The IRS recently released Notice 2020-62, which updates the safe harbor explanations that may be used to satisfy the  notice requirement for eligible rollover distributions, also referred to as the “Safe Harbor Notices.”  These changes to the Safe Harbor Notices take into account recent statutory changes brought about by the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act of 2019 and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

What are the § 402(f) Safe Harbor Notices?

Under § 402(f) of the Code, plan administrators of certain retirement plans are required to provide a written explanation to any recipient of an eligible rollover distribution.  This notice must be provided by 401(k) plans and other qualified plans, 403(b) plans and 457(b) governmental plans within a reasonable period of time before the distribution is to made — generally at least 30 days unless otherwise elected by the recipient.  To assist plan administrators in satisfying this notice requirement, the IRS has published and continues to update two versions of its Safe Harbor Notice, one for distributions from a designated Roth account, and one for distributions from non-Roth accounts.

Plan administrators may satisfy the § 402(f) notice requirement by relying on the Safe Harbor Notices, although they are not required to do so.

What Changes Have Been Incorporated Into the New § 402(f) Safe Harbor Notices?

The Safe Harbor Notices have been revised to reflect the following statutory changes adopted by the SECURE Act and by the CARES Act:

Qualified Birth or Adoption Distributions

Section 113 of the SECURE Act provides an exception to the Code § 72(t) 10% additional tax on distributions in the case of “qualified birth or adoption distributions.”  Qualified birth and adoption distributions may be taken from an eligible retirement plan in connection with a qualified birth or adoption during the one year period following the date of birth or the date when the legal adoption is finalized, and may not exceed $5,000.

The Safe Harbor Notices have been revised to reflect that the 10% additional tax does not apply to qualified birth or adoption distributions.

Change to Required Minimum Distribution Rules

Section 114 of the SECURE Act also amended the required beginning date applicable to 401(k) plans, defined benefit plans and other qualified plans, such as 403(b) plans and 457(b) governmental plans.  This change also applies to individual retirement accounts (“IRAs”).  Effective calendar year 2020, the required beginning date is April 1st  of the calendar year following the calendar year in which the participant attains age 72, rather than age 70½ under the former rule.

To reflect this later required beginning date, the IRS has revised the Safe Harbor Notices to explain that from January 1, 2020, required minimum distributions begin after age 72.

Coronavirus-Related Distributions and Other Payments in Connection with Certain Emergencies and Disasters

As discussed in our Client Alert, § 2202 of the CARES Act provides an exception to the 10% additional tax under § 72(t) for “coronavirus-related distributions.” A “coronavirus-related distribution” is a distribution of $100,000 or less, made before December 31, 2020, to an individual who is diagnosed with or whose spouse or dependent is diagnosed with COVID-19 or who experiences adverse financial consequences due to COVID-19.

Consistent with § 2202 of the CARES Act, the Safe Harbor Notices have been tweaked to reflect that the 10% additional tax under Code § 72(t) will not apply to payments excepted from the additional income tax by “federal legislation relating to certain emergencies and disasters.”  The distributions referred to in the Safe Harbor Notices include coronavirus-related distributions as well as distributions in connection with disaster losses incurred while living in certain federally declared disaster areas in 2016 and 2017, such as Hurricanes Harvey, Irma, and Maria, the 2017 California wildfires, and certain 2016 disasters.

What Should Plan Administrators Do?

The updated Safe Harbor Notices reflect applicable law as of August 6, 2020.  Accordingly, plan administrators  should begin using the new notices as soon as possible.  Plan administrators should continue to monitor legal developments that could affect the Safe Harbor Notices going forward, so that they can modify these notices to reflect new statutory provisions and IRS guidance.