Direct Rollovers and 20-Percent Withholding Upon Eligible Rollover Distributions From Qualified Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 602

[TD 8619]

RIN 1545-AR01

Direct Rollovers and 20-Percent Withholding Upon Eligible

Rollover Distributions From Qualified Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to eligible

rollover distributions from tax-qualified retirement plans and section

403(b) annuities. These regulations reflect the changes made by the

Unemployment Compensation Amendments of 1992 and affect the

administrators, sponsors, payors of, and participants in tax-qualified

retirement plans and section 403(b) annuities.

EFFECTIVE DATE: These regulations are effective on October 19, 1995.

FOR FURTHER INFORMATION CONTACT: Thomas Foley, (202) 622-6050 (not a

toll-free call).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations

have been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under

control number 1545-1341. Responses to this collection of information

are mandatory.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

The estimated annual burden per plan administrator/payor/

recordkeeper varies from .05 hour to 330 hours, depending on individual

circumstances, with an estimated average of .50 hour.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the Treasury, Office of Information

and Regulatory Affairs, Washington, DC 20503.

Books and records relating to this collection of information must

be

[[Page 49200]]

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On October 22, 1992, Temporary Income Tax Regulations (TD 8443)

under sections 401(a)(31), 402(c), 402(f), 403(b), and 3405(c) of the

Internal Revenue Code (Code) were published in the Federal Register (57

FR 48163). A notice of proposed rulemaking (EE-43-92) cross-referencing

the temporary regulations was published in the Federal Register (57 FR

48194) on the same day. The temporary regulations provide guidance for

complying with the Unemployment Compensation Amendments of 1992 (UCA).

In addition, Notice 92-48 (1992-2 C.B. 381), provides a safe harbor

explanation that can be used in order to satisfy section 402(f) of the

Code. Written comments were received on the proposed and temporary

regulations and a public hearing on the proposed and temporary

regulations was held on January 15, 1993.

In response to initial comments on the proposed and temporary

regulations, the IRS provided additional guidance under UCA in Notice

93-3 (1993-1 C.B. 293), and Notice 93-26 (1993-1 C.B. 308). The notices

solicited public comments concerning the additional guidance.

After consideration of all the comments, the temporary regulations

are replaced and the proposed regulations under sections 401(a)(31),

402(c), 402(f), 403(b), and 3405(c) are adopted as revised by this

Treasury decision.

Explanation of Provisions

1. Overview

UCA significantly changed the treatment of distributions from

qualified plans and section 403(b) annuities. First, under section

402(c), as amended by UCA, all distributions from qualified plans to an

employee (or to the employee's spouse after the employee's death) from

the ``balance to the credit'' of the employee are ``eligible rollover

distributions'' to the extent includible in gross income, except (1)

substantially equal periodic payments over life or life expectancy or

for a period of ten years or more, and (2) required minimum

distributions under section 401(a)(9).

Second, UCA added a new qualification provision under section

401(a)(31) that requires qualified plans to provide employees with a

direct rollover option. Under a direct rollover option, an employee may

elect to have an eligible rollover distribution paid directly to an

individual retirement account or individual retirement annuity, or to

another qualified plan that accepts rollovers (collectively referred to

as eligible retirement plans). The direct rollover option is provided

in addition to the pre-existing rollover provisions under section 402.

Thus, an employee who receives an eligible rollover distribution but

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. (However, where employer

securities are distributed, a special rule limits withholding to the

value of cash and other property received in the distribution.) To the

extent that a distribution is both includible in gross income and not

an eligible rollover distribution, the elective withholding rules under

section 3405 and Sec. 35.3405-1 continue to apply.

Finally, section 402(f), as amended by UCA, requires that, within a

reasonable period of time before making a distribution, the plan

administrator give a written explanation (the section 402(f) notice) 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.

Similar rules are provided for section 403(b) annuities. However, a

distribution from a section 403(b) annuity may only be rolled over to

another section 403(b) annuity or individual retirement plan and not to

a qualified plan.

UCA requirements generally apply to distributions from qualified

plans and section 403(b) annuities that are made on or after January 1,

1993. (A special delayed effective date applies to certain section

403(b) annuities sponsored by state or local governments.)

In general, comments received on the proposed and temporary

regulations were favorable. Thus, the final regulations retain the

general structure and substance of the proposed and temporary

regulations.

2. Notice 93-3 and Notice 93-26

As discussed above, in response to initial comments on the proposed

and temporary regulations, additional guidance under UCA was provided

by Notice 93-3, 1993-1 C.B. 293, and Notice 93-26, 1993-1 C.B. 308. The

major issues addressed in these notices include the following:

A distribution that occurs when a participant's accrued

benefit is offset by the amount of a plan loan is an eligible rollover

distribution if it otherwise qualifies as such. However, the plan need

not offer a direct rollover of the offset distribution. For purposes of

determining the amount that must be withheld, the offset distribution

is treated in the same manner as a distribution of employer securities.

In determining whether a distribution is a required

minimum distribution for purposes of section 402(c), any distribution

prior to the year an employee attains (or would have attained) age

70\1/2\ is not treated as a required minimum distribution and any

annuity distribution paid from a defined benefit plan or an annuity

contract in that year or a subsequent year is treated as a required

minimum distribution.

A participant may affirmatively elect to make an immediate

direct rollover or receive an immediate payment, provided that the

participant has been informed of the right to take at least 30 days,

after receiving the appropriate notices, to make this decision.

Amounts paid under an annuity contract distributed by a

qualified plan are payments of the balance to the credit in the

qualified plan for purposes of section 402(c) and, thus, are subject to

the same UCA rules as distributions from qualified plans (e.g.,

permitting direct rollover and requiring 20-percent withholding).

The commentary on Notices 93-3 and 93-26 was favorable.

Accordingly, the guidance contained in the notices has been

incorporated into these final regulations. In addition, certain other

revisions have been made to the regulations in response to comments, to

clarify certain issues, and to facilitate administration and

compliance. The most significant of these revisions are discussed

below.

3. Section 402(f) and Other Participant Notices

a. Timing of Notice

As discussed above, the Code requires that the plan administrator

provide the section 402(f) notice within a reasonable period of time

prior to making an eligible rollover distribution. The

[[Page 49201]]

temporary regulations provide that this reasonable time period is the

same period required for obtaining consent to a distribution under

section 411(a)(11). The regulations under section 411(a)(11) provide

that 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, no more than 90 days and

no less than 30 days prior to the annuity starting date.

The 90/30-day time period was adopted in the temporary regulations

under section 402(f) because the IRS and Treasury believed that it was

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 response to initial comments, the

IRS and Treasury issued Notice 93-26, which modified the 30-day time

period to allow a participant to affirmatively elect to make an

immediate direct rollover or receive an immediate payment, but did not

change the 90-day time period for either section 402(f) or section

411(a)(11). As discussed above, the final regulations are modified in a

manner consistent with the additional guidance provided in Notice 93-

26.

Commentators requested an expansion of the 90-day time period. More

broadly, commentators asked that the requirements of sections

411(a)(11), 417, and 402(f) be addressed in the context of new

technologies that use electronic media, such as telephone or computer

systems, to automate plan administrative functions that traditionally

have been processed manually by use of paper-based systems (e.g.,

notices to participants and participant distribution requests). For

example, some commentators suggested that plans be permitted to provide

an annual written notice if a summary of the notice is provided through

these new technologies. In addition, commentators asked that the

modification to the 30-day rule permitting immediate payment after an

affirmative election, announced in Notice 93-26, be applied to

distributions subject to section 401(a)(11) and 417.

The IRS and Treasury continue to believe that the section 402(f)

notice (as well as the section 411(a)(11) and section 417 notices)

should be provided close to the time participants are considering the

distribution to which the notice applies. Therefore, no change to the

90-day rule is made in these final regulations.

Although no additional guidance on the use of electronic media is

provided in these final regulations, the IRS and Treasury will continue

to consider modifications of the notice and consent requirements that

might be appropriate to accommodate new technologies, if adequate

safeguards are provided. The IRS and Treasury continue to invite

comments on this issue. These final regulations specifically delegate

authority to the Commissioner to modify or provide additional guidance

in the Internal Revenue Bulletin with respect to the notice

requirements of section 402(f). A parallel delegation of authority is

provided in the proposed and temporary regulations under sections

411(a)(11) and 417 which are being published in connection with these

final regulations.

The proposed and temporary regulations under section 411(a)(11) are

modified in a manner consistent with the changes to the 30-day rule

described in Notice 93-26. The proposed and temporary regulations under

section 417 modify the timing requirement with respect to the notice

required by that section. Under this modification, if a participant

affirmatively elects a distribution (whether a qualified joint and

survivor annuity or an optional form of benefit), the plan may permit

the distribution to commence at any time more than seven days after the

section 417 notice is given, provided that the distributee has the

right to revoke the election until the later of the annuity starting

date or the expiration of the seven-day period that begins the day

after the section 417 notice is provided.

b. Posting of Notice

In response to questions from commentators, the final regulations

clarify that section 402(f) notices must be provided directly to each

distributee rather than by posting at the place of employment.

c. Additions to Model Notice

Notice 92-48, 1992-2 C.B. 381, contains the model section 402(f)

notice that serves as a ``Safe Harbor Explanation'' for purposes of

complying with section 402(f). The IRS is considering developing

additional model language to address specific subjects not addressed in

the current model notice, including withholding on employer securities,

treatment of plan loan offset amounts (including withholding and the

timing and availability of a right to roll over), and the $5,000 death

benefit exclusion. Until this additional language is published, plan

administrators may continue to satisfy section 402(f) by providing the

current model notice, even if issues not addressed in the current

notice (such as those listed in the preceding sentence) are relevant to

the distributee. Plan administrators are encouraged, however, to

supplement the model notice with language addressing these issues when

applicable to a distributee. The IRS and Treasury invite comments or

suggestions concerning possible additions or modifications to the

notice.

4. Definition of Eligible Rollover Distribution

As noted above, under section 402(c) and section 403(b), as amended

by UCA, all distributions from qualified plans and section 403(b)

annuities to an employee (or to the employee's spouse after the

employee's death) of any portion of the ``balance to the credit'' of

the employee are ``eligible rollover distributions'' to the extent

includible in gross income, except (1) substantially equal periodic

payments over life or life expectancy or for a period of ten years or

more, and (2) required minimum distributions under section 401(a)(9).

a. Benefits Included in the Balance to the Credit

Based on the broad statutory definition of an eligible rollover

distribution and the UCA legislative history, the final regulations

provide that generally all plan benefits are included in the ``balance

to the credit'' of an employee, including ancillary benefits not

protected by section 411(d)(6). Therefore, the final regulations do not

adopt commentators' suggestions to exclude various items from the

definition, such as qualified disability benefits, hardship

distributions, and distributions that are includible in gross income

but that are made to a distributee reasonably expected to have no

income tax liability.

b. Substantially Equal Periodic Payments From a Defined Contribution

Plan

The final regulations retain the rule that the principles of

section 72(t) apply for purposes of determining whether distributions

constitute a series of substantially equal periodic payments. The

preamble to the temporary regulations provides that, in determining

whether payments in a series are substantially equal for purposes of

section 402(c)(4), the principles of Notice 89-25, 1989-1 C.B. 662, are

applicable. Notice 89-25 provides guidance for determining whether

distributions from a separate account are substantially equal for

purposes of section 72(t). Commentators requested guidance on applying

the three methods in Notice 89-25 for

[[Page 49202]]

determining whether payments are substantially equal over life or life

expectancy to payments for a period other than life or life expectancy.

In response to these comments, the final regulations provide that

payments from a qualified defined contribution plan that are calculated

on a declining balance of years will be considered substantially equal.

In addition, if a distribution from a defined contribution plan

consists of payments of a fixed amount each year until the account

balance is exhausted, reasonable actuarial assumptions must be used to

determine the period of years over which the payments will be made.

c. Disregard of Contingencies

The final regulations retain the rule that the determination of

whether payments are substantially equal for a given period is made

when payments commence, without regard to contingencies or

modifications that have not yet occurred. Recovery from a disability is

added to the final regulations as an example of a contingency that is

disregarded until it occurs. In addition, although not addressed in the

regulations, it should be noted that a mere change in the type (as

opposed to the amount) of benefit being paid in a series of payments is

not relevant in determining whether the payments are substantially

equal and are being paid for a period described in section

402(c)(4)(A). Thus, if a distributee receives a series of disability

benefits followed by a series of retirement benefits, and the two

benefits are reasonably expected to be substantially equal, the

retirement benefits may be combined with the disability benefits in

determining whether a series of payments are substantially equal and

are for a period described in section 402(c)(4)(A).

In response to comments, the final regulations also clarify that a

mere change in distributee upon the death of an employee is not a

modification that requires a redetermination of whether the remaining

payments under the annuity are substantially equal periodic payments

over a period described in section 402(c)(4)(A) and, thus, excluded

from the definition of eligible rollover distribution.

d. Coordination With Social Security Benefits

The final regulations expand the scope of the rule in the temporary

regulations permitting social security benefits to be taken into

account in determining whether a series of periodic payments are

substantially equal. Under the final regulations, if the amount paid

annually from the plan is reduced upon attainment of social security

retirement age (or commencement of social security benefits), the

payments after the reduction will be treated as substantially equal to

the payments prior to the reduction, even if the reduction is not equal

to the distributee's annual social security benefits, provided that the

reduction does not exceed the annual social security benefits and the

post-reduction payments are substantially equal.

e. Supplements and Adjustments to Annuity Payments

The final regulations retain the rule that a payment will be

treated as independent, and thus as not part of a series of

substantially equal periodic payments, if the payment is substantially

larger or smaller than the other payments in the series. However, in

response to comments, the final regulations clarify that adjustments to

the amount of annuity payments that result solely from correction of

reasonable administrative error or delay in payment will not cause any

payment in a series of payments that are otherwise substantially equal

to fail to be treated as a payment in the series.

Further, in response to comments concerning the payment of ``13th

checks'' and other supplemental annuity payments, the regulations

provide an additional rule for defined benefit plans. If a defined

benefit plan provides a benefit increase for annuitants (e.g., retirees

or beneficiaries) that supplements a series of substantially equal

annuity payments in a consistent manner for all similarly situated

annuitants, the benefit increase will not constitute an independent

payment (and will not cause the series of payments to be treated as not

substantially equal), if the payment either is not more than 10 percent

of the annual rate of payment or is not more than $750.

f. Required Minimum Distributions

As noted above, the final regulations incorporate the guidance in

Notice 93-3 concerning the determination of the required minimum

distribution for purposes of section 402(c). Also, in response to

questions concerning the allocation of basis in the case of a required

minimum distribution, the final regulations clarify that if part (but

not all) of a payment is required under section 401(a)(9) and if part

(but not all) of the same payment represents return of basis, the plan

must first allocate the return of basis toward satisfaction of the

section 401(a)(9) required minimum distribution. This rule has the

effect of maximizing the amount that is eligible to be rolled over.

g. Corrective Distributions and Deemed Distributions

The final regulations retain the rule that certain corrective

distributions and deemed distributions are excluded from the definition

of an eligible rollover distribution. The regulations also clarify

that, to the extent corrective distributions are properly made from a

section 403(b) annuity, they are not eligible rollover distributions.

With respect to deemed distributions under section 72(p), the final

regulations include the clarifications provided in Notice 93-3 with

respect to the distinction between plan loan offset amounts and deemed

distributions under section 72(p), except for the portion of Example 6

from Notice 93-3 that addressed issues relating to the tax treatment of

a distribution that occurs after a deemed distribution. This portion of

the example generated numerous questions and comments concerning the

proper interpretation of section 72(p). Those questions and comments

are best addressed in the context of guidance under section 72(p)

rather than section 402(c). No inference should be drawn from the

deletion of a portion of the example.

h. $5,000 Death Benefit Exclusions

The final regulations clarify that, to the extent that a death

benefit is a distribution from a qualified plan, the portion of the

distribution that is excluded from gross income under section 101(b) is

not an eligible rollover distribution. However, recognizing that a

surviving spouse or former spouse may be entitled to more than one

death benefit that might qualify for the death benefit exclusion, the

final regulations permit the plan administrator of a qualified plan to

assume, for purposes of section 401(a)(31) and section 3405, that any

death benefit being distributed from the plan to the surviving spouse

or former spouse of an employee that qualifies for the exclusion is the

only benefit that so qualifies.

5. Direct Rollover Requirement

a. Procedures for Accomplishing a Direct Rollover

The final regulations under section 401(a)(31) retain the rules

that permit the employer to accomplish an employee's direct rollover by

any reasonable means of delivery to an eligible retirement plan,

including delivery of a check to the eligible retirement plan by the

employee (provided that the payee line of the

[[Page 49203]]

check is made out in a manner that will ensure that the check is

negotiable solely by the trustee or custodian of the recipient plan).

The preamble to the temporary regulations requested comments on whether

a standard notation, such as ``Direct Rollover,'' should be required to

appear on the face of any check provided to an employee for delivery.

The comments received were divided, and the final regulations do not

require any standard notation.

b. Procedures That Substantially Impair the Availability of Direct

Rollover

The temporary regulations provide that it would not be reasonable,

and thus would not satisfy section 401(a)(31), for a plan administrator

to require information or documentation or to establish procedures that

``effectively eliminate'' the right to take a direct rollover. The

final regulations broaden this language to include procedures that

``substantially impair'' the right to take a direct rollover, and

provide additional examples illustrating violations of section

401(a)(31).

c. Qualification Protection for Recipient Plans

The temporary regulations do not address qualification protection

for qualified plans accepting rollovers. Comments were received asking

for criteria that, if satisfied, would permit a receiving plan to

assume that the plan from which it is accepting a rollover is

qualified. To encourage plans to accept rollovers, these final

regulations provide a safe harbor for receiving plans that reasonably

determine that the distributing plan is qualified. The regulations also

provide an example of a reasonable determination in this respect. The

example illustrates that a reasonable determination will have been made

if, prior to accepting a rollover contribution, the receiving plan

obtains a plan administrator's letter indicating that the distributing

plan had a favorable determination letter regarding qualification.

However, if the receiving plan later obtains actual knowledge that the

distributing plan was not qualified at the time of the direct rollover,

corrective distributions with respect to the rollover amount would be

required.

In addition, the final regulations under section 3405 retain the

rule that no withholding liability will be imposed on a plan

administrator that reasonably relies on ``adequate information''

provided by the distributee. Commentators asked whether this ``adequate

information'' protection under section 3405 could also be extended to

section 401(a)(31). Specifically, they asked if the distributing plan

is protected from being treated as violating section 401(a)(31) where

the distributee purports to elect a direct rollover but the

distribution made in accordance with the information provided by the

distributee does not in fact result in a direct rollover. The IRS and

Treasury do not believe any special relief is needed in this case

because there is no violation of section 401(a)(31) if the plan follows

the distributee's directions after providing a direct rollover option.

d. Direct Rollovers to Qualified Defined Benefit Plans

The definition of eligible retirement plan under section 402(c)

includes all qualified trusts (defined contribution plans and defined

benefit plans) as well as qualified annuity plans under section 403(a)

and individual retirement plans. For purposes of section 401(a)(31),

section 401(a)(31)(D) provides that the only qualified trusts that are

treated as eligible retirement plans are defined contribution plans.

Commentators asked whether a plan may permit direct rollovers to

qualified defined benefit plans. The final regulations clarify that the

limitation in section 401(a)(31)(D) applies only for purposes of

determining the scope of the requirement under section 401(a)(31),

while the definition of eligible retirement plan in section

402(c)(8)(B) controls the types of plans to which direct rollovers are

permitted. Thus, under section 401(a)(31), a plan is required to offer

a direct rollover to any defined contribution plan, and is permitted

(but not required) to offer a direct rollover to a qualified trust that

is a defined benefit plan. In addition, the final regulations clarify

that an eligible rollover distribution that is paid in a direct

rollover to a defined benefit plan is not subject to withholding.

e. Default Procedures

The final regulations retain the rules permitting a plan

administrator to establish a procedure for a participant who fails to

make any election. However, the regulations clarify that if a default

procedure is implemented, the distributee must receive an explanation

of the procedure in conjunction with the section 402(f) notice.

f. Valuation of Distributed Property

Some commentators raised concerns about the valuation of property

in order to determine the portion of the distribution eligible for

direct rollover or subject to withholding. The IRS and Treasury

recognize the difficulties in satisfying the rollover, withholding, and

reporting requirements where property is involved and invite comments

regarding these issues, including suggested approaches for addressing

the valuation and taxation of property distributed by qualified plans.

While these regulations include no changes with respect to these

issues, they continue to permit use of the rules provided in Q&A F-1

and Q&A F-3 of Sec. 35.3405-1 for purposes of withholding.

g. Plan Amendments

The final regulations retain the rule that, although plans must

comply in operation with section 401(a)(31) beginning January 1, 1993,

plans need not be amended to comply with section 401(a)(31) until the

end of the remedial amendment period for amending the plan to comply

with the amendments to section 401(a) made by the Tax Reform Act of

1986 (TRA '86). Notice 92-36 (1992-2 C.B. 364), specifies the remedial

amendment period for most employers. Announcement 95-48 (1995-23 IRB

11), dated June 5, 1995, extends this period for plans maintained by

tax exempt organizations and governments.

Plans may continue to use the model amendment published in Rev.

Proc. 93-12 (1993-1 C.B. 479), to comply in form with section

401(a)(31) and these final regulations. For plans that have received

favorable determination letters, see the relevant guidance for the

timing of plan amendments, e.g., section 21.04 of Rev. Proc. 95-6

(1995-1 I.R.B. 166).

6. Other Rollover Rules

a. Rollover Elections Are Irrevocable

The final regulations incorporate the rule in Sec. 1.402(a)(5)-1T

that, in order for a contribution of an eligible rollover distribution

to an individual retirement plan to qualify for exclusion from gross

income as a rollover contribution, the participant must irrevocably

elect to treat the contribution as a rollover contribution at the time

the contribution is made to the individual retirement plan. A direct

rollover election is deemed to be such an irrevocable election.

b. 60-Day Rule

The final regulations clarify that the 60-day period for a

distributee to roll over a distribution commences on the date of that

distribution regardless of the number of distributions during the

taxable year. Because section 402, as amended by UCA, no longer

requires that the distribution constitute a specified portion of the

balance to the credit of the employee in order to be eligible for

rollover, there is no longer

[[Page 49204]]

any need for the prior administrative rule under which the 60-day

period began as of the date of the last distribution during the taxable

year.

c. Rollover From Plan Not Counted in One-Year-Look-Back Rule

The final regulations clarify that a rollover (whether or not it is

a direct rollover) from a qualified plan is not treated as a rollover

contribution for purposes of the one-year-look-back rule in section

408(d)(3)(B).

7. 20-Percent Mandatory Withholding

a. Additional Withholding

In response to comments, the regulations clarify that a plan

administrator or payor may (but is not required to) permit a

distributee to elect to have more than 20 percent withheld from an

eligible rollover distribution.

b. Limitation of Withholding to Cash and Property Distributed

Section 3405(e)(8) limits the maximum amount that may be withheld

on any designated distribution to the sum of the amount of money and

the fair market value of property (other than employer securities) that

is received in the distribution. Commentators asked whether 20-percent

withholding applies if the portion of the distribution that is a

designated distribution is allocated to employer stock and paid to the

employee, while the portion of the distribution that is the return of

basis is allocated to cash. The final regulations clarify that the

section 3405(e)(8) provision limiting withholding to the sum of cash

and property (other than employer securities) applies to the total

distribution (including, for example, return of basis) and not just to

the designated distribution.

Effective Date

These final regulations apply to distributions made on or after

October 19, 1995. The text of these regulations replaces the temporary

regulations published in the Federal Register on October 22, 1992.

Although they will be removed from the Code of Federal Regulations

(CFR), the temporary regulations, as they appear in the April 1, 1995

edition of 26 CFR part 1, retain their effectiveness with respect to

distributions made on or after January 1, 1993, but before October 19,

1995. However, for any distribution made on or after January 1, 1993

but before October 19, 1995, plans may comply with the provisions of

UCA by substituting all or part of the provisions of these final

regulations for the corresponding provisions of the temporary

regulations, if any.

In addition, no penalties or sanctions will apply for failure to

satisfy section 401(a)(31) or section 402(f), or for failure to

withhold in accordance with section 3405(c), if the requirements of UCA

are satisfied with respect to a distribution, made on or after October

19, 1995 but before January 1, 1996, by substituting all or part of the

provisions of the temporary regulations for the corresponding

provisions of these final regulations. For any distribution made on or

after October 19, 1995 but before January 1, 1996, a distributee may

roll over the distribution if it qualifies as an eligible rollover

distribution if all or part of the provisions of the temporary

regulations are substituted for the corresponding provisions of these

final regulations. Moreover, during this period, the plan administrator

and the employee (or spousal distributee) need not apply the provisions

in the same manner with respect to any distribution.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has 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 Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business Administration for comment on its

impact on small business.

Drafting Information

The principal author of these regulations is Marjorie Hoffman,

Office of the Associate Chief Counsel (Employee Benefits and Exempt

Organizations), IRS. However, other personnel from the Service and the

Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensation.

26 CFR Part 602

Reporting and recordkeeping requirements.

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

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read,

in part, as follows:

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

Secs. 1.401(a)(31)-1T, 1.402(c)-2T, 1.402(f)-2T, and 1.403(b)-

2T [Removed]

Par. 2. Sections 1.401(a)(31)-1T, 1.402(c)-2T, 1.402(f)-2T, and

1.403(b)-2T are removed.

Par. 3. Sections 1.401(a)(31)-1, 1.402(c)-2, and 1.403(b)-2 are

added and Sec. 1.402(f)-1 is revised to read as follows:

Sec. 1.401(a)(31)-1 Requirement to offer direct rollover of eligible

rollover distributions; questions and answers.

The following questions and answers relate to the qualification

requirement imposed by section 401(a)(31) of the Internal Revenue Code

of 1986, pertaining to the direct rollover option for eligible rollover

distributions from pension, profit-sharing, and stock bonus plans.

Section 401(a)(31) was added by section 522(a) of the Unemployment

Compensation Amendments of 1992, Public Law 102-318, 106 Stat. 290

(UCA). For additional UCA guidance under sections 402(c), 402(f),

403(b)(8) and (10), and 3405(c), see Secs. 1.402(c)-2, 1.402(f)-1, and

1.403(b)-2, and Sec. 31.3405(c)-1 of this chapter, respectively.

List of Questions

Q-1: What are the direct rollover requirements under section

401(a)(31)?

Q-2: Does section 401(a)(31) require that a qualified plan

permit a direct rollover to be made to a qualified trust that is not

part of a defined contribution plan?

Q-3: What is a direct rollover that satisfies section

401(a)(31), and how is it accomplished?

Q-4: Is providing a distributee with a check for delivery to an

eligible retirement plan a reasonable means of accomplishing a

direct rollover?

Q-5: Is an eligible rollover distribution that is paid to an

eligible retirement plan in a direct rollover currently includible

in gross income or subject to 20-percent withholding?

Q-6: What procedures may a plan administrator prescribe for

electing a direct rollover, and what information may the plan

administrator require a distributee to provide when electing a

direct rollover?

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

[[Page 49205]]

make a direct rollover within a certain time period?

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?

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?

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?

Q-11: Will a plan satisfy section 401(a)(31) if the plan

administrator 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?

Q-12: Is a plan administrator 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?

Q-13: Is the eligible retirement plan designated by a

distributee to receive a direct rollover distribution required to

accept the distribution?

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?

Q-15: Must a direct rollover option be provided for an eligible

rollover distribution that is in the form of a plan loan offset

amount?

Q-16: Must a direct rollover option be provided for an eligible

rollover distribution from a qualified plan distributed annuity

contract?

Q-17: What assumptions may a plan administrator make regarding

whether a benefit is an eligible rollover distribution?

Q-18: When must a qualified plan be amended to comply with

section 401(a)(31)?

Questions and Answers

Q-1: What are the direct rollover requirements under section

401(a)(31)?

A-1: (a) General rule. To satisfy section 401(a)(31), added by UCA,

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 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. For purposes

of section 401(a)(31) and this section, eligible rollover distribution

has the meaning set forth in section 402(c)(4) and Sec. 1.402(c)-2,

Q&A-3 through Q&A-10 and Q&A-14, except as otherwise provided in Q&A-2

of this section, eligible retirement plan has the meaning set forth in

section 402(c)(8)(B) and Sec. 1.402(c)-2, Q&A-2.

(b) Related Internal Revenue 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). See

Sec. 31.3405(c)-1 of this chapter for guidance concerning the

withholding requirements applicable to eligible rollover distributions.

(2) Notice requirement. Section 402(f) requires the plan

administrator of a qualified plan to provide, within a reasonable

period of 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

that election. The explanation also is required to provide certain

other relevant information relating to the taxation of distributions.

See Sec. 1.402(f)-1 for guidance concerning the written explanation

required under section 402(f).

(3) Section 403(b) annuities. Section 403(b)(10) provides that

requirements similar to those imposed by section 401(a)(31) apply to

annuities described in section 403(b). See Sec. 1.403(b)-2 for guidance

concerning the direct rollover requirements for distributions from

annuities described in section 403(b).

(c) Effective date--(1) Statutory effective date. Section

401(a)(31) applies to eligible rollover distributions made on or after

January 1, 1993.

(2) Regulatory effective date. This section applies to eligible

rollover distributions made on or after October 19, 1995. For eligible

rollover distributions made on or after January 1, 1993 and before

October 19, 1995, Sec. 1.401(a)(31)-1T (as it appeared in the April 1,

1995 edition of 26 CFR part 1), applies. However, for any distribution

made on or after January 1, 1993 but before October 19, 1995, a plan

may satisfy section 401(a)(31) by substituting any or all provisions of

this section for the corresponding provisions of Sec. 1.401(a)(31)-1T,

if any.

Q-2: Does section 401(a)(31) require that a qualified plan permit a

direct rollover to be made to a qualified trust that is not part of a

defined contribution plan?

A-2: No. Section 401(a)(31)(D) limits the types of qualified trusts

that are treated as eligible retirement plans to defined contribution

plans that accept eligible rollover distributions. Therefore, although

a plan is permitted, at a participant's election, to make a direct

rollover to any type of eligible retirement plan, as defined in section

402(c)(8)(B) (including a defined benefit plan), a plan will not fail

to satisfy section 401(a)(31) solely because the plan will not permit a

direct rollover to a qualified trust that is part of a defined benefit

plan. In contrast, if a distributee elects a direct rollover of an

eligible rollover distribution to an annuity plan described in section

403(a), that distribution must be paid to the annuity plan, even if the

recipient annuity plan is a defined benefit plan.

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 a

custodial individual retirement account or 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

[[Page 49206]]

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 currently includible in

gross income or subject to 20-percent withholding?

A-5: No. An eligible rollover distribution that is paid to an

eligible retirement plan in a direct rollover is not currently

includible in the distributee's gross income under section 402(c) 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 section 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 to provide when electing a direct

rollover?

A-6: (a) Permissible procedures. Except as otherwise provided in

paragraph (b) of this Q&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 Sec. 31.3405(c)-1(b), Q&A-7 of this chapter. For example,

it would be reasonable for the plan administrator to require that the

distributee provide a statement from the designated recipient plan that

the plan will accept the direct rollover for the benefit of the

distributee and that the recipient plan is, or is intended to be, an

individual retirement account, an individual retirement annuity, a

qualified annuity plan described in section 403(a), or a qualified

trust described in section 401(a), as applicable. In the case of a

designated recipient plan that is a qualified trust, it also would be

reasonable for the plan administrator to require a statement that the

qualified trust is not excepted from the definition of an eligible

retirement plan by section 401(a)(31)(D) (i.e., is not a defined

benefit plan).

(b) Impermissible procedures. A plan will fail to satisfy section

401(a)(31) if the plan administrator prescribes any unreasonable

procedure, or requires information or documentation, that effectively

eliminates or substantially impairs the distributee's ability to elect

a direct rollover. For example, it would effectively eliminate or

substantially impair the distributee's ability to elect a direct

rollover if the recipient plan required the distributee to obtain an

opinion of counsel stating that the eligible retirement plan receiving

the rollover is a qualified plan or individual retirement account.

Similarly, it would effectively eliminate or substantially impair the

distributee's ability to elect a direct rollover if the distributing

plan required a letter from the recipient eligible retirement plan

stating that, upon request by the distributing plan, the recipient plan

will automatically return any direct rollover amount that the

distributing plan advises the recipient plan was paid incorrectly. It

would also effectively eliminate or substantially impair the

distributee's ability to elect a direct rollover if the distributing

plan required, as a condition for making a direct rollover, a letter

from the recipient eligible retirement plan indemnifying the

distributing plan for any liability arising from the distribution.

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 any 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 default procedure and an explanation of the direct rollover option

as required under section 402(f) and Sec. 1.402(f)-1, Q&A-1 and unless

the timing requirements described in Sec. 1.402(f)-1, Q&A-2 and Q&A-3

have been satisfied with respect to the explanations of both the

default procedure and the direct rollover option.

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 with respect to revocation of a direct

rollover election 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 a specified minimum

amount, provided the specified minimum amount is less than or equal to

$500 or any greater amount as prescribed by the Commissioner in revenue

rulings, notices, and other guidance published in the Internal Revenue

Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter. If the entire

amount of the eligible rollover distribution is less than or equal to

the specified minimum amount, 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. Thus, the plan administrator may

require that the distributee select a single eligible retirement plan

to which the eligible rollover distribution (or portion thereof) will

be distributed in a direct rollover.

Q-11: Will a plan satisfy section 401(a)(31) if the plan

administrator 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

[[Page 49207]]

administrator does not permit any 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 rules described

in Sec. 31.3405(c)-1, Q&A-14 of this chapter (relating to whether

withholding under section 3405(c) is required for 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 or the lower specified amount.

Q-12: Is a plan administrator 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: (a) Yes. A plan administrator 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:

(1) 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

(2) 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.

(b) See Sec. 1.402(f)-1, Q&A-3 for further guidance concerning the

rules for providing section 402(f) notices when eligible rollover

distributions are made in a series of periodic payments.

Q-13: Is the eligible retirement plan designated by a distributee

to receive a direct rollover distribution required to accept the

distribution?

A-13: (a) General rule. 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 accepting only cash or its equivalent).

(b) Qualification of receiving plan. A plan that accepts a direct

rollover from another plan will not fail to satisfy section 401(a)

merely because the plan making the distribution is, in fact, not

qualified under section 401(a) or section 403(a) at the time of the

distribution, if, prior to accepting the rollover, the receiving plan

reasonably concluded that the distributing plan was qualified under

section 401(a) or section 403(a). For example, the receiving plan may

reasonably conclude that the distributing plan was qualified under

section 401(a) or section 403(a) if, prior to accepting the rollover,

the plan administrator of the distributing plan provided the receiving

plan with a statement that the distributing plan had received a

determination letter from the Commissioner indicating that the plan was

qualified.

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 plan 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 Sec. 1.411(d)-4, Q&A-3.

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 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: Must a direct rollover option be provided for an eligible

rollover distribution that is in the form of a plan loan offset amount?

A-15: A plan will not fail to satisfy section 401(a)(31) merely

because the plan does not permit a distributee to elect a direct

rollover of an eligible rollover distribution in the form of a plan

loan offset amount. Section 1.402(c)-2(b), Q&A-9 defines a plan loan

offset amount, in general, as a distribution that occurs when, under

the terms governing a plan loan, the participant's accrued benefit is

reduced (offset) in order to repay the loan. A plan administrator is

permitted to allow a direct rollover of a participant note for a plan

loan to a qualified trust described in section 401(a) or a qualified

annuity plan described in section 403(a). See Sec. 1.402(c)-2, Q&A-9

for examples illustrating the rules for plan loan offset amounts that

are set forth in this Q&A-15. See Sec. 31.3405(c)-1, Q&A-11 of this

chapter for guidance concerning special withholding rules that apply to

a distribution in the form of a plan loan offset amount.

Q-16: Must a direct rollover option be provided for an eligible

rollover distribution from a qualified plan distributed annuity

contract?

A-16: Yes. If any amount to be distributed under a qualified plan

distributed annuity contract is an eligible rollover distribution (in

accordance with Sec. 1.402(c)-2), Q&A-10 the annuity contract must

satisfy section 401(a)(31) in the same manner as a qualified plan under

section 401(a). Section 1.402(c)-2, Q&A-10 defines a qualified plan

distributed annuity contract as an annuity contract purchased for a

participant, and distributed to the participant, by a qualified plan.

In the case of a qualified plan distributed annuity contract, the payor

under the contract is treated as the plan administrator. See

Sec. 31.3405(c)-1, Q&A-13 of this chapter concerning the application of

mandatory 20-percent withholding requirements to distributions from a

qualified plan distributed annuity contract.

Q-17: What assumptions may a plan administrator make regarding

whether a benefit is an eligible rollover distribution?

A-17: (a) General rule. For purposes of section 401(a)(31), a plan

administrator may make the assumptions described in paragraphs (b) and

(c) of this Q&A-17 in determining the amount of a distribution that is

an eligible rollover distribution for which a direct rollover option

must be provided. Section 31.3405(c)-1, Q&A-10 of this chapter provides

assumptions for purposes of complying with section 3405(c). See

Sec. 1.402(c)-2, Q&A-15 concerning the effect of these assumptions for

purposes of section 402(c).

(b) $5,000 death benefit. A plan administrator is permitted to

assume that a distribution from the plan that

[[Page 49208]]

qualifies for the $5,000 death benefit exclusion under section 101(b)

is the only death benefit being paid with respect to a deceased

employee that qualifies for that exclusion. Thus, to the extent that

such a distribution would be excludible from gross income based on this

assumption, the plan administrator is permitted to assume that it is

not an eligible rollover distribution.

(c) Determination of designated beneficiary. For the purpose of

determining the amount of the minimum distribution required to satisfy

section 401(a)(9)(A) for any calendar year, the plan administrator is

permitted to assume that there is no designated beneficiary.

Q-18: When must a qualified plan be amended to comply with section

401(a)(31)?

A-18: Even though section 401(a)(31) applies to distributions from

qualified plans made on or after January 1, 1993, a qualified plan is

not required to be amended before 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 accordance with the

requirements of section 401(a)(31); and

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

Sec. 1.402(c)-2 Eligible rollover distributions; questions and

answers.

The following questions and answers relate to the rollover rules

under section 402(c) of the Internal Revenue Code of 1986, as added by

sections 521 and 522 of the Unemployment Compensation Amendments of

1992, Public Law 102-318, 106 Stat. 290 (UCA). For additional UCA

guidance under sections 401(a)(31), 402(f), 403(b)(8) and (10), and

3405(c), see Secs. 1.401(a)(31)-1, 1.402(f)-1, and 1.403(b)-2, and

Sec. 31.3405(c)-1 of this chapter, respectively.

List of Questions

Q-1: What is the rule regarding distributions that may be rolled

over to an eligible retirement plan?

Q-2: What is an eligible retirement plan and a qualified plan?

Q-3: What is an eligible rollover distribution?

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

distributions?

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 section 402(c)(4)(A)?

Q-6: What types of variations in the amount of a payment cause

the payment to be independent of a series of substantially equal

periodic payments and thus not part of the series?

Q-7: When is a distribution from a plan a required minimum

distribution under section 401(a)(9)?

Q-8: How are amounts that are not includible in gross income

allocated for purposes of determining the required minimum

distribution?

Q-9: What is a distribution of a plan loan offset amount and is

it an eligible rollover distribution?

Q-10: What is a qualified plan distributed annuity contract, and

is an amount paid under such a contract a distribution of the

balance to the credit of the employee in a qualified plan for

purposes of section 402(c)?

Q-11: If an eligible rollover distribution is paid to an

employee, and the employee contributes all or part of the eligible

rollover distribution to an eligible retirement plan within 60 days,

is the amount contributed not currently includible in gross income?

Q-12: How does section 402(c) apply to a distributee who is not

the employee?

Q-13: Must an employee's (or spousal distributee's) election to

treat a contribution of an eligible rollover distribution to an

individual retirement plan as a rollover contribution be

irrevocable?

Q-14: How is the $5,000 death benefit exclusion under section

101(b) treated for purposes of determining the amount that is an

eligible rollover distribution?

Q-15: May an employee (or spousal distributee) roll over more

than the plan administrator determines to be an eligible rollover

distribution using an assumption described in Sec. 1.401(a)(31)-1,

Q&A-17?

Q-16: Is a rollover from a qualified plan to an individual

retirement account or individual retirement annuity treated as a

rollover contribution for purposes of the one-year look-back

rollover limitation of section 408(d)(3)(B)?

Questions and Answers

Q-1: What is the rule regarding distributions that may be rolled

over to an eligible retirement plan?

A-1: (a) General rule. Under section 402(c), as added by UCA, any

portion of a distribution from a qualified plan that is 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). For

purposes of section 402(c) and this section, a rollover is either a

direct rollover as described in Sec. 1.401(a)(31)-1, Q&A-3 or a

contribution of an eligible rollover distribution to an eligible

retirement plan that satisfies the time period requirement in section

402(c)(3) and Q&A-11 of this section and the designation requirement

described in Q&A-13 of this section. See Q&A-2 of this section for the

definition of an eligible retirement plan and a qualified plan.

(b) Related Internal Revenue Code provisions--(1) Direct rollover

option. Section 401(a)(31), added by 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 Sec. 1.401(a)(31)-1 for

further guidance concerning this direct rollover option.

(2) Notice requirement. Section 402(f) 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 that election.

The explanation also is required to provide certain other relevant

information relating to the taxation of distributions. See

Sec. 1.402(f)-1 for guidance concerning the written explanation

required under section 402(f).

(3) 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 section 401(a)(31), the

eligible rollover distribution is subject to 20-percent income tax

withholding under section 3405(c). See Sec. 31.3405(c)-1 of this

chapter for provisions relating to the withholding requirements

applicable to eligible rollover distributions.

(4) Section 403(b) annuities. See Sec. 1.403(b)-2 for guidance

concerning the direct rollover requirements for distributions from

annuities described in section 403(b).

(c) Effective date--(1) Statutory effective date. Section 402(c),

added by UCA, applies to eligible rollover distributions made on or

after January 1, 1993, even if the event giving rise to the

distribution occurred 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.

(2) Regulatory effective date. This section applies to any

distribution made on or after October 19, 1995. For eligible rollover

distributions made on or after January 1, 1993 and before October 19,

1995, Sec. 1.402(c)-2T (as it appeared in the April 1, 1995 edition of

26 CFR part 1), applies. However, for any distribution made on or after

January 1, 1993 but before October 19, 1995, any

[[Page 49209]]

or all of the provisions of this section may be substituted for the

corresponding provisions of Sec. 1.402(c)-2T, if any.

Q-2: What is an eligible retirement plan and a qualified plan?

A-2: An eligible retirement plan, under section 402(c)(8)(B), means

a qualified plan or an individual retirement plan. For purposes of

section 402(c) and this section, a qualified plan is an employees'

trust described in section 401(a) which is exempt from tax under

section 501(a) or an annuity plan described in section 403(a). An

individual retirement plan is an individual retirement account

described in section 408(a) or an individual retirement annuity (other

than an endowment contract) described in section 408(b).

Q-3: What is an eligible rollover distribution?

A-3: (a) General rule. Unless specifically excluded, an eligible

rollover distribution means any distribution to an employee (or to a

spousal distributee described in Q&A-12(a) of this section) of all or

any portion of the balance to the credit of the employee in a qualified

plan. Thus, except as specifically provided in Q&A-4(b) of this

section, any amount distributed to an employee (or such a spousal

distributee) from a qualified plan is an eligible rollover

distribution, regardless of whether it is a distribution of a benefit

that is protected under section 411(d)(6).

(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 made (not less frequently than annually) over any one

of the following periods--

(i) The life of the employee (or the joint lives of the employee

and the employee's designated beneficiary);

(ii) The life expectancy of the employee (or the joint life and

last survivor expectancy of the employee and the employee's designated

beneficiary); or

(iii) A specified period of ten years or more;

(2) Any distribution to the extent the distribution is a required

minimum distribution under section 401(a)(9); 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 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) Elective deferrals, as defined in section 402(g)(3), that,

pursuant to Sec. 1.415-6(b)(6)(iv), are returned as a result of the

application of the section 415 limitations, together with the income

allocable to these corrective distributions.

(b) Corrective distributions of excess deferrals as described in

Sec. 1.402(g)-1(e)(3), together with the income allocable to these

corrective distributions.

(c) Corrective distributions of excess contributions under a

qualified cash or deferred arrangement described in Sec. 1.401(k)-

1(f)(4) and excess aggregate contributions described in Sec. 1.401(m)-

1(e)(3), together with the income allocable to these distributions.

(d) Loans that are treated as deemed distributions pursuant to

section 72(p).

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

404(k).

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

(g) Similar items designated by the Commissioner in revenue

rulings, notices, and other guidance published in the Internal Revenue

Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.

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 section 402(c)(4)(A)?

A-5: (a) General rule. Generally, whether a series of payments is a

series of substantially equal periodic payments over a specified period

is determined at the time payments begin, and by following the

principles of section 72(t)(2)(A)(iv), without regard to contingencies

or modifications that have not yet occurred. Thus, for example, a joint

and 50-percent survivor annuity 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

employee if the employee's beneficiary dies before the employee.

Similarly, for purposes of determining if a disability benefit payment

is part of a series of substantially equal payments for a period

described in section 402(c)(4)(A), any contingency under which payments

cease upon recovery from the disability may be disregarded.

(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 of not less than $200 a month

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. A series of payments that are not substantially equal solely

because the amount of each payment is reduced upon attainment of social

security retirement age (or, alternatively, upon commencement of social

security early retirement, survivor, or disability benefits) will also

be treated as substantially equal as long as the reduction in the

actual payments is level and does not exceed the applicable social

security benefit.

(c) Changes in the amount of payments or the distributee. 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 Q&A-3(b)(1) of this section. This

determination is made without taking into account payments made or the

years of payment that elapsed prior to the change. However, a new

determination is not made merely because, upon the death of the

employee, the spouse or former spouse of the employee becomes the

distributee. Thus, once distributions commence over a period that is at

least as long as either the first annuitant's life or 10 years (e.g.,

as provided by a life annuity with a five-year or ten-year-certain

guarantee), then substantially equal payments to the survivor are not

eligible rollover distributions even though the payment period

remaining after the death of the employee is or may be less than the

period described in section 402(c)(4)(A). For example, substantially

equal periodic payments made under a life annuity with a five-year term

certain would not be an eligible rollover distribution even when

[[Page 49210]]

paid after the death of the employee with three years remaining under

the term certain.

(d) Defined contribution plans. The following rules apply in

determining whether a series of payments from a defined contribution

plan constitute substantially equal periodic payments for a period

described in section 402(c)(4)(A):

(1) Declining balance of years. A series of payments from an

account balance under a defined contribution plan will be considered

substantially equal payments over a period if, for each year, the

amount of the distribution is calculated by dividing the account

balance by the number of years remaining in the period. For example, a

series of payments will be considered substantially equal payments over

10 years if the series is determined as follows. In year 1, the annual

payment is the account balance divided by 10; in year 2, the annual

payment is the remaining account balance divided by 9; and so on until

year 10 when the entire remaining balance is distributed.

(2) Reasonable actuarial assumptions. If an employee's account

balance under a defined contribution plan is to be distributed in

annual installments of a specified amount until the account balance is

exhausted, then, for purposes of determining if the period of

distribution is a period described in section 402(c)(4)(A), the period

of years over which the installments will be distributed must be

determined using reasonable actuarial assumptions. For example, if an

employee has an account balance of $100,000, elects distributions of

$12,000 per year until the account balance is exhausted, and the future

rate of return is assumed to be 8% per year, the account balance will

be exhausted in approximately 14 years. Similarly, if the same employee

elects a fixed annual distribution amount and the fixed annual amount

is less than or equal to $10,000, it is reasonable to assume that a

future rate of return will be greater than 0% and, thus, the account

will not be exhausted in less than 10 years.

(e) 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: What types of variations in the amount of a payment cause the

payment to be independent of a series of substantially equal periodic

payments and thus not part of the series?

A-6: (a) Independent payments. Except as provided in paragraph (b)

of this Q&A, a payment is treated as independent of the payments in a

series of substantially equal payments, and thus not part of the

series, if the payment is substantially larger or smaller than the

other payments in the series. 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 of whether the payment is made before, with, or after

payments in the series. For example, if an employee 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 an employee's surviving spouse receives a survivor life

annuity of $1,000 per month plus a single payment on account of death

of $7,500, the single payment is treated as independent of the payments

in the annuity and is an eligible rollover distribution unless

otherwise excepted (e.g., $5,000 of the $7,500 might qualify to be

excluded from gross income as a death benefit under section 101(b)).

(b) Special rules--(1) Administrative error or delay. If, due

solely to reasonable administrative error or delay in payment, there is

an adjustment after the annuity starting date to the amount of any

payment in a series of payments that otherwise would constitute a

series of substantially equal payments described in section

402(c)(4)(A) and this section, the adjusted payment or payments will be

treated as part of the series of substantially equal periodic payments

and will not be treated as independent of the payments in the series.

For example, if, due solely to reasonable administrative delay, the

first payment of a life annuity is delayed by two months and reflects

an additional two months worth of benefits, that payment will be

treated as a substantially equal payment in the series rather than as

an independent payment. The result will not change merely because the

amount of the adjustment is paid in a separate supplemental payment.

(2) Supplemental payments for annuitants. A supplemental payment

from a defined benefit plan to annuitants (e.g., retirees or

beneficiaries) will be treated as part of a series of substantially

equal payments, rather than as an independent payment, provided that

the following conditions are met--

(i) The supplement is a benefit increase for annuitants;

(ii) The amount of the supplement is determined in a consistent

manner for all similarly situated annuitants;

(iii) The supplement is paid to annuitants who are otherwise

receiving payments that would constitute substantially equal periodic

payments; and

(iv) The aggregate supplement is less than or equal to the greater

of 10% of the annual rate of payment for the annuity, or $750 or any

higher amount prescribed by the Commissioner in revenue rulings,

notices, and other guidance published in the Federal Register. See

Sec. 601.601(d)(2)(ii)(b) of this chapter.

(3) Final payment in a series. If a payment in a series of payments

from an account balance under a defined contribution plan represents

the remaining balance to the credit and is substantially less than the

other payments in the series, the final payment must nevertheless be

treated as a payment in the series of substantially equal payments and

may not be treated as an independent payment if the other payments in

the series are substantially equal and the payments are for a period

described in section 402(c)(4)(A) based on the rules provided in

paragraph (d)(2) of Q&A-5 of this section. Thus, such final payment

will not be an eligible rollover distribution.

Q-7: When is a distribution from a plan a required minimum

distribution under section 401(a)(9)?

A-7: (a) General rule. Except as provided in paragraphs (b) and (c)

of this Q&A, if a minimum distribution is required for a calendar year,

the amounts distributed during that calendar year are treated as

required minimum distributions under section 401(a)(9), to the extent

that the total required minimum distribution under section 401(a)(9)

for the calendar year has not been satisfied. Accordingly, these

amounts are not eligible rollover distributions. For example, if an

employee is required under section

[[Page 49211]]

401(a)(9) to receive a required minimum distribution for a calendar

year of $5,000 and the employee receives a total of $7,200 in that

year, the first $5,000 distributed will be treated as the required

minimum distribution and will not be an eligible rollover distribution

and the remaining $2,200 will be an eligible rollover distribution if

it otherwise qualifies. If the total section 401(a)(9) required minimum

distribution for a calendar year 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 minimum distribution.

(b) Distribution before age 70\1/2\. Any amount that is paid before

January 1 of the year in which the employee attains (or would have

attained) age 70\1/2\ will not be treated as required under section

401(a)(9) and, thus, is an eligible rollover distribution if it

otherwise qualifies.

(c) Special rule for annuities. In the case of annuity payments

from a defined benefit plan, or under an annuity contract purchased

from an insurance company (including a qualified plan distributed

annuity contract (as defined in Q&A-10 of this section)), the entire

amount of any such annuity payment made on or after January 1 of the

year in which an employee attains (or would have attained) age 70\1/2\

will be treated as an amount required under section 401(a)(9) and,

thus, will not be an eligible rollover distribution.

Q-8: How are amounts that are not includible in gross income

allocated for purposes of determining the required minimum

distribution?

A-8: If section 401(a)(9) has not yet been satisfied by the plan

for the year with respect to an employee, a distribution is made to the

employee that exceeds the amount required to satisfy section 401(a)(9)

for the year for the employee, and a portion of that distribution is

excludible from gross income, the following rule applies for purposes

of determining the amount of the distribution that is an eligible

rollover distribution. The portion of the distribution that is

excludible from gross income is first allocated toward satisfaction of

section 401(a)(9) and then the remaining portion of the required

minimum distribution, if any, is satisfied from the portion of the

distribution that is includible in gross income. For example, assume an

employee is required under section 401(a)(9) to receive a minimum

distribution for a calendar year of $4,000 and the employee receives a

$4,800 distribution, of which $1,000 is excludible from income as a

return of basis. First, the $1,000 return of basis is allocated toward

satisfying the required minimum distribution. Then, the remaining

$3,000 of the required minimum distribution is satisfied from the

$3,800 of the distribution that is includible in gross income, so that

the remaining balance of the distribution, $800, is an eligible

rollover distribution if it otherwise qualifies.

Q-9: What is a distribution of a plan loan offset amount, and is it

an eligible rollover distribution?

A-9: (a) General rule. A distribution of a plan loan offset amount,

as defined in paragraph (b) of this Q&A, is an eligible rollover

distribution if it satisfies Q&A-3 of this section. Thus, an amount

equal to the plan loan offset amount can be rolled over by the employee

(or spousal distributee) to an eligible retirement plan within the 60-

day period under section 402(c)(3), unless the plan loan offset amount

fails to be an eligible rollover distribution for another reason. See

Sec. 1.401(a)(31)-1, Q&A-15 for guidance concerning the offering of a

direct rollover of a plan loan offset amount. See Sec. 31.3405(c)-1,

Q&A-11 of this chapter for guidance concerning special withholding

rules with respect to plan loan offset amounts.

(b) Definition of plan loan offset amount. For purposes of section

402(c), a distribution of a plan loan offset amount is a distribution

that occurs when, under the plan terms governing a plan loan, the

participant's accrued benefit is reduced (offset) in order to repay the

loan (including the enforcement of the plan's security interest in a

participant's accrued benefit). A distribution of a plan loan offset

amount can occur in a variety of circumstances, e.g., where the terms

governing a plan loan require that, in the event of the employee's

termination of employment or request for a distribution, the loan be

repaid immediately or treated as in default. A distribution of a plan

loan offset amount also occurs when, under the terms governing the plan

loan, the loan is cancelled, accelerated, or treated as if it were in

default (e.g., where the plan treats a loan as in default upon an

employee's termination of employment or within a specified period

thereafter). A distribution of a plan loan offset amount is an actual

distribution, not a deemed distribution under section 72(p).

(c) Examples. The rules with respect to a plan loan offset amount

in this Q&A-9, Sec. 1.401(a)(31)-1, Q&A-15 and Sec. 31.3405(c)-1, Q&A-

11 of this chapter are illustrated by the following examples:

Example 1. (a) In 1996, Employee A has an account balance of

$10,000 in Plan Y, of which $3,000 is invested in a plan loan to

Employee A that is secured by Employee A's account balance in Plan

Y. Employee A has made no after-tax employee contributions to Plan

Y. Plan Y does not provide any direct rollover option with respect

to plan loans. Upon termination of employment in 1996, Employee A,

who is under age 70\1/2\ , elects a distribution of Employee A's

entire account balance in Plan Y, and Employee A's outstanding loan

is offset against the account balance on distribution. Employee A

elects a direct rollover of the distribution.

(b) In order to satisfy section 401(a)(31), Plan Y must pay

$7,000 directly to the eligible retirement plan chosen by Employee A

in a direct rollover. When Employee A's account balance was offset

by the amount of the $3,000 unpaid loan balance, Employee A received

a plan loan offset amount (equivalent to $3,000) that is an eligible

rollover distribution. However, under Sec. 1.401(a)(31)-1, Q&A-15

Plan Y satisfies section 401(a)(31), even though a direct rollover

option was not provided with respect to the $3,000 plan loan offset

amount.

(c) No withholding is required under section 3405(c) on account

of the distribution of the $3,000 plan loan offset amount because no

cash or other property (other than the plan loan offset amount) is

received by Employee A from which to satisfy the withholding.

Employee A may roll over $3,000 to an eligible retirement plan

within the 60 day period provided in section 402(c)(3).

Example 2. (a) The facts are the same as in Example 1, except

that the terms governing the plan loan to Employee A provide that,

upon termination of employment, Employee A's account balance is

automatically offset by the amount of any unpaid loan balance to

repay the loan. Employee A terminates employment but does not

request a distribution from Plan Y. Nevertheless, pursuant to the

terms governing the plan loan, Employee A's account balance is

automatically offset by the amount of the $3,000 unpaid loan

balance.

(b) The $3,000 plan loan offset amount attributable to the plan

loan in this example is treated in the same manner as the $3,000

plan loan offset amount in Example 1.

Example 3. (a) The facts are the same as in Example 2, except

that, instead of providing for an automatic offset upon termination

of employment to repay the plan loan, the terms governing the plan

loan require full repayment of the loan by Employee A within 30 days

of termination of employment. Employee A terminates employment, does

not elect a distribution from Plan Y, and also fails to repay the

plan loan within 30 days. The plan administrator of Plan Y declares

the plan loan to Employee A in default and executes on the loan by

offsetting Employee A's account balance by the amount of the $3,000

unpaid loan balance.

[[Page 49212]]

(b) The $3,000 plan loan offset amount attributable to the plan

loan in this example is treated in the same manner as the $3,000

plan loan offset amount in Example 1 and in Example 2. The result in

this Example 3 is the same even though the plan administrator treats

the loan as in default before offsetting Employee A's accrued

benefit by the amount of the unpaid loan.

Example 4. (a) The facts are the same as in Example 1, except

that Employee A elects to receive the distribution of the account

balance that remains after the $3,000 offset to repay the plan loan,

instead of electing a direct rollover of the remaining account

balance.

(b) In this case, the amount of the distribution received by

Employee A is $10,000, not $3,000. Because the amount of the $3,000

offset attributable to the loan is included in determining the

amount that equals 20 percent of the eligible rollover distribution

received by Employee A, withholding in the amount of $2,000 (20

percent of $10,000) is required under section 3405(c). The $2,000 is

required to be withheld from the $7,000 to be distributed to

Employee A in cash, so that Employee A actually receives a check for

$5,000.

Example 5. The facts are the same as in Example 4, except that

the $7,000 distribution to Employee A after the offset to repay the

loan consists solely of employer securities within the meaning of

section 402(e)(4)(E). In this case, no withholding is required under

section 3405(c) because the distribution consists solely of the

$3,000 plan loan offset amount and the $7,000 distribution of

employer securities. This is the result because the total amount

required to be withheld does not exceed the sum of the cash and the

fair market value of other property distributed, excluding plan loan

offset amounts and employer securities. Employee A may roll over the

employer securities and $3,000 to an eligible retirement plan within

the 60-day period provided in section 402(c)(3).

Example 6. Employee B, who is age 40, has an account balance in

Plan Z, a profit sharing plan qualified under section 401(a) that

includes a qualified cash or deferred arrangement described in

section 401(k). Plan Z provides for no after-tax employee

contributions. In 1990, Employee B receives a loan from Plan Z, the

terms of which satisfy section 72(p)(2), and which is secured by

elective contributions subject to the distribution restrictions in

section 401(k)(2)(B). In 1996, the loan fails to satisfy section

72(p)(2) because Employee B stops repayment. In that year, pursuant

to section 72(p), Employee B is taxed on a deemed distribution equal

to the amount of the unpaid loan balance. Under Q&A-4 of this

section, the deemed distribution is not an eligible rollover

distribution. Because Employee B has not separated from service or

experienced any other event that permits the distribution under

section 401(k)(2)(B) of the elective contributions that secure the

loan, Plan Z is prohibited from executing on the loan. Accordingly,

Employee B's account balance is not offset by the amount of the

unpaid loan balance at the time Employee B stops repayment on the

loan. Thus, there is no distribution of an offset amount that is an

eligible rollover distribution in 1996.

Q-10: What is a qualified plan distributed annuity contract, and is

an amount paid under such a contract a distribution of the balance to

the credit of the employee in a qualified plan for purposes of section

402(c)?

A-10: (a) Definition of a qualified plan distributed annuity

contract. A qualified plan distributed annuity contract is an annuity

contract purchased for a participant, and distributed to the

participant, by a qualified plan.

(b) Treatment of amounts paid as eligible rollover distributions.

Amounts paid under a qualified plan distributed annuity contract are

payments of the balance to the credit of the employee for purposes of

section 402(c) and are eligible rollover distributions, if they

otherwise qualify. Thus, for example, if the employee 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 minimum distribution

under section 401(a)(9). This rule applies even if the annuity contract

is distributed in connection with a plan termination. See

Sec. 1.401(a)(31)-1, Q&A-16 and Sec. 31.3405(c)-1, Q&A-13 of this

chapter concerning the direct rollover requirements and 20-percent

withholding requirements, respectively, that apply to eligible rollover

distributions from such an annuity contract.

Q-11: If an eligible rollover distribution is paid to an employee,

and the employee contributes all or part of the eligible rollover

distribution to an eligible retirement plan within 60 days, is the

amount contributed not currently includible in gross income?

A-11: Yes, the amount contributed is not currently includible in

gross income, provided that it is contributed to the eligible

retirement plan no later than the 60th day following the day on which

the employee received the distribution. If more than one distribution

is received by an employee from a qualified plan during a taxable year,

the 60-day rule applies separately to each 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 of the eligible rollover distribution actually received by

the employee. 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

employee'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-12: How does section 402(c) apply to a distributee who is not the

employee?

A-12: (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 in accordance with a qualified domestic relations

order (as defined in section 414(p)) to the employee's spouse or former

spouse who is an alternate payee. Therefore, a distribution to the

surviving spouse of an employee (or to a spouse or former spouse who is

an alternate payee under a qualified domestic relations order),

including a distribution of ancillary death benefits attributable to

the employee, is an eligible rollover distribution if it meets the

requirements of section 402(c)(2) and (4) and Q&A-3 through Q&A-10 and

Q&A-14 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 a surviving spouse. Only an individual retirement plan is

treated as an eligible retirement plan with respect to an eligible

rollover distribution to a surviving spouse.

(b) Non-spousal distributee. A distributee other than the employee

or the employee's surviving spouse (or a spouse or former spouse who is

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 are not subject to the 20-percent income

tax withholding under section 3405(c).

Q-13: Must an employee's (or spousal distributee's) election to

treat a contribution of an eligible rollover distribution to an

individual retirement plan as a rollover contribution be irrevocable?

A-13: (a) In general. Yes. In order for a contribution of an

eligible rollover distribution to an individual retirement plan to

constitute a rollover and, thus, to qualify for current exclusion from

gross income, a distributee must elect, at the time the contribution is

made, to treat the contribution as a rollover

[[Page 49213]]

contribution. An election is made by designating to the trustee,

issuer, or custodian of the eligible retirement plan that the

contribution is a rollover contribution. This election is irrevocable.

Once any portion of an eligible rollover distribution has been

contributed to an individual retirement plan and designated as a

rollover distribution, taxation of the withdrawal of the contribution

from the individual retirement plan is determined under section 408(d)

rather than under section 402 or 403. Therefore, the eligible rollover

distribution is not eligible for capital gains treatment, five-year or

ten-year averaging, or the exclusion from gross income for net

unrealized appreciation on employer stock.

(b) Direct rollover. If an eligible rollover distribution is paid

to an individual retirement plan in a direct rollover at the election

of the distributee, the distributee is deemed to have irrevocably

designated that the direct rollover is a rollover contribution.

Q-14: How is the $5,000 death benefit exclusion under section

101(b) treated for purposes of determining the amount that is an

eligible rollover distribution?

A-14: To the extent that a death benefit is a distribution from a

qualified plan, the portion of the distribution that is excluded from

gross income under section 101(b) is not an eligible rollover

distribution. See Sec. 1.401(a)(31)-1, Q&A-17 for guidance concerning

assumptions that a plan administrator may make with respect to whether

and to what extent a distribution of a survivor benefit is excludible

from gross income under section 101(b).

Q-15: May an employee (or spousal distributee) roll over more than

the plan administrator determines to be an eligible rollover

distribution using an assumption described in Sec. 1.401(a)(31)-1, Q&A-

17?

A-15: Yes. The portion of any distribution that an employee (or

spousal distributee) may roll over as an eligible rollover distribution

under section 402(c) is determined based on the actual application of

section 402 and other relevant provisions of the Internal Revenue Code.

The actual application of these provisions may produce different

results than any assumption described in Sec. 1.401(a)(31)-1, Q&A-17

that is used by the plan administrator. Thus, for example, even though

the plan administrator calculates the portion of a distribution that is

a required minimum distribution (and thus is not made eligible for

direct rollover under section 401(a)(31)), by assuming that there is no

designated beneficiary, the portion of the distribution that is

actually a required minimum distribution and thus not an eligible

rollover distribution is determined by taking into account the

designated beneficiary, if any. If, by taking into account the

designated beneficiary, a greater portion of the distribution is an

eligible rollover distribution, the distributee may rollover the

additional amount. Similarly, even though a plan administrator assumes

that a distribution from a qualified plan is the only death benefit

with respect to an employee that qualifies for the $5,000 death benefit

exclusion under section 101(b), to the extent that the death benefit

exclusion is allocated to a different death benefit, a greater portion

of the distribution may actually be includible in gross income and,

thus, be an eligible rollover distribution, and the surviving spouse

may roll over the additional amount if it otherwise qualifies.

Q-16: Is a rollover from a qualified plan to an individual

retirement account or individual retirement annuity treated as a

rollover contribution for purposes of the one-year look-back rollover

limitation of section 408(d)(3)(B)?

A-16: No. A distribution from a qualified plan that is rolled over

to an individual retirement account or individual retirement annuity is

not treated for purposes of section 408(d)(3)(B) as an amount received

by an individual from an individual retirement account or individual

retirement annuity which is not includible in gross income because of

the application of section 408(d)(3).

Sec. 1.402(f)-1 Required explanation of eligible rollover

distributions; questions and answers.

The following questions and answers concern the written explanation

requirement imposed by section 402(f) of the Internal Revenue Code of

1986 relating to distributions eligible for rollover treatment. Section

402(f) was amended by section 521(a) of the Unemployment Compensation

Amendments of 1992, Public Law 102-318, 106 Stat. 290 (UCA). For

additional UCA guidance under sections 401(a)(31), 402(c), 403(b)(8)

and (10), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.403(b)-

2, and 31.3405(c)-1 of this chapter, respectively.

List of Questions

Q-1: What are the requirements for a written explanation under

section 402(f)?

Q-2: When must the plan administrator provide the section 402(f)

notice to a distributee?

Q-3: 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?

Q-4: May a plan administrator post the section 402(f) notice as

a means of providing it to distributees?

Questions and Answers

Q-1: What are the requirements for a written explanation under

section 402(f)?

A-1: (a) General rule. Under section 402(f), as amended by 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 elect that the distribution be

paid in the form of 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

may defer tax on the distribution if it 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) (averaging with respect to

lump sum distributions) and (e) (other rules including treatment of net

unrealized appreciation). See Sec. 1.401(a)(31)-1, Q&A-7 for additional

information that must be provided if a plan provides a default

procedure regarding the election of a direct rollover.

(b) Model section 402(f) notice. The plan administrator will be

deemed to have complied with the requirements of paragraph (a) of this

Q&A-1 relating to the contents of the section 402(f) notice if the plan

administrator provides the applicable model section 402(f) notice

published by the Internal Revenue Service for this purpose in a revenue

ruling, notice, or other guidance published in the Internal Revenue

Bulletin. See Sec. 601.601(d)(2)(ii)(b) of this chapter.

(c) Delegation to Commissioner. The Commissioner, in revenue

rulings, notices, and other guidance, published in the Internal Revenue

Bulletin, may modify, or provide any additional guidance with respect

to, the notice requirement of this section. See

Sec. 601.601(d)(2)(ii)(b) of this chapter.

(d) Effective date--(1) Statutory effective date. Section 402(f)

applies to eligible rollover distributions made after December 31,

1992.

(2) Regulatory effective date. This section applies to eligible

rollover distributions made on or after October

[[Page 49214]]

19, 1995. For eligible rollover distributions made on or after January

1, 1993 and before October 19, 1995, Sec. 1.402(c)-2T, Q&A-11 through

15 (as it appeared in the April 1, 1995 edition of 26 CFR part 1),

apply. However, for any distribution made on or after January 1, 1993

but before October 19, 1995, a plan administrator or payor may satisfy

the requirements of section 402(f) by substituting any or all

provisions of this section for the corresponding provisions of

Sec. 1.402(c)-1T, Q&A-11 through 15, if any.

Q-2: When must the plan administrator provide the section 402(f)

notice to a distributee?

A-2: The plan administrator must provide a distributee with the

section 402(f) notice no less than 30 days and no more than 90 days

before the date of distribution. However, if the distributee, after

having received the section 402(f) notice, affirmatively elects a

distribution, a plan will not fail to satisfy section 402(f) merely

because the distribution is made less than 30 days after the section

402(f) notice was provided to the distributee, provided that the

following requirement is met. The plan administrator must provide

information to the distributee clearly indicating that (in accordance

with the first sentence of this Q&A-2) the distributee has a right to

consider the decision of whether or not to elect a direct rollover for

at least 30 days after the notice is provided. The plan administrator

may use any method to inform the distributee of the relevant time

period, provided that the method is reasonably designed to attract the

attention of the distributee. For example, this information could be

provided either 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. For purposes of satisfying the requirement in

the first sentence of this Q&A-2, the plan administrator may substitute

the annuity starting date, within the meaning of Sec. 1.401(a)-20, Q&A-

10, for the date of distribution.

Q-3: 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-3: 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-1 and Q&A-2 of this

section, and providing the notice at least once annually for as long as

the payments continue. However, see Sec. 1.401(a)(31)-1, Q&A-12 for

additional guidance if 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 (absent a subsequent change of

election).

Q-4: May a plan administrator post the section 402(f) notice as a

means of providing it to distributees?

A-4: No. The posting of the section 402(f) notice will not be

considered provision of the notice. The written notice must be provided

individually to any distributee of an eligible rollover distribution

within the time period described in Q&A-2 and Q&A-3 of this section.

Sec. 1.403(b)-2 Eligible rollover distributions; questions and

answers.

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, 106 Stat. 290)

(UCA). For additional UCA guidance under sections 401(a)(31), 402(c),

402(f), and 3405(c), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 1.402(f)-1,

and Sec. 31.3405(c)-1 of this chapter, respectively.

List of Questions

Q-1: What is the rule regarding distributions that may be rolled

over to an eligible retirement plan from annuities, custodial

accounts, and retirement income accounts described in section

403(b)?

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?

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?

Q-4: When do sections 403 (b)(8) and (b)(10), as amended by UCA,

and this Sec. 1.403(b)-2 apply to distributions from section 403(b)

annuities?

Questions and Answers

Q-1: What is the rule regarding distributions that may be rolled

over to an eligible retirement plan from annuities, custodial accounts,

and retirement income accounts described in section 403(b)?

A-1: Under section 403(b)(8), as amended by UCA, any eligible

rollover distribution from a section 403(b) annuity is permitted to be

rolled over to an eligible retirement plan. For purposes of this

section, a section 403(b) annuity includes an annuity contract, a

custodial account, and a retirement income account described in section

403(b). 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 Sec. 1.402(c)(2), Q&A-2 but does not

include a qualified plan (as defined in Sec. 1.402(c)-2), Q&A-2. Except

to the extent otherwise provided in this section, an eligible rollover

distribution from a section 403(b) annuity is an eligible rollover

distribution described in section 402(c) (2) and (4) and Sec. 1.402(c)-

2, Q&A-3 through Q&A-10 and Q&A-14, except that the distribution is

from section 403(b) annuity rather than a qualified plan. Thus, for

example, to the extent that corrective distributions described in

Sec. 1.402(c)-2, Q&A-4 are properly made from a section 403(b) annuity,

such distributions are not eligible rollover distributions. Similarly,

in the case of annuity distributions from an annuity contract described

in section 403(b), the entire amount of any such annuity payment made

on or after January 1 of the year in which an employee attains (or

would have attained) age 70\1/2\ will be treated as an amount required

under section 401(a)(9) and, thus, will not be an eligible rollover

distribution. The rules with respect to rollovers in sections 402

(c)(1), (c)(3), and (c)(9) and Sec. 1.402(c)-2, Q&A-11 through Q&A-13

and Q&A-15 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), 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 Sec. 1.401(a)(31)-1 apply to

the section 403(b) annuity as though it were a plan qualified under

section 401(a) unless otherwise provided in this section. For example,

as described in Sec. 1.401(a)(31)-

[[Page 49215]]

1, Q&A-14 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, is not

subject to the applicable law governing transfers of funds between

section 403(b) annuities. In applying the provisions of

Sec. 1.401(a)(31)-1, the payor of the eligible rollover distribution is

treated as the plan administrator.

(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). See Sec. 31.3405(c)-1 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

the 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. For purposes of satisfying the reasonable time period, the

qualified plan timing rule provided in Sec. 1.402(f)-1, Q&A-2 does not

apply to section 403(b) annuities. However, a payor of a section 403(b)

annuity will be deemed to have provided the explanation within a

reasonable time period if the payor complies with the time period in

that rule.

Q-4: When do sections 403(b)(8) and (b)(10), as amended by UCA, and

this Sec. 1.403(b)-2 apply to distributions from section 403(b)

annuities?

A-4: (a) General rule--(1) Statutory effective date. Section

403(b)(8), as amended by UCA, and section 403(b)(10), as amended by

UCA, apply to distributions made on or after January 1, 1993. In

addition, the underlying section 403(b) annuity document must be

amended at the time provided in, and the section 403(b) annuity must

operate in accordance with the requirements of Sec. 1.401(a)(31)-1,

Q&A-18. Section 522 of UCA provides a special effective date for

governmental section 403(b) annuities. This special effective date is

specified in Sec. 1.403(b)-2T (as it appeared in the April 1, 1995

edition of 26 CFR part 1).

(2) Regulatory effective date. This section applies to

distributions made on or after October 19, 1995. For distributions made

on or after January 1, 1993 and before October 19, 1995, Sec. 1.403(b)-

2T (as it appeared in the April 1, 1995 edition of 26 CFR part 1),

applies. However, for distributions made on or after January 1, 1993

but before October 19, 1995, a section 403(b) annuity may satisfy

section 403(b)(10) by substituting any or all provisions of this

section for the corresponding provisions of Sec. 1.403(b)-2T, if any.

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

Par. 4. The authority citation for part 31 continues to read in

part as follows:

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

Par. 5. Section 31.3402(p)-1 is amended by adding a sentence at the

end of paragraph (a) to read as follows:

Sec. 31.3402(p)-1 Voluntary withholding agreements.

(a) * * * See Sec. 31.3405(c)-1, Q&A-3 concerning agreements to

have more than 20-percent Federal income tax withheld from eligible

rollover distributions within the meaning of section 402.

* * * * *

Par. 6. Section 31.3405(c)-1 is added to read as follows:

Sec. 31.3405(c)-1 Withholding on eligible rollover distributions;

questions and answers.

The following questions and answers relate to withholding on

eligible rollover distributions under section 3405(c) of the Internal

Revenue Code of 1986, as added by section 522(b) of the Unemployment

Compensation Amendments of 1992 (Public Law 102- 318, 106 Stat. 290)

(UCA). For additional UCA guidance under sections 401(a)(31), 402(c),

402(f), and 403(b)(8) and (10), see Secs. 1.401(a)(31)-1, 1.402(c)-2,

1.402(f)-1, and 1.403(b)-2 of this chapter, respectively.

List of Questions

Q-1: What are the withholding requirements under section 3405

for distributions from qualified plans and section 403(b) annuities?

Q-2: May a distributee elect under section 3405(c) not to have

Federal income tax withheld from an eligible rollover distribution?

Q-3: May a distributee be permitted to elect to have more than

20-percent Federal income tax withheld from an eligible rollover

distribution?

Q-4: Who has responsibility for complying with section 3405(c)

relating to the 20-percent income tax withholding on eligible

rollover distributions?

Q-5: May the plan administrator shift the withholding

responsibility to the payor and, if so, how?

Q-6: 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?

Q-7: 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?

Q-8: Is an eligible rollover distribution that is paid to a

qualified defined benefit plan subject to 20-percent withholding?

Q-9: If property other than cash, employer securities, or plan

loans is distributed, how is the 20-percent income tax withholding

required under section 3405(c) accomplished?

Q-10: What assumptions may a plan administrator make regarding

whether a benefit is an eligible rollover distribution for purposes

of determining the amount of a distribution that is subject to 20-

percent mandatory withholding?

Q-11: Are there special rules for applying the 20-percent

withholding requirement to employer securities and a plan loan

offset amount distributed in an eligible rollover distribution?

Q-12: How does the mandatory withholding rule apply to net

unrealized appreciation from employer securities?

Q-13: Does the 20-percent withholding requirement apply to

eligible rollover distributions from a qualified plan distributed

annuity contract?

Q-14: 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?

Q-15: If eligible rollover distributions are made from a

qualified plan, who has responsibility for making the returns and

reports required under these regulations?

Q-16: What eligible rollover distributions must be reported on

Form 1099-R?

Q-17: Must the plan administrator, trustee or custodian of the

eligible retirement plan report amounts received in a direct

rollover?

Questions and Answers

Q-1: What are the withholding requirements under section 3405 for

distributions from qualified plans and section 403(b) annuities?

A-1: (a) General rule. Section 3405(c), added by UCA, provides that

any designated distribution that is an

[[Page 49216]]

eligible rollover distribution (as defined in section 402(f)(2)(A))

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. See

Sec. 1.402(c)-2, Q&A-2 of this chapter for the definition of a

qualified plan and Sec. 1.403(b)-2, Q&A-1 of this chapter for the

definition of a section 403(b) annuity. For purposes of section 3405

and this section, with respect to a distribution from a qualified plan,

an eligible retirement plan is a trust qualified under section 401(a),

an annuity plan described in section 403(a), or an individual

retirement plan (as described in Sec. 1.402(c)-2, Q&A-2 of this

chapter). For purposes of section 3405 and this section, with respect

to a distribution from a section 403(b) annuity, an eligible retirement

plan is an annuity contract, a custodial account, a retirement income

account described in section 403(b), or an individual retirement plan.

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 Sec. 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

Sec. 1.401(a)(31)-1 of this chapter concerning the requirements and the

procedures for electing a direct rollover under section 401(a)(31). See

section 402(c)(2) and (4), and Sec. 1.402(c)-2, Q&A-3 through Q&A-10

and Q&A-14 of this chapter for rules to determine what constitutes an

eligible rollover distribution. See Sec. 1.402(f)-1, Q&A-1 through Q&A-

3 and Sec. 1.403(b)-2, Q&A-3 of this chapter concerning the notice that

must be provided to a distributee, within a reasonable period of time

before making an eligible rollover distribution. See Sec. 1.403(b)-2,

Q&A-1 and Q&A-2 of this chapter for guidance concerning the rollover

provisions and direct rollover requirements for distributions from

annuities described in section 403(b).

(c) Effective date--(1) Statutory effective date--(i) General rule.

Section 3405(c), as added by UCA, applies to eligible rollover

distributions made on or after January 1, 1993, 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.

(ii) Special rule for governmental section 403(b) annuities.

Section 522 of UCA provides a special effective date for governmental

section 403(b) annuities. This special effective date appears in

Sec. 1.403(b)-2T of this chapter (as it appeared in the April 1, 1995

edition of 26 CFR part 1).

(2) Regulatory effective date. This section applies to eligible

rollover distributions made on or after October 19, 1995. For eligible

rollover distributions made on or after January 1, 1993 and before

October 19, 1995, Sec. 31.3405(c)-1T (as it appeared in the April 1,

1995 edition of 26 CFR part 1), applies. However, for any distribution

made on or after January 1, 1993 but before October 19, 1995, a plan

administrator or payor may comply with the withholding requirements of

section 3405(c) by substituting any or all provisions of this section

for the corresponding provisions of Sec. 31.3405(c)-1T, if any.

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 Sec. 1.401(a)(31)-1 and Sec. 1.403(b)-2, Q&A-2 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: May a distributee be permitted to elect to have more than 20-

percent Federal income tax withheld from an eligible rollover

distribution?

A-3: Yes. Under section 3402(p), a distributee of an eligible

rollover distribution and the plan administrator or payor are permitted

to enter into an agreement to provide for withholding in excess of 20

percent from an eligible rollover distribution. Any agreement must be

made in accordance with applicable forms and instructions. However, no

request for withholding will be effective between the plan

administrator or payor and the distributee until the plan administrator

or payor accepts the request by commencing to withhold from the amounts

with respect to which the request was made. An agreement under section

3402(p) shall be effective for such period as the plan administrator or

payor and the distributee mutually agree upon. However, either party to

the agreement may terminate the agreement prior to the end of such

period by furnishing a signed written notice to the other.

Q-4: Who has responsibility for complying with section 3405(c)

relating to the 20-percent income tax withholding on eligible rollover

distributions?

A-4: 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. When an amount is paid under a

qualified plan distributed annuity contract as defined in

Sec. 1.402(c)-2, Q&A-10 of this chapter, the payor is treated as the

plan administrator. See Q&A-13 of this section concerning eligible

rollover distributions from a qualified plan distributed annuity

contract.

Q-5: May the plan administrator shift the withholding

responsibility to the payor and, if so, how?

A-5: Yes. The plan administrator may shift the withholding

responsibility to the payor by following the procedures set forth in

Sec. 35.3405-1, Q&A E-2 through E-5 of this chapter (relating to

elective withholding on pensions, annuities and certain other deferred

income) with appropriate adjustments, including the plan

administrator's identification of amounts that constitute required

minimum distributions.

Q-6: 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-6: 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-7: 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-7: (a) General rule. If the plan administrator reasonably relied

on adequate information provided by the

[[Page 49217]]

distributee (as described in paragraph (b) of this Q&A), 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, with respect

to distributions from qualified plans, in section 402(c)(8)(B) and

Sec. 1.402(c)-2, Q&A-2 of this chapter and, with respect to a

distributions from section 403(b) annuities, in Sec. 1.403(b)-2), Q&A-1

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.

(b) Adequate information. The plan administrator has obtained from

the distributee adequate information on which to rely in making a

direct rollover if the distributee furnishes to the plan administrator:

the name of the eligible retirement plan; a representation that the

recipient plan is an individual retirement plan, a qualified plan, or a

section 403(b) annuity, as appropriate; and 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 Sec. 1.401(a)(31)-1, Q&A-3 and Q&A-4 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: Is an eligible rollover distribution that is paid to a

qualified defined benefit plan subject to 20-percent withholding?

A-8: No. If an eligible rollover distribution is paid in a direct

rollover to an eligible retirement plan within the meaning of section

402(c)(8), including a qualified defined benefit plan, it is reasonable

to believe that the distribution is not includible in gross income

pursuant to section 402(c)(1). Accordingly, pursuant to section

3405(e)(1)(B), the distribution is not a designated distribution and is

not subject to 20-percent withholding.

Q-9: If property other than cash, employer securities, or plan

loans is distributed, how is the 20-percent income tax withholding

required under section 3405(c) accomplished?

A-9: 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, employer securities, or plan loan

offset amounts, the plan administrator or payor must apply

Sec. 35.3405-1, Q&A F-2 of this chapter and may apply Sec. 35.3405-1,

Q&A F-3 of this chapter in determining how to satisfy the withholding

requirements.

Q-10: What assumptions may a plan administrator make regarding

whether a benefit is an eligible rollover distribution for purposes of

determining the amount of a distribution that is subject to 20-percent

mandatory withholding?

A-10: (a) In general. For purposes of determining the amount of a

distribution that is subject to 20-percent mandatory withholding, a

plan administrator may make the assumptions described in paragraphs

(b), (c), and (d) of this Q&A in determining the amount of a

distribution that is an eligible rollover distribution and a designated

distribution. Q&A-17 of Sec. 1.401(a)(31)-1 of this chapter provides

assumptions for purposes of complying with section 401(a)(31). See

Sec. 1.402(c)-2, Q&A-15 of this chapter concerning the effect of these

assumptions for purposes of section 402(c).

(b) $5,000 death benefit. A plan administrator may assume that a

distribution that qualifies for the $5,000 death benefit exclusion

under section 101(b) is the only death benefit being paid with respect

to a deceased employee that qualifies for that exclusion. Thus, in such

a case, the plan administrator may assume that the distribution is not

an eligible rollover distribution to the extent that it would be

excludible from gross income based on this assumption.

(c) Required minimum distributions. 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.

(d) Valuation of property. In the case of a distribution that

includes property, in calculating the amount of the distribution for

purposes of applying section 3405(c), the value of the property may be

determined in accordance with Sec. 35.3405-1, Q&A F-1 of this chapter.

Q-11: Are there special rules for applying the 20-percent

withholding requirement to employer securities and a plan loan offset

amount distributed in an eligible rollover distribution?

A-11: Yes. The maximum amount to be withheld on any designated

distribution (including any eligible rollover distribution) under

section 3405(c) must not exceed the sum of the cash and the fair market

value of property (excluding employer securities) received in the

distribution. The amount of the sum is determined without regard to

whether any portion of the cash or property is a designated

distribution or an eligible rollover distribution. For purposes of this

rule, any plan loan offset amount, as defined in Sec. 1.402(c)-2, Q&A-9

of this chapter, is treated in the same manner as employer securities.

Thus, although employer securities and plan loan offset amounts must be

included in the amount that is multiplied by 20-percent, the total

amount required to be withheld for an eligible rollover distribution is

limited to the sum of the cash and the fair market value of property

received by the distributee, excluding any amount of the distribution

that is a plan loan offset amount or that is distributed in the form of

employer securities. For example, if the only portion of an eligible

rollover distribution that is not paid in a direct rollover consists of

employer securities or a plan loan offset amount, withholding is not

required. In addition, if a 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)(ii).

Q-12: How does the mandatory withholding rule apply to net

unrealized appreciation from employer securities?

A-12: An eligible rollover distribution can include net unrealized

appreciation from employer securities, within the meaning of section

402(e)(4), even if the net unrealized appreciation is excluded from

gross income under section 402(e)(4). However, to the extent that it is

excludable from gross income pursuant to section 402(e)(4), net

unrealized appreciation is not a designated distribution pursuant to

section 3405(e)(1)(B) because it is reasonable to believe that it is

not includable in gross income. Thus, to the extent that net unrealized

appreciation is excludable from gross income pursuant to section

402(e)(4), net

[[Page 49218]]

unrealized appreciation is not included in the amount of an eligible

rollover distribution that is subject to 20-percent withholding.

Q-13: Does the 20-percent withholding requirement apply to eligible

rollover distributions from a qualified plan distributed annuity

contract?

A-13: The 20-percent withholding requirement applies to eligible

rollover distributions from a qualified plan distributed annuity

contract as defined in Q&A-10 of Sec. 1.402(c)-2 of this chapter. In

the case of an eligible rollover distribution from such an annuity

contract, the payor is treated as the plan administrator for purposes

of section 3405. See Sec. 1.401(a)(31)-1, Q&A-16 of this chapter

concerning the direct rollover requirements that apply to distributions

from such an annuity contract and see Sec. 1.402(c)-2, Q&A-10 of this

chapter concerning the treatment of distributions from such annuity

contracts as eligible rollover distributions.

Q-14: 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-14: 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. However, once the $200

threshold has been reached, the sum of all payments during the year

must be used to determine the applicable amount to be withheld from

subsequent payments during the year.

Q-15: If eligible rollover distributions are made from a qualified

plan, who has responsibility for making the returns and reports

required under these regulations?

A-15: 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-16: What eligible rollover distributions must be reported on Form

1099-R?

A-16: 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

Sec. 35.3405-1 of this chapter and applicable forms and instructions.

Q-17: Must the plan administrator, trustee or custodian of the

eligible retirement plan report amounts received in a direct rollover?

A-17: (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.

Sec. 31.3405(c)-1T [Removed]

Par. 7. Section 31.3405(c)-1T is removed.

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. In Sec. 602.101, paragraph (c) is amended as follows:

1. Removing the following entries from the table:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

1.401(a)(31)-1T....................................... 1545-1341

* * * * *

1.402(c)-2T........................................... 1545-1341

* * * * *

1.402(f)-2T........................................... 1545-1341

* * * * *

1.403(b)-2T........................................... 1545-1341

* * * * *

31.3405(c)-1T......................................... 1545-1341

* * * * *

------------------------------------------------------------------------

2. Revising the entry for 1.402(f)-1 and adding entries to the

table in numerical order to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control No.

------------------------------------------------------------------------

* * * * *

1.401(a)(31)-1........................................ 1545-1341

* * * * *

1.402(c)-2............................................ 1545-1341

* * * * *

1.402(f)-1............................................ 1545-1341

* * * * *

1.403(b)-2............................................ 1545-1341

* * * * *

31.3405(c)-1.......................................... 1545-1341

* * * * *

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: August 29, 1995.

Cynthia G. Beerbower,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 95-23265 Filed 9-15-95; 4:00 pm]

BILLING CODE 4830-01-U