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RMD - 402f notice not needed?


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We always provided the 402f notice with RMD paperwork just to be on the safe side, but I stumbled upon this article that suggests that Notice 2020-62 clarifies that this is not necessary.  I can see why it wouldn't be, but I'm just being overly-cautious.  Any thoughts?

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Relevant section from article:
 

Quote

In late 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), allowing individuals to receive a “qualified birth or adoption distribution” of up to $5,000 from an eligible retirement plan. While such distributions may be recontributed to the plan from which they are paid, Notice 2020-62 clarifies that they are not eligible rollover distributions and not subject to the 402(f) notice requirements. The SECURE Act also raised, from age 70 1/2 to age 72, the age by which a qualified plan participant must begin receiving required minimum distributions (RMDs). The recent guidance clarifies that 402(f) notices must continue to be issued for eligible rollover distributions until a participant’s RMDs begin.

 

Of course, the IRS Notice nowhere comes right out and says this - it says that QBAD doesn't need a 402f notice because it can't be rolled over.  Is the GF article writer just being a little aggressive?

I note that American Funds has removed the 402f notice from it's RMD form, so maybe there really is something here...
 

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402(f) notice is required to be provided for any eligible rollover distribution. RMD is not an eligible rollover distribution; therefore, no notice.

The content of the notice describes how you can roll over your distribution and continue to defer taxation on it. With an RMD you do not have the option to roll it over, so providing the notice would actually be misleading to the participant.

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402(f) section is titled:

(f) Written explanation to recipients of distributions eligible for rollover treatment

(underline added)

Do you give 402(f) notices for testing refunds, too?

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I agree with the above, and I'm sure we've all seen many times where a participant who receives an RMD notice decides to take additional amounts. Then you have to provide a 402(f) notice. A PIA, but I don't see a good way around it, unless you mess with a special cover letter or notice that says, "Ignore this 402(f) Notice unless you decide to withdraw more than the RMD amount" or something like that. Seems to me that would be confusing to them. When they ask for more, we send out new forms, with the 402(f) Notice. Not saying this is necessarily the best way - others may have a better approach that works well.

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If you're in active conversation with the participant, they might even be fine with just having the 20% apply to the whole larger-than-RMD amount, in which case the notice makes sense and you're not tasked with separate forms where they end up with a weighted 18.7% withheld or something like that.

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What do BenefitsLink people think about using the IRS’s safe-harbor texts and writing a little more so one notice covers differing possibilities or portions?  For example:

If this distribution or a portion of it is an eligible rollover distribution, . . . .

If this distribution or a portion of it is not an eligible rollover distribution, . . . .

Like?  Dislike?

Aside from whether you like or dislike this method, do you think it minimally complies with Internal Revenue Code § 402(f)?

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36 minutes ago, Peter Gulia said:

If this distribution or a portion of it is an eligible rollover distribution, . . . .

If this distribution or a portion of it is not an eligible rollover distribution, . . . .

Like?  Dislike?

Meh.  You can do it if you like but it will only provide clarity to those who choose to read it carefully, i.e. no one.  

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Bird, thank you for your useful observation.

Adding nothing, a typical notice already is too long and too difficult for any but the most capable and determined reader.

If that assumption is right, which distributees would we harm by editing the notice?

Many administrators (often by falling-in with a recordkeeper’s service) furnish a § 402(f) notice for every distribution.  Some do so to lessen risks about failing to furnish a notice when it was required.  Some do it because the notice is furnished (perhaps as a part of a claim form) before anyone has received a claimant’s claim, and so before one knows whether the to-be-requested distribution will be eligible or not.  Also, one distribution might have within it a portion that is rollover-eligible and a portion that isn’t.

If a notice is furnished to a distributee who gets a distribution or a portion that is not rollover-eligible, might it help (or at least not harm) a reader to get a little more information?

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We see a lot of participants opt to take more than the minimum, which is why we defaulted to providing the notice.  "Your RMD is $4,700."  "Then I'll take $5,000."  This way, we've already given the notice... which is especially helpful when we're having these conversations in December.

But I'm thinking some re-wording might change the way it works: "here is your RMD, period.  If you want anything else, that's an in-service distribution, which is a separate transaction; don't cross the streams."

Thanks, all.

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If you are offering a payment amount greater than the RMD, include the 402(f). The SECURE Act raised the penalty to $100 per participant for not providing the elective withholding notice so don't forget to include that also for the RMD piece.  

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17 minutes ago, bito'money said:

The SECURE Act raised the penalty to $100 per participant for not providing the elective withholding notice

Can you tell me what section of the act that's from?  It's relative to my interests at the moment...

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Internal Revenue Code of 1986 (26 U.S.C.) § 6652

(h)   Failure to give notice to recipients of certain pension, etc., distributions

In the case of each failure to provide notice as required by section 3405(e)(10)(B), at the time prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid, on notice and demand of the Secretary and in the same manner as tax, by the person failing to provide such notice, an amount equal to $100 for each such failure, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $50,000.

amended by SECURE § 403(c).

(i)    Failure to give written explanation to recipients of certain qualifying rollover distributions

In the case of each failure to provide a written explanation as required by section 402(f), at the time prescribed therefor, unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid, on notice and demand of the Secretary and in the same manner as tax, by the person failing to provide such written explanation, an amount equal to $100 for each such failure, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $50,000.

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