IRS Modifies Language in the Safe Harbor Special Tax Notice

On August 6, 2020, the Internal Revenue Service ("IRS") issued Notice 2020-62, updating the safe harbor explanations that may be used to satisfy the special tax notice requirement under Internal Revenue Code ("Code") § 402(f) for eligible rollover distributions. The Notice reflects certain statutory changes after October 1, 2018. This e-alert highlights the changes that qualified governmental plans should consider making to their Special Tax Notices.

New Exception to 10% Additional Tax under Code § 72(t)(1) for Qualified Birth or Adoption Distributions

As we discussed in our e-alert dated December 27, 2019, the Setting Every Community Up for Retirement Enhancement Act ("SECURE Act") creates a new exception under Code § 72(t) and permits penalty-free withdrawals of up to $5,000 from "eligible retirement plans" (does not include defined benefit plans) if the withdrawal is made during a one-year period beginning on the date of the birth of the individual's child or on the date the individual finalizes an adoption (excluding adoption of the child of the taxpayer's spouse). The SECURE Act also allows for the repayment of such "qualified birth or adoption distributions."  

Notice 2020-62 modifies the safe harbor explanations to reflect the new exception to the 10% additional tax under Code § 72(t)(1) for qualified birth or adoption distributions.

Increase in Individual's Required Minimum Distribution Age

As we discussed in our e-alert dated December 27, 2019, the SECURE Act increases an individual's required minimum distribution age from age 70½ (for employees who were born before July 1, 1949) to age 72 (for employees who were born after June 30, 1949). As a result, for distributions required to be made after December 31, 2019 with respect to individuals who attain age 70½ after such date, the age for the required beginning date for mandatory distributions is increased to age 72.

Notice 2020-62 modifies the safe harbor explanations to reflect the increase in an individual's required minimum distribution age from age 70½ to age 72.

Coronavirus-Related Distributions

As we discussed in our e-alerts dated March 27, 2020, May 11, 2020, May 12, 2020 and June 29, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") added a new category of in-service distribution, referred to as a "coronavirus-related distribution," which is a distribution of up to $100,000 for a taxable year made from a 401(a) plan, 403(b) plan, governmental 457(b) plan, or IRA on or after January 1, 2020, and before December 31, 2020, to a qualified individual. A coronavirus-related distribution is exempt from the 10% additional tax on early distributions under Code § 72(t)(1). Coronavirus-related distributions may be included in gross income ratably over a three-year period, starting with the year of distribution. The CARES Act also allows for the repayment of such "coronavirus-related distributions." 

As we discussed in our e-alert dated June 29, 2020, IRS Notice 2020-50 provides additional guidance regarding coronavirus-related distributions and loans under the CARES Act. 

Notice 2020-62 modifies the safe harbor explanations to reflect the Coronavirus-Related Distributions under the CARES Act by revising the 10% additional tax exception language to include payments exempted by federal legislation relating to certain emergencies and disasters. 

Other Minor Clarifying Changes

Finally, the new safe harbor Special Tax Notice includes other minor clarifying changes, including the addition that payments of certain premiums for health and accident insurance are not eligible rollover distributions, the rearrangement of bullets for readability and the spelling out of acronyms the first time used.

For Additional Information

For additional information about Notice 2020-62, including if you would like a review of  your Special Tax Notice, or for more information about the employee benefit implications of the COVID-19 pandemic and how they might affect your employee benefit plans, please contact Audra Ferguson-Allen, Robert L. Gauss, Tara S. Sciscoe, Christopher Sears, Lisa E. Harrison, Lindsey Knowles or the Ice Miller Employee Benefits attorney with whom you work. Please contact our COVID-19 Task Force if you have any questions about managing the risks of the coronavirus pandemic. Also see our Coronavirus (COVID-19) Resource Center for additional resources, which is updated daily.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.