Regulators Issue Post-PPA Distribution Guidance

According to a news release from the US Treasury Department and the Internal Revenue Service (IRS),    Notice 2007-7   presents a series of PPA provisions and explains in question-and-answer format how certain plan payments will be treated for tax purposes.

Among the areas addressed are:

• interest rate assumptions for lump sum distributions.
• hardship distributions from a 401(k) and similar plans.
• early distributions from qualified plans to terminated public safety employees.
• rollovers from qualified plans to IRAs for non-spouse beneficiaries.
• distributions to pay for health insurance for retired public safety officers.
• earlier vesting of certain employer contributions.
• new rules for the notice and consent period for distributions

Early Withdrawal Penalty

For example, according to regulators, the PPA amended §72 of the Tax Code by adding § 72(t)(10), which allows a qualified public safety employee to not have to pay a 10% early withdrawal penalty if the distribution occurs when the person reaches age 50 instead of 55. The change is effective after the PPA’s enactment date of August 17, 2006, the IRS guidance said.

The notice also clarifies several issues concerning the provision permitting IRA owners age 70½ or older to directly transfer tax-free, up to $100,000 per year to an eligible charity. Additionally, the $100,000 annual limit applies separately for each spouse of a married couple. If both spouses have IRAs and are at least age 70 ½, the couple can transfer a combined total of $200,000, the guidance said.

Wednesday’s guidance also clarified that if a direct trustee-to-trustee transfer of any portion of a distribution from an eligible retirement plan is made to an individual retirement plan described in § 408(a) or (b) (an “IRA”) that is established by the nonspouse beneficiary to receive the distribution, the transfer is treated as a direct rollover of an eligible rollover distribution for purposes of § 402(c).

Also, tax code § 402(l) now provides for an exclusion from gross income for distributions from eligible government plans used to pay qualified health insurance premiums of an eligible retired public safety officer. The exclusion applies  to an eligible retired public safety officer who elects to have qualified health insurance premiums deducted from amounts distributed from an Eligible Government Plan and paid directly to the insurer.

The regulators also pointed out that Section 904 of PPA ’06 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan. Under Code § 411(a)(2)(B), a defined contribution plan satisfies the minimum vesting requirements for an employer nonelective contributions if it has a three-year vesting schedule or a two-to-six year vesting schedule. Code § 411(a) (2) (B) as amended by § 904 of PPA ’06 generally applies to contributions for plan years beginning after December 31, 2006.