Notice 2009-68 statement aboutdirect rollover of after-tax contributions

[Everett Moreland]

Please let me know if you think the following statement in Notice 2009-68 (the new 402(f) notice) is correct:

"If you do a direct rollover of only a portion of the amount paid from the Plan and a portion is paid to you, each of the payments will include an allocable portion of the after-tax contributions."

[ScottR]

Possibly. (g) I think it's true WRT post-1986 voluntaries. (not 100% sure about the year).

I seem to recall that pre-1986 voluntaries may be refunded on a FIFO basis. i.e. basis is refunded first, without tax.

.. Scott

[GMK]

Good point, Scott.

It's pre-1987 after-tax contributions that can be taken basis first, no tax. Distributions of amounts contributed after 1986 have to be the proportional mixture of pre- and after-tax amounts.

[Everett Moreland]

Thank you for your reply.

My concern about the above statement in Notice 2008-68 is that it seems to conflict with the last sentence in IRC Section 402©(2), which is the last sentence of this post. That last sentence was added by Section 411(q)(2) of the Job Creation and Worker Assistance Act of 2002 and is explained as follows in the Joint Committee on Taxation's General Explanation of Tax Legislation Enacted in the 107th Congress:

"A technical correction was enacted in section 411(q) of the Job Creation and Worker Assistance Act of 2002, described in Part Eight of this document, to clarify that a qualified plan must provide for the direct rollover of after-tax contributions only to a qualified defined contribution plan or a traditional IRA and that, if a distribution includes both pretax and after-tax amounts, the portion of the distribution that is rolled over is treated as consisting first of pretax amounts." (at 128 note 122)

"Under prior law and under the Act, a qualified retirement plan must provide for the rollover of certain distributions directly to a qualified defined contribution plan, a qualified annuity plan, a tax-sheltered annuity plan, a governmental eligible deferred compensation plan, or a traditional IRA, if the participant elects a direct rollover. The provision clarifies that a qualified retirement plan must provide for the direct rollover of after-tax contributions only to a qualified defined contribution plan or a traditional IRA. The provision also clarifies that, if a distribution includes both pretax and after-tax amounts, the portion of the distribution that is rolled over is treated as consisting first of pretax amounts." (at 253)

IRC Section 402©(1) and (2):

© Rules applicable to rollovers from exempt trusts.--

(1) Exclusion from income.--If--

(A) any portion of the balance to the credit of an employee in a qualified trust is paid to the employee in an eligible rollover distribution,

(B) the distributee transfers any portion of the property received in such distribution to an eligible retirement plan, and

© in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,

then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.

(2) Maximum amount which may be rolled over.--In the case of any eligible rollover distribution, the maximum amount transferred to which paragraph (1) applies shall not exceed the portion of such distribution which is includible in gross income (determined without regard to paragraph (1)). The preceding sentence shall not apply to such distribution to the extent--

(A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or

(B) such portion is transferred to an eligible retirement plan described in clause (i) or (ii) of paragraph (8)(B).

In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1)).

[masteff]

I agree w/ your analysis, Everett. The statement in question also blatenty contradicts IRS Publications 575 and 590. The Service clearly dropped the ball on this one.

[GMK]

Thank you for spotting this, Everett, and for the confirming references, masteff.

[Everett Moreland]

The following from page 5 of the Spring 2010 IRS employee plan news, available here: ftp://ftp.irs.gov/pub/irs-tege/spr10.pdf , seems to be an admission that the quoted statement from Notice 2009-68 in the first post is inaccurate:

"Ordering Rule for Partial Rollovers

"If you receive an IRA or plan distribution that consists of after-tax and pre-tax amounts, you would first use the formulas above to determine the pre-tax amount of the distribution. If you roll over only part of that distribution to a Roth IRA, the first dollars rolled over come from the pre-tax amount of the distribution. After all the pre-tax portion of the distribution has been rolled over, any remaining amount is after-tax, which may also be rolled over to a Roth IRA."

[david rigby]

... an admission that the quoted statement from Notice 2009-68 in the first post is inaccurate

Not the same as an IRS admission that they were wrong.