides that if the distributee of any eligible rollover distribution elects to have the distribution paid directly to an eligible retirement plan (as defined in Q&A-1 of this section) and specifies the eligible retirement plan to which the distribution is to be paid, then the distribution will be paid to that eligible retirement plan in a direct rollover. For purposes of determining whether a section 403(b) annuity has satisfied this direct rollover requirement, the provisions of section 1.401(a)(31)-1T apply to the section 403(b) annuity as though it were a plan qualified under section 401(a) unless otherwise provided in this section. (In applying the provisions of section 1.401(a)(31)-1T, the payor of the eligible rollover distribution is treated as the plan administrator.) For example, as described in Q&A-14 of section 1.401(a)(31)-1T, a direct rollover from a section 403(b) annuity to another section 403(b) annuity is a distribution and a rollover and not a transfer of funds between section 403(b) annuities and, thus, does not affect the applicable law governing transfers of funds between section 403(b) annuities.

(b) MANDATORY WITHHOLDING. As in the case of an eligible rollover distribution from a qualified plan, if a distributee of an eligible rollover distribution from a section 403(b) annuity does not elect to have the eligible rollover distribution paid directly to an eligible retirement plan in a direct rollover, the eligible rollover distribution is subject to 20-percent income tax withholding imposed under section 3405(c), as enacted by section 522(b) of UCA. See section 31.3405(c)-1T of this chapter for provisions regarding the withholding requirements relating to eligible rollover distributions.

Q-3: Is the payor of a section 403(b) annuity required to provide a distributee of an eligible rollover distribution with an explanation of the direct rollover option?

A-3: Yes. In order to ensure that the distributee of an eligible rollover distribution from a section 403(b) annuity has a meaningful right to elect a direct rollover, the distributee must be informed of the option. Thus, within a reasonable time period before making an eligible rollover distribution, the payor must provide an explanation to the distributee of his or her right to elect a direct rollover and the income tax withholding consequences of not electing a direct rollover.

Q-4: When do section 403(b)(8), as amended by section 521 of UCA, section 403(b)(10), as amended by section 522 of UCA, and this section 1.403(b)-2T apply to distributions from section 403(b) annuities?

A-4:(a) GENERAL RULE. Except as otherwise provided in paragraph (b) of this Q&A, section 403(b)(8), as amended by section 521 of UCA, section 403(b)(10), as amended by section 522 of UCA, and this section 1.403 (b) -2T apply to distributions from section 403(b) annuities made after December 31, 1992. In addition, except as otherwise provided in paragraph (b) of this Q&A, the underlying document of a section 403(b) annuity must be amended at the time provided in, and the amendment and operation of the section 403(b) annuity must satisfy the requirements of, Q&A-15 of section 1.401(a)(31)-1T.

(b) SPECIAL RULE FOR GOVERNMENT SECTION 403(b) ANNUITIES. If, as of July 1, 1992, a state law prohibits a direct rollover from a section 403(b) annuity purchased for an employee by an employer which is a State or a political subdivision thereof (or an agency or instrumentality of one or more of either), the direct rollover requirements of section 401(a)(31) and Q&A-2 and Q&A-3 of this section 1.403(b)-2T do not apply to distributions from that section 403(b) annuity made before the earlier of --

(1) 90 days after the first day after July 1, 1992 on which a direct rollover is allowed under state law; or

(2) January 1, 1994.

PART 31 -- EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX UPON SOURCE

Par. 6. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805. * * *

Par. 7. Section 31.3405(c)-1T is added to read as follows:

SECTION 31.3405(c)-1T WITHHOLDING ON ELIGIBLE ROLLOVER DISTRIBUTIONS; QUESTIONS AND ANSWERS (TEMPORARY).

The following questions and answers relate to withholding on eligible rollover distributions under section 3405(c) of the Internal Revenue Code of 1986, as amended by section 522(b) of the Unemployment Compensation Amendments of 1992 (Public Law 102-318)(UCA). Q&A-1 through Q&A-10 relate to general rules for withholding on eligible rollover distributions. Q&A-11 through Q&A-13 relate to reporting and recordkeeping.

Q-1: How did the Unemployment Compensation Amendments of 1992 (UCA) change the law on withholding requirements under section 3405 for distributions from qualified plans and section 403(b) annuities?

A-1: (a) GENERAL RULE. Section 3405(c), as enacted by section 522(b) of UCA, provides that any designated distribution that is an eligible rollover distribution from a qualified plan or a section 403(b) annuity is subject to income tax withholding at the rate of 20 percent unless the distributee of the eligible rollover distribution elects to have the distribution paid directly to an eligible retirement plan in a direct rollover. For purposes of section 3405 and this section, a qualified plan is a trust qualified under section 401(a) or annuity plan described in section 403(a), and a section 403(b) annuity is an annuity contract, a custodial account or a retirement income account described in section 403(b). If a designated distribution is not an eligible rollover distribution, it is subject to the elective withholding provisions of section 3405(a) and (b) and section 35.3405-1 of this chapter and is not subject to the mandatory withholding provisions of section 3405(c) and this section.

(b) APPLICATION OF OTHER STATUTORY PROVISIONS. See section 1.401(a)(31)-1T of this chapter and Q&A-2 of section 1.403(b)-2T of this chapter concerning the requirements for a direct rollover option under section 401(a)(31) and the procedures for electing it. See section 402(c)(2) and (4), Q&A-3 through Q&A-8 of section 1.402(c)-2T of this chapter, and Q&A-1 of section 1.403(b)-2T of this chapter for provisions for determining what constitutes an eligible rollover distribution. See section 402(c)(8)(B) and Q&A-2 of section 1.402(c)- 2T of this chapter, and Q&A-1 of section 1.403 (b)-2T of this chapter for the meaning of eligible retirement plan. See Q&A-11 through Q&A- 15 of section 1.402(c)-2T of this chapter and Q&A-3 of section 1.403(b)-2T of this chapter concerning the explanation required to inform a distributee of an eligible rollover distribution of the direct rollover option and the consequences of not electing the option.

(c) EFFECTIVE DATE -- (1) GENERAL RULE. Except as otherwise provided in paragraph (c)(2) of this Q&A, section 3405(c), as added by section 522 of UCA, and this section 31.3405(c)-1T apply to eligible rollover distributions made after December 31, 1992. Consequently, section 3405(c) and this section 31.3405(c)-1T apply to any eligible rollover distribution made after December 31, 1992, even if the employee's employment with the employer maintaining the plan terminated before January 1, 1993 and even if the eligible rollover distribution is part of a series of payments that began before January 1, 1993.

(2) TRANSITION RULE. A special transition rule applies in the case of eligible rollover distributions made after December 31, 1992, and before April 1, 1993, if timely compliance with the withholding requirements in section 3405(c) and this section 31.3405(c)-1T would cause undue hardship for the plan administrator or payor. In this case, the plan administrator or payor may delay the application of the 20-percent withholding requirement on eligible rollover distributions, using the following "catch-up withholding" method. If 20-percent withholding on an eligible rollover distribution made after December 31, 1992, and before April 1, 1993, is required under section 3405(c) and this section 31.3405(c)-1T, the dollar amount required to be withheld from the distribution may be withheld instead from any one or more later distributions from the plan with respect to the distributee that are made before January 1, 1994. The amount of this delayed withholding may be added to the amount (if any) that would otherwise be required to be withheld from the later distribution, whether or not the later distribution is paid in a direct rollover to an eligible retirement plan. Thus, the "catch-up withholding" method may be used only if there is reason to expect that one or more later distributions sufficient to satisfy the prior withholding requirement will be made before January l, 1994. For purposes of this paragraph, whether there would be undue hardship for the plan administrator or payor will be determined under the principles set forth in Q&A G-6 of section 35.3405-1. If a plan administrator or payor can establish that the undue hardship requirement for use of the "catch-up withholding" method is satisfied, prior approval from the Internal Revenue Service is not required and should not be requested.

(3) SPECIAL RULE FOR GOVERNMENT SECTION 403(b) ANNUITIES. If, as of July 1, 1992, a state law prohibits a direct rollover from a section 403(b) annuity purchased for an employee by an employer which is a State or a political subdivision thereof (or an agency or instrumentality of one or more of either), section 3405(c) and this section 31.3405(c)-1T do not apply to distributions from that section 403(b) annuity made before the earlier of:

(i) 90 days after the first day after July l, 1992 on which a direct rollover is allowed under state law; or

(ii) January 1, 1994.

Q-2: May a distributee elect under section 3405(c) not to have Federal income tax withheld from an eligible rollover distribution?

A-2: No. The 20-percent income tax withholding imposed under section 3405(c)(1) applies to an eligible rollover distribution unless the distributee elects under section 401(a)(31) to have the eligible rollover distribution paid directly to an eligible retirement plan in a direct rollover. See section 1.401(a)(31)-1T of this chapter and Q&A-2 of section 1.403(b)-2T of this chapter for provisions concerning the requirement that a distributee of an eligible rollover distribution be permitted to elect a distribution in the form of a direct rollover.

Q-3: Who has responsibility for complying with section 3405(c) relating to the 20-percent income tax withholding on eligible rollover distributions?

A-3: Section 3405(d) generally requires the plan administrator of a qualified plan and the payor of a section 403(b) annuity to withhold under section 3405(c)(1) an amount equal to 20 percent of the portion of an eligible rollover distribution that the distributee does not elect to have paid in a direct rollover.

Q-4: May the plan administrator shift the withholding responsibility to the payor and, if so, how?

A-4: Yes. The plan administrator may shift the withholding responsibility to the payor by following the procedures set forth in Q&A A-13 and Q&A E-2 of section 35.3405-1 of this chapter (relating to elective withholding on pensions, annuities and certain other deferred income) with appropriate adjustments.

Q-5: How does the 20-percent withholding requirement under section 3405(c) apply if a distributee elects to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to have the remainder of that distribution paid to the distributee?

A-5: If a distributee elects to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to receive the remainder of the distribution, the 20- percent withholding requirement under section 3405(c) applies only to the portion of the eligible rollover distribution that the distributee receives and not to the portion that is paid in a direct rollover.

Q-6: Will the plan administrator be subject to liability for tax, interest, or penalties for failure to withhold 20 percent from an eligible rollover distribution that, because of erroneous information provided by a distributee, is not paid to an eligible retirement plan even though the distributee elected a direct rollover?

A-6: If the plan administrator reasonably relied on adequate information provided by the distributee (as described in Q&A-7 of this section), the plan administrator will not be subject to liability for taxes, interest, or penalties for failure to withhold income tax from an eligible rollover distribution solely because the distribution is paid to an account or plan that is not an eligible retirement plan (as defined in sections 401(a)(31)(D) and 402(c)(8)(B) and Q&A-2 of section 1.401(a)(31)-1T of this chapter). Although the plan administrator is not required to verify independently the accuracy of information provided by the distributee, the plan administrator's reliance on the information furnished must be reasonable. For example, it is not reasonable for the plan administrator to rely on information that is clearly erroneous on its face.

Q-7: What constitutes "adequate information" on which the plan administrator may reasonably rely in making a direct rollover?

A-7: The plan administrator has obtained from the distributee adequate information that the account or plan to which the eligible rollover distribution was paid was an eligible retirement plan if the distributee furnishes to the plan administrator the name of the eligible retirement plan; represents that the recipient plan is an individual retirement plan, a qualified plan, or a section 403(b) annuity, as appropriate; and furnishes to the plan administrator any other information that is necessary in order to permit the plan administrator to accomplish the direct rollover by the means it has selected. This information must include any information needed to comply with the specific requirements of Q&A-3 and Q&A-4 of section 1.401(a)(31)-1T of this chapter. For example, if the direct rollover is to be made by mailing a check to the trustee of an individual retirement account, the plan administrator must obtain, in addition to the name of the individual retirement account and the representation described above, the name and address of the trustee of the individual retirement account.

Q-8: If property other than cash is distributed, how is the 20- percent income tax withholding required under section 3405(c) accomplished?

A-8: When all or a portion of an eligible rollover distribution subject to 20-percent income tax withholding under section 3405(c) consists of property other than cash, the plan administrator or payor must apply the provisions of Q&A F-1 through F-3 of section 35.3405-1 of this chapter.

Q-9: Is there an exception from the 20-percent withholding requirement for employer securities distributed in an eligible rollover distribution?

A-9: Yes. Section 3405(d)(8), as amended by section 52l(b) of UCA, provides that the maximum amount to be withheld on any designated distribution (including any eligible rollover distribution) must not exceed the sum of the cash and the fair market value of other property (excluding employer securities) received in the distribution. In addition, if the distribution consists solely of employer securities and cash (not in excess of $200) in lieu of fractional shares, no amount is required to be withheld as income tax from the distribution under section 3405 (including section 3405(c) and this section). For purposes of section 3405 and this section, employer securities means securities of the employer corporation within the meaning of section 402(e)(4)(E).

Q-10: Must a payor or plan administrator withhold tax from an eligible rollover distribution for which a direct rollover election was not made if the amount of the distribution is less than $200?

A-10: No. However, all eligible rollover distributions received within one taxable year of the distributee under the same plan must be aggregated for purposes of determining whether the $200 floor is reached. If the plan administrator or payor does not know at the time of the first distribution (that is less than $200) whether there will be additional eligible rollover distributions during the year for which aggregation is required, the plan administrator need not withhold from the first distribution. If distributions are made within one taxable year under more than one plan of an employer, the plan administrator or payor may, but need not, aggregate distributions for purposes of determining whether the $200 floor is reached.

Q-11: If eligible rollover distributions are made from a qualified plan, who has responsibility for making the returns and reports required under these regulations?

A-11: Generally, the plan administrator, as defined in section 414(g), is responsible for maintaining the records and making the required reports with respect to eligible rollover distributions from qualified plans. However, if the plan administrator fails to keep the required records and make the required reports, the employer maintaining the plan is responsible for the reports and returns.

Q-12: What eligible rollover distributions must be reported on Form 1099-R?

A-12: Each eligible rollover distribution, including each eligible rollover distribution that is paid directly to an eligible retirement plan in a direct rollover, must be reported on Form 1099-R in accordance with the instructions for Form 1099-R. For purposes of the reporting required under section 6047(e), a direct rollover is treated as a distribution that is immediately rolled over to an eligible retirement plan. Distributions that are not eligible rollover distributions are subject to the reporting requirements set forth in section 35.3405-1 of this chapter and applicable forms and instructions.

Q-13: Must the plan administrator, trustee or custodian of the eligible retirement plan report amounts received in a direct rollover?

A-13: (a) INDIVIDUAL RETIREMENT PLAN. If a distributee elects to have an eligible rollover distribution paid to an individual retirement plan in a direct rollover, the eligible rollover distribution is reported on Form 5498 as a rollover contribution to the individual retirement plan, in accordance with the instructions for Form 5498.

(b) QUALIFIED PLAN OR SECTION 403(b) ANNUITY. If a distributee elects to have an eligible rollover distribution paid to a qualified plan or section 403(b) annuity, the recipient plan or annuity is not required to report the receipt of the rollover contribution.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 8. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. Section 602.101(c) is amended by adding the following entries to the table:

 Section 602.101 OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT.