March 2026
A retirement plan is a qualified plan only if the plan provides that a participant who receives a distribution which is an eligible rollover distribution has the right to make a direct rollover. A participant must have the option to have his or her eligible rollover distribution be a direct rollover. The employer does not have the right to not offer a participant the direct rollover. A direct rollover is an eligible rollover distribution that is paid directly for his or her benefit to another eligible retirement plan, including an IRA.
The concept of the law and the related IRS procedure is - a participant should be given the relevant tax information to make an informed decision so that he or she may decide how to best structure his or her distribution.
A participant is to be given a complying distribution form sometimes called a section 402(f) notice form no less than 30 days and no more than 180 days before the date of the distribution. A participant may waive the 30-day limit.
The starting point is - if the distribution is an eligible rollover distribution but the participant elects NOT to directly roll it over, then the plan administrator or trustee must withhold 20% of the distribution and the participant will be paid 80%. Conversely, the plan administrator or trustee must withhold 0% if the participant instructs to have the funds directly rolled over.
A participant whose distribution is an eligible rollover distribution has to decide from three options-
1. do I rollover 100% of the distribution to an IRA;
2. am I paid 80% in cash with 20% withheld or
3. do I take a portion in cash and directly rollover the remainder?
The Government Accountability Office (GAO) recommended and the IRS agreed to add the following two additional options-
1. don’t take a withdrawal and thereby leave the funds in the former employer’s plan or
2. transfer or do a direct rollover into the new employer’s plan.
Why these two additional recommended options? There are many in the federal government who don’t like IRAs and feel a person will be better off having funds in an employer sponsored plan where there normally are professional investment advisers. The Department of Labor (DOL) has this belief.
SECURE ACT 2.0 contained a number of new tax rules. There are now new additional exceptions to the 10% additional tax. These are explained in the safe harbor provisions. There are new rules for emergency personal expenses, qualified birth or adoption expenses, domestic abuse victims, terminally ill individuals and pension-linked emergency savings account. Some of these new exception distributions are eligible rollover distributions and others are not.
The RMD age was changed from age 72 to age 73. An RMD is never eligible to be rollover.
The law was changed to provide a plan may set the force out limit as $7,000 as increased from $5,000.
The rules applying to distributions which are eligible rollover distributions and those distributions which are not eligible rollover distributions are complicated. Employers will want to review these safe harbors and modify their section 402(f) notice forms.
The IRS has created one safe harbor for Designated Roth accounts and one for non-Designated Roth funds. A plan may furnish a notice containing both safe harbors or a safe harbor just addressing one topic.
In summary, the IRS has issued new guidance so that plan sponsors can revise their section 402(f) notices. CWF wants to remind IRA custodians/trustees that they should always ask a customer who decides to make a direct rollover into his or her IRA for a copy of the distribution form he or she completed. It is to be placed into the customer’s file. This copy is better than a rollover certification form. A plan administrator will not furnish the IRA custodian/trustee with the form.
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