How Do You Spell Relief? IRS Gives Sponsors More Ways to Say "No"

However, some participants may find it harder to rollover distributions from other plans.

The notice modifies Notice 99-5.

Background

Qualified plans must permit a participant election to have a rollover distribution paid directly to another eligible retirement plan, if certain conditions are met (though the latter isn’t required to accept rollovers).

Generally, any distribution is eligible, but there are exceptions such as substantially equal periodic payments, after-tax contributions, minimum required distributions, etc. 

The IRS Restructuring and Reform Act of 1998 added section 402(c)(4)(C) to the Code, which added another exception.  Essentially, any elective contributions (e.g. “pre-tax”) made prior to a date specified in the plan plus earnings on those contributions were eligible to be distributed upon the hardship of an employee.  The date was generally required to be prior to July 1, 1989, and many plans chose January 1 of that year.  Amounts meeting this condition are generally referred to as “pre-89”.  These “pre-89” amounts were not eligible for rollover, if distributed on account of a hardship because they could be distributed without meeting the more rigid conditions for hardship withdrawals. 

Enter Notice 99-5

Notice 99-5 tried to offer some transition relief for the new exemption.  It allowed qualified plans and 403(b) annuities to treat distributions made in calendar year 1999 that would have been eligible rollovers prior to the Restructuring and Reform Act as eligible rollover distributions.  This essentially gave the plan the option to ignore the 1998 exception.   

It also said that if another event might have triggered the distribution in addition to the hardship, the distribution wouldn’t be considered ineligible for rollover on account of being a hardship.  This gave the plan the ability to more broadly consider a distribution as eligible for rollover.

Finally, the notice also provided some guidance on the allocation of “basis” in the hardship distribution for the receiving plan.

Provider Panic

After the publication of Notice 99-5, plan sponsors and recordkeepers expressed concerns that:

• plan records didn’t distinguish between those amounts contributed prior to January 1, 1989
• Y2K preparations had hindered their ability to comply with Notice 99-5 by January 1, 2001

How Do You Spell Relief?

IRS Notice 2000-32 basically provides plan sponsors with more ways to say “no” to rollover distributions from other plans.
 
Under the new rule, if plan records aren’t able to segregate pre-89 amounts from other amounts, then those other amounts are treated the same as pre-89 amounts – ineligible for rollover if distributed on account of hardship.

The new Notice provides an alternative to Notice 99-5, allowing a distribution made on account of a hardship to be treated as ineligible, even if another distributable event has occurred – at least until further guidance is issued. 

In an effort to simplify the determination of “basis” in a rollover, the IRS now says that if part of a hardship distribution is not includible in gross income, basis may be allocated to the portion ineligible for rollover or the portion eligible for rollover – or between the two portions, using any reasonable method. 

In any event, the plan must be consistent in how it treats all d