Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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is $20,000 (20%). See Notice 2014-54, Example 1. This is considered a single distribution even if Darcy directs that part of the money be sent directly to a traditional IRA and part to a Roth IRA (see ¶ 2.2.05 (B)), or directs that part of the money be rolled directly into a traditional IRA and part be paid to him personally (see ¶ 2.2.05 (C)). Note that Darcy still cannot simply request a separate distribution of his after-tax money. He can request a partial distribution from his account, but the partial distribution will contain pro rata amounts of the pre- and after-tax money in that account. What’s changed is that he can now separate the pre- and after-tax portions of any particular distribution and have them sent to different destinations (see ¶ 2.2.05 ). Prior to issuance of Notice 2014-54, the IRS’s position was that a distribution that was sent to multiple different “destinations” would be treated as multiple distributions, one separate distribution to each “destination.” See Notice 2009-68, 2009-39 IRB 423 (9/28/09), providing a “safe harbor” form of notice that plan administrators could use to tell employees about their distribution options; Reg. § 1.402A-1 , A-5(a), third sentence (discussed at ¶ 5.7.06 ); and the Instructions for IRS Form 1099-R (2014), p. 4 (“If part of the distribution is a direct rollover and part of it is distributed to the participant, prepare two Forms 1099-R”). If the money sent to each separate destination is treated as a separate distribution, then each “destination” will receive a pro rata share of the pre- and after-tax money in the employee’s account, with no ability to send the pre- and after-tax money to different “destinations.” This IRS rule was controversial—for one thing, it contradicted other IRS pronouncements. For example, the IRS’s own regulation dealing with income tax withholding treats the direct rollover and outright payment as two portions of a single eligible rollover distribution , when the “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….” Reg. § 31.3405(c)-1 , Q-6. See also PLR 2009-26041, in which the IRS blessed a “direct rollover of the [participant’s] entire account balance from Plan X into Plan Y, except the after-tax contributions…which were to be distributed directly to” the participant; such a split-up of the pre- and after-tax money is not possible if the direct rollover and outright distribution must be treated as two separate distributions as was stated in Notice 2009-68. According to anecdotal evidence, some plan administrators simply ignored the Notice 2009-68 rule on this point (they have been well rewarded; see ¶ 2.2.05 (G)). Now Notice 2014-54 formally reverses the rule; contains a proposed amendment to Reg. § 1.402A-1 , A-5(a); and states that the IRS “intends to revise the safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan.” Although the new rule is formally effective January 1, 2015, plan administrators can use it for pre-2015 distributions as well. For the effect this has on distributions that occurred between Notices 2009-68 and 2014-54, see ¶ 2.2.05 (G). 2.2.05 Partial and split rollovers, conversions: QRP distributions This ¶ 2.2.05 explains what happens to the pre- and after-tax portions of a distribution made from a “traditional” QRP account to the participant if the distribution is sent via direct rollover to both a traditional and a Roth IRA, or if only part of the distribution is rolled over to an IRA. Most of these rules come from IRS Notice 2014-54, 2014-41 IRB 670 (10/6/14) (“Notice 2014-54”). A. Introduction: Please read this first