If a participant is to receive a distribution, the plan must provide the participant with a notice explaining the rollover rules. If the distribution is an eligible rollover distribution, the participant must receive an IRC section 402(f) notice.

Description:
A rollover distribution occurs when a terminated participant takes a distribution from the plan or an active participant takes an in-service distribution that is eligible to be rolled over and moves it to another qualified plan or individual retirement arrangement. Consequently, the distribution is not taxed until it is distributed from the new qualified plan or individual retirement arrangement. Some distributions are eligible rollover distributions. These are distributions that are not part of a series of substantially equal periodic payments or required minimum distributions. If a participant elects not to rollover a distribution that is an eligible rollover distribution, the distribution is automatically subject to 20% tax withholding. This is true even if the participant subsequently rolls the distribution over to another plan or individual retirement arrangement.

What It Should Contain:
The notice, commonly known as an §402(f) Notice, generally explains the rollover rules, including the automatic 20% withholding. Notice 2009-68 simplifies the presentation of an employee’s options when receiving an eligible rollover distribution. It contains two sample explanations that satisfy the  requirements of the notice employers must provide to employees leaving with retirement assets. These sample explanations also reflect law changes -- such as information on a distribution from a designated Roth account under an employer plan -- and to explain rules that apply in special situations -- such as when a distribution is made to a surviving spouse or other beneficiary. This notice “modifies and supersedes” Notice 2002-3. However, the models in Notice 2002-3 (appropriately modified to reflect statutory changes) will continue to be safe harbor explanations with respect to notices provided through the end of 2009. (So, sponsors can immediately move to the models in the new notice, or can continue to use the old models as appropriately modified on a transition basis through the end of 2009.)

Timing:
The notice must be provided to plan participants within a reasonable period of time. The notice should be provided no less than 30 days and no more than 90 days before the distribution is to be made. The participant may waive the 30-day period.

Who Is Responsible For Sending It:
The administrator of the plan.

If a participant takes a plan distribution before attaining age 59 ½, the participant may be subject to an IRC section 72(t) additional tax of 10% of the amount of the distribution. This is in addition to income tax on the taxable portion of the distribution. The plan administrator will automatically withhold 20% on the taxable portion of the distribution. The 10% additional tax can be avoided by making a rollover contribution into an IRA or another tax qualified plan within 60 days of the distribution. If a direct rollover is made into an IRA or another tax qualified plan within 60 days of the distribution, income taxes are postponed until distributions are received from the subsequent plan.

If a participant takes a distribution after attaining age 59 ½, there is no additional tax, however, the plan administrator will automatically withhold 20% on the taxable portion of the distribution. If a direct rollover into an IRA or another tax qualified plan is made within 60 days of the distribution, taxes are once again deferred.