IRS Updates Safe Harbor Special Tax Notice Language

On September 18, 2018, the Internal Revenue Service ("IRS") issued Notice 2018-74, modifying the safe harbor explanations that may be used to satisfy the special tax notice requirement under Internal Revenue Code ("Code") § 402(f). The notice reflects certain statutory changes after December 8, 2014. This alert highlights the changes qualified governmental plans should consider making to their Special Tax Notices. Of course, if you have questions about your Special Tax Notice or would like your Notice reviewed in light of this development, please contact Audra Ferguson-Allen, Robert Gauss, Lisa Harrison, Lindsay Knowles, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you most closely work.

Extended Rollover Deadline for Qualified Plan Loan Offset Amounts under the Tax Cuts and Jobs Act of 2017 ("TCJA")
 
The TCJA extended the time within which a participant may roll over the amount of a plan loan offset to achieve a tax-free rollover of the loan offset amount. The new time period applies to unpaid accrued loan amounts that are offset from the participant’s account at plan termination or after severance from employment, if the plan provides that the accrued unpaid loan amount must be offset at such time. Prior to this change, the deadline to roll over the offset was 60 days after the date of the loan offset. As of January 1, 2018, the deadline is the filing due date (including extensions) for the participant’s tax return for the year in which the loan offset amount occurs.  

The Notice modifies the safe harbor explanations to reflect the extended rollover deadline for qualified plan loan offset amounts under the TCJA.

Other Extension of the 60-day Rollover Deadline
 
Under Rev. Proc 2007-56, the 60-day deadline for rollovers may be postponed for taxpayers affected by a federally declared disaster or a terroristic or military action.

"Rev. Proc. 2007-56 does not, by itself, provide any postponements … Rather, for taxpayers to be entitled to a postponement…the IRS must publish a notice or issue other guidance providing relief with respect to a federally declared disaster or a terroristic or military action.  For example, News Release TX-2018-05, July 9, 2018, provides tax relief relating to severe storms and flooding in Texas."*
* For certain disasters, Congress has enacted legislation providing special rules for distributions made on account of the disaster. For information on rules applicable to distributions (and the ability to repay those distributions) made on account of Hurricane Harvey or Tropical Storm Harvey, Hurricane Irma, Hurricane Maria, the 2017 California wildfires, and certain 2016 disasters, see Publication 976, Disaster Relief. Distributions made on account of these disasters (assuming certain requirements are met) are not treated as eligible rollover distributions for purposes of [the special tax notice requirements]. See, for example, section 502(a)(6)(A) of the Disaster Tax Relief and Airport and Airway Extension Act of 2017, P.L. 115-63.
The Notice includes modifying changes recognizing the possibility that taxpayers affected by federally declared disasters may have an extended deadline for making rollovers.

Other Clarifying Changes
 
Finally, the new safe harbor Special Tax Notice includes other important clarifying changes. The changes relevant to government plans:
 

• Clarify that the 10% additional tax under Section 72(t) for early distributions applies only to amounts includable in income;
• Clarify that the exception to the 10% additional tax under Section 72(t) for payments to a qualified public safety employee after separation from service (if the employee will be at least age 50 in the year of the separation) is not available for payments from IRAs; and
• Explain how the rollover rules apply to governmental Section 457(b) plans that include designated Roth accounts.

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.