n-14-74.pdf

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Safe Harbor Explanations – Eligible Rollover Distributions

Notice 2014-74

I. PURPOSE

This notice amends the two safe harbor explanations in Notice 2009-68,
2009-2 C.B. 423, that can be used to satisfy the requirement under § 402(f) of
the Internal Revenue Code (“Code”) that certain information be provided to
recipients of eligible rollover distributions. Amendments to the safe harbor
explanations reflected in this notice relate to the allocation of pre-tax and after-
tax amounts, distributions in the form of in-plan Roth rollovers, and certain other
clarifications to the two safe harbor explanations. The amendments to the safe
harbor explanations (and attached model notices) may be used for plans that
apply the guidance in section III of Notice 2014-54, 2014-41 I.R.B. 670, with
respect to the allocation of pretax and after-tax amounts.

II. BACKGROUND
Section 402(f) requires the plan administrator of a plan qualified under
§ 401(a) to provide the written explanation described in § 402(f)(1) to any
recipient of an eligible rollover distribution, as defined in § 402(c)(4). In addition,
§§ 403(a)(4)(B) and 457(e)(16)(B) require the plan administrator of a § 403(a)
plan, or an eligible §
457(b) plan maintained by a governmental employer
described in § 457(e)(1)(A), to provide the written explanation to any recipient of
an eligible rollover distribution. Further, § 403(b)(8)(B) requires a payor under a
§ 403(b) plan to provide the written explanation to the recipient of an eligible
rollover distribution.

Notice 2009-68 contains two safe harbor explanations that reflect the
relevant law as of September 28, 2009: one explanation is for payments not from
a designated Roth account and the other explanation is for payments from a
designated Roth account. These explanations include rules on the rollover of
payments to Roth IRAs, including explanations of transition rules that only
applied to distributions made before 2011. Notice 2009-68 provides that the safe
harbor explanations can be used by plan administrators and payors to satisfy
§ 402(f) to the extent the explanations accurately reflect current law.

Section 402A(c)(4), which was added to the Code by the Small Business
Jobs Act of 2010, P.L. 111-240, permits plans that include a qualified Roth
contribution program to provide for rollovers to designated Roth accounts in the
same plan (“in-plan Roth rollovers”). Notice 2010-84, 2010-51 I.R.B. 872,
provides guidance on in-plan Roth rollovers under § 402A(c)(4). For a plan

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offering in-plan Roth rollovers, Q&A-5 of Notice 2010-84 provides an amendment
to the safe harbor explanation for payments not from a designated Roth account
that can be used to satisfy § 402(f).

Section 402A(c)(4)(E), which was added to the Code by the American
Taxpayer Relief Act of 2012, P.L. 112-240, permits the in-plan Roth rollover of
amounts not otherwise distributable. Notice 2013-74, 2013-52 I.R.B. 819,
provides additional guidance on in-plan Roth rollovers, including on in-plan Roth
rollovers of amounts not otherwise distributable. Notice 2013-74 modifies Notice
2010-84, and also provides that a written explanation under § 402(f) is not
required for a participant who makes an in-plan Roth rollover of an amount not
otherwise distributable.

Proposed regulations that would modify § 1.402A-1, Q&A-5(a), were
issued in conjunction with Notice 2014-54. The proposed regulations would limit
the applicability of the requirement in § 1.402A-1, Q&A-5(a), applicable to
distributions from designated Roth accounts, that “any amount paid in a direct
rollover is treated as a separate distribution from any amount paid directly to the
employee.” Under the proposed regulations, this separate distribution
requirement would not apply to distributions made on or after the applicability
date of the Treasury decision finalizing the proposed regulations. Before the
proposed regulations are finalized, taxpayers are permitted to apply the rules set
out in section III of Notice 2014-54.

Section III of Notice 2014-54 provides new rules on the allocation of pretax
and after-tax amounts among disbursements made from a plan to multiple
destinations. Notice 2014-54 provides that the new allocation rules generally
apply to distributions made on or after January 1, 2015 (or the applicability date
of the Treasury decision that finalizes the proposed regulations under § 1.402A-
1, in the case of distributions from a designated Roth account). However,
transition rules permit the earlier application of the new allocation rules. The
notice also provides that the IRS intends to revise the safe harbor explanations
under § 402(f) to reflect the new allocation rules.

III. AMENDMENTS TO THE SAFE HARBOR EXPLANATIONS

This section III contains amendments to update the safe harbor
explanations in Notice 2009-68 for changes in the law occurring after
September 28, 2009, and to make certain other clarifying changes. The
amendments with respect to in-plan Roth rollovers apply to plans that offer in-
plan Roth rollovers, including in-plan Roth rollovers of amounts not otherwise
distributable, and the amendments with respect to the allocation of pretax and
after-tax amounts apply to plans that apply the guidance in section III of Notice
2014-54.
The updated safe harbor explanations provided in this notice can be
used by plan administrators and payors to satisfy § 402(f). However, the
updated safe harbor explanations will not satisfy § 402(f) to the extent the

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explanations are no longer accurate because of a change in the relevant law
occurring after December 8, 2014. The instructions in Notice 2009-68 on how to
use the safe harbor explanations continue to apply.

Part A contains amendments to the safe harbor explanation for payments
not from a designated Roth account and Part B contains amendments to the safe
harbor explanation for payments from a designated Roth account. References
throughout the safe harbor explanations to “IRS Publication 590, Individual
Retirement Arrangements (IRAs)” should be replaced with “IRS Publication 590-
A, Contributions to Individual Retirement Arrangements (IRAs), and Publication
590-B, Distributions from Individual Retirement Arrangements (IRAs),” as
applicable, after Publications 590-A and 590-B are issued. Restated safe harbor
explanations that include these amendments are at the end of this notice.

Part A – Amendments to the Safe Harbor Explanation for Payments not from a
Designated Roth Account

1. Under the heading “How much may I roll over?,” replace the eighth bullet with
the following:

Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution

2. Under the heading “If I don’t do a rollover, will I have to pay the 10%
additional income tax on early distributions?,” delete the ninth bullet (as it repeats
the concept found in the last bullet), which reads:

Contributions made under special automatic enrollment rules that are
withdrawn pursuant to your request within 90 days of enrollment

3. Under the heading “If I do a rollover to an IRA, will the 10% additional income
tax apply to early distributions from the IRA?,” replace item (3) in the last bullet
with the following:

payments for health insurance premiums after you have received
unemployment compensation for 12 consecutive weeks (or would have
been eligible to receive unemployment compensation but for self-
employed status).

4. Under the heading “If your payment includes after-tax contributions,” replace
the first and second paragraphs with the following:

After-tax contributions included in a payment are not taxed. If a payment
is only part of your benefit, an allocable portion of your after-tax
contributions is included in the payment, so you cannot take a payment of
only after-tax contributions. However, if you have pre-1987 after-tax

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contributions maintained in a separate account, a special rule may apply
to determine whether the after-tax contributions are included in a payment.
In addition, special rules apply when you do a rollover, as described
below.

You may roll over to an IRA a payment that includes after-tax contributions
through either a direct rollover or a 60-day rollover. You must keep track
of the aggregate amount of the after-tax contributions in all of your IRAs
(in order to determine your taxable income for later payments from the
IRAs). If you do a direct rollover of only a portion of the amount paid from
the Plan and at the same time the rest is paid to you, the portion directly
rolled over consists first of the amount that would be taxable if not rolled
over. For example, assume you are receiving a distribution of $12,000, of
which $2,000 is after-tax contributions. In this case, if you directly roll over
$10,000 to an IRA that is not a Roth IRA, no amount is taxable because
the $2,000 amount not directly rolled over is treated as being after-tax
contributions. If you do a direct rollover of the entire amount paid from the
Plan to two or more destinations at the same time, you can choose which
destination receives the after-tax contributions.

If you do a 60-day rollover to an IRA of only a portion of a payment made
to you, the after-tax contributions are treated as rolled over last. For
example, assume you are receiving a distribution of $12,000, of which
$2,000 is after-tax contributions, and no part of the distribution is directly
rolled over. In this case, if you roll over $10,000 to an IRA that is not a
Roth IRA in a 60-day rollover, no amount is taxable because the $2,000
amount not rolled over is treated as being after-tax contributions.

5. Under the heading “If you roll over your payment to a Roth IRA,” delete the
first paragraph, which reads:

You can roll over a payment from the Plan made before January 1, 2010
to a Roth IRA only if your modified adjusted gross income is not more than
$100,000 for the year the payment is made to you and, if married, you file
a joint return. These limitations do not apply to payments made to you
from the Plan after 2009. If you wish to roll over the payment to a Roth
IRA, but you are not eligible to do a rollover to a Roth IRA until after 2009,
you can do a rollover to a traditional IRA and then, after 2009, elect to
convert the traditional IRA into a Roth IRA.

6. Under the heading “If you roll over your payment to a Roth IRA,” replace the
second paragraph with the following:

If you roll over a payment from the Plan to a Roth IRA, a special rule
applies under which the amount of the payment rolled over (reduced by
any after-tax amounts) will be taxed. However, the 10% additional income

5

tax on early distributions will not apply (unless you take the amount rolled
over out of the Roth IRA within 5 years, counting from January 1 of the
year of the rollover).

7. Under the heading “If you roll over your payment to a Roth IRA,” delete the
fourth paragraph, which reads:

You cannot roll over a payment from the Plan to a designated Roth
account in an employer plan.

8. Following the section that is headed “If you roll over your payment to a Roth
IRA,” add a new section to read as follows:

If you do a rollover to a designated Roth account in the Plan

You cannot roll over a distribution to a designated Roth account in another
employer’s plan. However, you can roll the distribution over into a
designated Roth account in the distributing Plan. If you roll over a
payment from the Plan to a designated Roth account in the Plan, the
amount of the payment rolled over (reduced by any after-tax amounts
directly rolled over) will be taxed. However, the 10% additional tax on
early distributions will not apply (unless you take the amount rolled over
out of the designated Roth account within the 5-year period that begins on
January 1 of the year of the rollover).

If you roll over the payment to a designated Roth account in the Plan, later
payments from the designated Roth account that are qualified distributions
will not be taxed (including earnings after the rollover). A qualified
distribution from a designated Roth account is a payment made both after
you are age 59½ (or after your death or disability) and after you have had
a designated Roth account in the Plan for at least 5 years. In applying this
5-year rule, you count from January 1 of the year your first contribution
was made to the designated Roth account. However, if you made a direct
rollover to a designated Roth account in the Plan from a designated Roth
account in a plan of another employer, the 5-year period begins on
January 1 of the year you made the first contribution to the designated
Roth account in the Plan or, if earlier, to the designated Roth account in
the plan of the other employer. Payments from the designated Roth
account that are not qualified distributions will be taxed to the extent of
earnings after the rollover, including the 10% additional income tax on
early distributions (unless an exception applies).

Part B – Amendments to the Safe Harbor Explanation for Payments from a
Designated Roth Account

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1. Under the heading “How do I do a rollover?,” replace the next-to-last
paragraph with the following:

If you do a direct rollover of only a portion of the amount paid from the
Plan and a portion is paid to you at the same time, the portion directly
rolled over consists first of earnings.

2. Under the heading “How much may I roll over?,” replace the eighth bullet with
the following:

Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution

3. Under the heading “If I don’t do a rollover, will I have to pay the 10%
additional income tax on early distributions?,” delete the eighth bullet (as it
repeats the concept found in the last bullet), which reads:

Contributions made under special automatic enrollment rules that are
withdrawn pursuant to your request within 90 days of enrollment

4. Under the heading “If I do a rollover to a Roth IRA, will the 10% additional
income tax apply to early distributions from the IRA?,” replace item (3) in the last
bullet with the following:

payments for health insurance premiums after you have received
unemployment compensation for 12 consecutive weeks (or would have
been eligible to receive unemployment compensation but for self-
employed status).

IV. EFFECT ON OTHER DOCUMENTS

Notice 2009-68 is modified.

DRAFTING INFORMATION

The principal author of this notice is Angelique Carrington of the Employee
Plans, Tax Exempt and Government Entities Division. Questions regarding this
notice may be sent via e-mail to RetirementPlanQuestions@irs.gov
.

* * *

7

For Payments Not From a
Designated Roth Account

YOUR ROLLOVER OPTIONS

You are receiving this notice because all or a portion of a payment you are
receiving from the [INSERT NAME OF PLAN] (the “Plan”) is eligible to be rolled
over to an IRA or an employer plan. This notice is intended to help you decide
whether to do such a rollover.

This notice describes the rollover rules that apply to payments from the Plan that
are not from a designated Roth account (a type of account with special tax rules
in some employer plans). If you also receive a payment from a designated Roth
account in the Plan, you will be provided a different notice for that payment, and
the Plan administrator or the payor will tell you the amount that is being paid from
each account.

Rules that apply to most payments from a plan are described in the “General
Information About Rollovers” section. Special rules that only apply in certain
circumstances are described in the “Special Rules and Options” section.

GENERAL INFORMATION ABOUT ROLLOVERS

How can a rollover affect my taxes?

You will be taxed on a payment from the Plan if you do not roll it over. If you are
under age 59½ and do not do a rollover, you will also have to pay a 10%
additional income tax on early distributions (unless an exception applies).
However, if you do a rollover, you will not have to pay tax until you receive
payments later and the 10% additional income tax will not apply if those
payments are made after you are age 59½ (or if an exception applies).

Where may I roll over the payment?

You may roll over the payment to either an IRA (an individual retirement account
or individual retirement annuity) or an employer plan (a tax-qualified plan, section
403(b) plan, or governmental section 457(b) plan) that will accept the rollover.
The rules of the IRA or employer plan that holds the rollover will determine your
investment options, fees, and rights to payment from the IRA or employer plan
(for example, no spousal consent rules apply to IRAs and IRAs may not provide
loans). Further, the amount rolled over will become subject to the tax rules that
apply to the IRA or employer plan.

How do I do a rollover?

There are two ways to do a rollover. You can do either a direct rollover or a 60-
day rollover.

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If you do a direct rollover, the Plan will make the payment directly to your IRA or
an employer plan. You should contact the IRA sponsor or the administrator of
the employer plan for information on how to do a direct rollover.

If you do not do a direct rollover, you may still do a rollover by making a deposit
into an IRA or eligible employer plan that will accept it. You will have 60 days
after you receive the payment to make the deposit. If you do not do a direct
rollover, the Plan is required to withhold 20% of the payment for federal income
taxes (up to the amount of cash and property received other than employer
stock). This means that, in order to roll over the entire payment in a 60-day
rollover, you must use other funds to make up for the 20% withheld. If you do not
roll over the entire amount of the payment, the portion not rolled over will be
taxed and will be subject to the 10% additional income tax on early distributions if
you are under age 59½ (unless an exception applies).

How much may I roll over?

If you wish to do a rollover, you may roll over all or part of the amount eligible for
rollover. Any payment from the Plan is eligible for rollover, except:

• Certain payments spread over a period of at least 10 years or over your
life or life expectancy (or the lives or joint life expectancy of you and your
beneficiary)
• Required minimum distributions after age 70½ (or after death)
• Hardship distributions
• ESOP dividends
• Corrective distributions of contributions that exceed tax law limitations
• Loans treated as deemed distributions (for example, loans in default due
to missed payments before your employment ends)
• Cost of life insurance paid by the Plan
• Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution
• Amounts treated as distributed because of a prohibited allocation of S
corporation stock under an ESOP (also, there will generally be adverse
tax consequences if you roll over a distribution of S corporation stock to an
IRA).

The Plan administrator or the payor can tell you what portion of a payment is
eligible for rollover.

If I don’t do a rollover, will I have to pay the 10% additional income tax on
early distributions?

If you are under age 59½, you will have to pay the 10% additional income tax on
early distributions for any payment from the Plan (including amounts withheld for

9

income tax) that you do not roll over, unless one of the exceptions listed below
applies. This tax is in addition to the regular income tax on the payment not
rolled over.

The 10% additional income tax does not apply to the following payments from the
Plan:

• Payments made after you separate from service if you will be at least age
55 in the year of the separation
• Payments that start after you separate from service if paid at least
annually in equal or close to equal amounts over your life or life
expectancy (or the lives or joint life expectancy of you and your
beneficiary)
• Payments from a governmental defined benefit pension plan made after
you separate from service if you are a public safety employee and you are
at least age 50 in the year of the separation
• Payments made due to disability
• Payments after your death
• Payments of ESOP dividends
• Corrective distributions of contributions that exceed tax law limitations
• Cost of life insurance paid by the Plan
• Payments made directly to the government to satisfy a federal tax levy
• Payments made under a qualified domestic relations order (QDRO)
• Payments up to the amount of your deductible medical expenses
• Certain payments made while you are on active duty if you were a
member of a reserve component called to duty after September 11, 2001
for more than 179 days
• Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution.
If I do a rollover to an IRA, will the 10% additional income tax apply to early
distributions from the IRA?

If you receive a payment from an IRA when you are under age 59½, you will
have to pay the 10% additional income tax on early distributions from the IRA,
unless an exception applies. In general, the exceptions to the 10% additional
income tax for early distributions from an IRA are the same as the exceptions
listed above for early distributions from a plan. However, there are a few
differences for payments from an IRA, including:

• There is no exception for payments after separation from service that are
made after age 55.
• The exception for qualified domestic relations orders (QDROs) does not
apply (although a special rule applies under which, as part of a divorce or
separation agreement, a tax-free transfer may be made directly to an IRA
of a spouse or former spouse).

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• The exception for payments made at least annually in equal or close to
equal amounts over a specified period applies without regard to whether
you have had a separation from service.
• There are additional exceptions for (1) payments for qualified higher
education expenses, (2) payments up to $10,000 used in a qualified first-
time home purchase, and (3) payments for health insurance premiums
after you have received unemployment compensation for 12 consecutive
weeks (or would have been eligible to receive unemployment
compensation but for self-employed status).

Will I owe State income taxes?

This notice does not describe any State or local income tax rules (including
withholding rules).

SPECIAL RULES AND OPTIONS

If your payment includes after-tax contributions

After-tax contributions included in a payment are not taxed. If a payment is only
part of your benefit, an allocable portion of your after-tax contributions is included
in the payment, so you cannot take a payment of only after-tax contributions.
However, if you have pre-1987 after-tax contributions maintained in a separate
account, a special rule may apply to determine whether the after-tax
contributions are included in a payment. In addition, special rules apply when
you do a rollover, as described below.

You may roll over to an IRA a payment that includes after-tax contributions
through either a direct rollover or a 60-day rollover. You must keep track of the
aggregate amount of the after-tax contributions in all of your IRAs (in order to
determine your taxable income for later payments from the IRAs). If you do a
direct rollover of only a portion of the amount paid from the Plan and at the same
time the rest is paid to you, the portion directly rolled over consists first of the
amount that would be taxable if not rolled over. For example, assume you are
receiving a distribution of $12,000, of which $2,000 is after-tax contributions. In
this case, if you directly roll over $10,000 to an IRA that is not a Roth IRA, no
amount is taxable because the $2,000 amount not directly rolled over is treated
as being after-tax contributions. If you do a direct rollover of the entire amount
paid from the Plan to two or more destinations at the same time, you can choose
which destination receives the after-tax contributions.

If you do a 60-day rollover to an IRA of only a portion of a payment made to you,
the after-tax contributions are treated as rolled over last. For example, assume
you are receiving a distribution of $12,000, of which $2,000 is after-tax
contributions, and no part of the distribution is directly rolled over. In this case, if
you roll over $10,000 to an IRA that is not a Roth IRA in a 60-day rollover, no

11

amount is taxable because the $2,000 amount not rolled over is treated as being
after-tax contributions.

You may roll over to an employer plan all of a payment that includes after-tax
contributions, but only through a direct rollover (and only if the receiving plan
separately accounts for after-tax contributions and is not a governmental section
457(b) plan). You can do a 60-day rollover to an employer plan of part of a
payment that includes after-tax contributions, but only up to the amount of the
payment that would be taxable if not rolled over.

If you miss the 60-day rollover deadline

Generally, the 60-day rollover deadline cannot be extended. However, the IRS
has the limited authority to waive the deadline under certain extraordinary
circumstances, such as when external events prevented you from completing the
rollover by the 60-day rollover deadline. To apply for a waiver, you must file a
private letter ruling request with the IRS. Private letter ruling requests require the
payment of a nonrefundable user fee. For more information, see IRS Publication
590-A, Contributions to Individual Retirement Arrangements (IRAs).

If your payment includes employer stock that you do not roll over

If you do not do a rollover, you can apply a special rule to payments of employer
stock (or other employer securities) that are either attributable to after-tax
contributions or paid in a lump sum after separation from service (or after age
59½, disability, or the participant’s death). Under the special rule, the net
unrealized appreciation on the stock will not be taxed when distributed from the
Plan and will be taxed at capital gain rates when you sell the stock. Net
unrealized appreciation is generally the increase in the value of employer stock
after it was acquired by the Plan. If you do a rollover for a payment that includes
employer stock (for example, by selling the stock and rolling over the proceeds
within 60 days of the payment), the special rule relating to the distributed
employer stock will not apply to any subsequent payments from the IRA or
employer plan. The Plan administrator can tell you the amount of any net
unrealized appreciation.

If you have an outstanding loan that is being offset

If you have an outstanding loan from the Plan, your Plan benefit may be offset by
the amount of the loan, typically when your employment ends. The loan offset
amount is treated as a distribution to you at the time of the offset and will be
taxed (including the 10% additional income tax on early distributions, unless an
exception applies) unless you do a 60-day rollover in the amount of the loan
offset to an IRA or employer plan.

If you were born on or before January 1, 1936

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If you were born on or before January 1, 1936 and receive a lump sum
distribution that you do not roll over, special rules for calculating the amount of
the tax on the payment might apply to you. For more information, see IRS
Publication 575, Pension and Annuity Income.

If your payment is from a governmental section 457(b) plan

If the Plan is a governmental section 457(b) plan, the same rules described
elsewhere in this notice generally apply, allowing you to roll over the payment to
an IRA or an employer plan that accepts rollovers. One difference is that, if you
do not do a rollover, you will not have to pay the 10% additional income tax on
early distributions from the Plan even if you are under age 59½ (unless the
payment is from a separate account holding rollover contributions that were
made to the Plan from a tax-qualified plan, a section 403(b) plan, or an IRA).
However, if you do a rollover to an IRA or to an employer plan that is not a
governmental section 457(b) plan, a later distribution made before age 59½ will
be subject to the 10% additional income tax on early distributions (unless an
exception applies). Other differences are that you cannot do a rollover if the
payment is due to an “unforeseeable emergency” and the special rules under “If
your payment includes employer stock that you do not roll over” and “If you were
born on or before January 1, 1936” do not apply.

If you are an eligible retired public safety officer and your pension payment
is used to pay for health coverage or qualified long-term care insurance

If the Plan is a governmental plan, you retired as a public safety officer, and your
retirement was by reason of disability or was after normal retirement age, you
can exclude from your taxable income plan payments paid directly as premiums
to an accident or health plan (or a qualified long-term care insurance contract)
that your employer maintains for you, your spouse, or your dependents, up to a
maximum of $3,000 annually. For this purpose, a public safety officer is a law
enforcement officer, firefighter, chaplain, or member of a rescue squad or
ambulance crew.

If you roll over your payment to a Roth IRA

If you roll over a payment from the Plan to a Roth IRA, a special rule applies
under which the amount of the payment rolled over (reduced by any after-tax
amounts) will be taxed. However, the 10% additional income tax on early
distributions will not apply (unless you take the amount rolled over out of the Roth
IRA within 5 years, counting from January 1 of the year of the rollover).

If you roll over the payment to a Roth IRA, later payments from the Roth IRA that
are qualified distributions will not be taxed (including earnings after the rollover).
A qualified distribution from a Roth IRA is a payment made after you are age

13

59½ (or after your death or disability, or as a qualified first-time homebuyer
distribution of up to $10,000) and after you have had a Roth IRA for at least 5
years. In applying this 5-year rule, you count from January 1 of the year for
which your first contribution was made to a Roth IRA. Payments from the Roth
IRA that are not qualified distributions will be taxed to the extent of earnings after
the rollover, including the 10% additional income tax on early distributions
(unless an exception applies). You do not have to take required minimum
distributions from a Roth IRA during your lifetime. For more information, see IRS
Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs),
and IRS Publication 590-B, Distributions from Individual Retirement
Arrangements (IRAs).

If you do a rollover to a designated Roth account in the Plan

You cannot roll over a distribution to a designated Roth account in another
employer’s plan. However, you can roll the distribution over into a designated
Roth account in the distributing Plan. If you roll over a payment from the Plan to
a designated Roth account in the Plan, the amount of the payment rolled over
(reduced by any after-tax amounts directly rolled over) will be taxed. However,
the 10% additional tax on early distributions will not apply (unless you take the
amount rolled over out of the designated Roth account within the 5-year period
that begins on January 1 of the year of the rollover).

If you roll over the payment to a designated Roth account in the Plan, later
payments from the designated Roth account that are qualified distributions will
not be taxed (including earnings after the rollover). A qualified distribution from a
designated Roth account is a payment made both after you are age 59½ (or after
your death or disability) and after you have had a designated Roth account in the
Plan for at least 5 years. In applying this 5-year rule, you count from January 1
of the year your first contribution was made to the designated Roth account.
However, if you made a direct rollover to a designated Roth account in the Plan
from a designated Roth account in a plan of another employer, the 5-year period
begins on January 1 of the year you made the first contribution to the designated
Roth account in the Plan or, if earlier, to the designated Roth account in the plan
of the other employer. Payments from the designated Roth account that are not
qualified distributions will be taxed to the extent of earnings after the rollover,
including the 10% additional income tax on early distributions (unless an
exception applies).

If you are not a plan participant

Payments after death of the participant. If you receive a distribution after the
participant’s death that you do not roll over, the distribution will generally be
taxed in the same manner described elsewhere in this notice. However, the 10%
additional income tax on early distributions and the special rules for public safety
officers do not apply, and the special rule described under the section “If you

14

were born on or before January 1, 1936” applies only if the participant was born
on or before January 1, 1936.

If you are a surviving spouse. If you receive a payment from the Plan
as the surviving spouse of a deceased participant, you have the same
rollover options that the participant would have had, as described
elsewhere in this notice. In addition, if you choose to do a rollover to an
IRA, you may treat the IRA as your own or as an inherited IRA.

An IRA you treat as your own is treated like any other IRA of yours, so that
payments made to you before you are age 59½ will be subject to the 10%
additional income tax on early distributions (unless an exception applies)
and required minimum distributions from your IRA do not have to start until
after you are age 70½.

If you treat the IRA as an inherited IRA, payments from the IRA will not be
subject to the 10% additional income tax on early distributions. However,
if the participant had started taking required minimum distributions, you
will have to receive required minimum distributions from the inherited IRA.
If the participant had not started taking required minimum distributions
from the Plan, you will not have to start receiving required minimum
distributions from the inherited IRA until the year the participant would
have been age 70½.

If you are a surviving beneficiary other than a spouse. If you receive a
payment from the Plan because of the participant’s death and you are a
designated beneficiary other than a surviving spouse, the only rollover
option you have is to do a direct rollover to an inherited IRA. Payments
from the inherited IRA will not be subject to the 10% additional income tax
on early distributions. You will have to receive required minimum
distributions from the inherited IRA.

Payments under a qualified domestic relations order. If you are the spouse or
former spouse of the participant who receives a payment from the Plan under a
qualified domestic relations order (QDRO), you generally have the same options
the participant would have (for example, you may roll over the payment to your
own IRA or an eligible employer plan that will accept it). Payments under the
QDRO will not be subject to the 10% additional income tax on early distributions.

If you are a nonresident alien

If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or
U.S. employer plan, instead of withholding 20%, the Plan is generally required to
withhold 30% of the payment for federal income taxes. If the amount withheld
exceeds the amount of tax you owe (as may happen if you do a 60-day rollover),
you may request an income tax refund by filing Form 1040NR and attaching your

15

Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced
rate of withholding under an income tax treaty. For more information, see also
IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515,
Withholding of Tax on Nonresident Aliens and Foreign Entities.

Other special rules

If a payment is one in a series of payments for less than 10 years, your choice
whether to make a direct rollover will apply to all later payments in the series
(unless you make a different choice for later payments).

If your payments for the year are less than $200 (not including payments from a
designated Roth account in the Plan), the Plan is not required to allow you to do
a direct rollover and is not required to withhold for federal income taxes.
However, you may do a 60-day rollover.

Unless you elect otherwise, a mandatory cashout of more than $1,000 (not
including payments from a designated Roth account in the Plan) will be directly
rolled over to an IRA chosen by the Plan administrator or the payor. A
mandatory cashout is a payment from a plan to a participant made before age 62
(or normal retirement age, if later) and without consent, where the participant’s
benefit does not exceed $5,000 (not including any amounts held under the plan
as a result of a prior rollover made to the plan).

You may have special rollover rights if you recently served in the U.S. Armed
Forces. For more information, see IRS Publication 3, Armed Forces’ Tax Guide.

FOR MORE INFORMATION

You may wish to consult with the Plan administrator or payor, or a professional
tax advisor, before taking a payment from the Plan. Also, you can find more
detailed information on the federal tax treatment of payments from employer
plans in: IRS Publication 575, Pension and Annuity Income; IRS Publication
590-A, Contributions to Individual Retirement Arrangements (IRAs); IRS
Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs);
and IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). These
publications are available from a local IRS office, on the web at www.irs.gov
, or
by calling 1-800-TAX-FORM.

16

For Payments From a
Designated Roth Account

YOUR ROLLOVER OPTIONS

You are receiving this notice because all or a portion of a payment you are
receiving from the [INSERT NAME OF PLAN] (the “Plan”) is eligible to be rolled
over to a Roth IRA or designated Roth account in an employer plan. This notice
is intended to help you decide whether to do a rollover.

This notice describes the rollover rules that apply to payments from the Plan that
are from a designated Roth account. If you also receive a payment from the Plan
that is not from a designated Roth account, you will be provided a different notice
for that payment, and the Plan administrator or the payor will tell you the amount
that is being paid from each account.

Rules that apply to most payments from a designated Roth account are
described in the “General Information About Rollovers” section. Special rules
that only apply in certain circumstances are described in the “Special Rules and
Options” section.

GENERAL INFORMATION ABOUT ROLLOVERS

How can a rollover affect my taxes?

After-tax contributions included in a payment from a designated Roth account are
not taxed, but earnings might be taxed. The tax treatment of earnings included in
the payment depends on whether the payment is a qualified distribution. If a
payment is only part of your designated Roth account, the payment will include
an allocable portion of the earnings in your designated Roth account.

If the payment from the Plan is not a qualified distribution and you do not do a
rollover to a Roth IRA or a designated Roth account in an employer plan, you will
be taxed on the earnings in the payment. If you are under age 59½, a 10%
additional income tax on early distributions will also apply to the earnings (unless
an exception applies). However, if you do a rollover, you will not have to pay
taxes currently on the earnings and you will not have to pay taxes later on
payments that are qualified distributions.

If the payment from the Plan is a qualified distribution, you will not be taxed on
any part of the payment even if you do not do a rollover. If you do a rollover, you
will not be taxed on the amount you roll over and any earnings on the amount
you roll over will not be taxed if paid later in a qualified distribution.

A qualified distribution from a designated Roth account in the Plan is a payment
made after you are age 59½ (or after your death or disability) and after you have

17

had a designated Roth account in the Plan for at least 5 years. In applying the 5-
year rule, you count from January 1 of the year your first contribution was made
to the designated Roth account. However, if you did a direct rollover to a
designated Roth account in the Plan from a designated Roth account in another
employer plan, your participation will count from January 1 of the year your first
contribution was made to the designated Roth account in the Plan or, if earlier, to
the designated Roth account in the other employer plan.

Where may I roll over the payment?

You may roll over the payment to either a Roth IRA (a Roth individual retirement
account or Roth individual retirement annuity) or a designated Roth account in an
employer plan (a tax-qualified plan or section 403(b) plan) that will accept the
rollover. The rules of the Roth IRA or employer plan that holds the rollover will
determine your investment options, fees, and rights to payment from the Roth
IRA or employer plan (for example, no spousal consent rules apply to Roth IRAs
and Roth IRAs may not provide loans). Further, the amount rolled over will
become subject to the tax rules that apply to the Roth IRA or the designated Roth
account in the employer plan. In general, these tax rules are similar to those
described elsewhere in this notice, but differences include:

• If you do a rollover to a Roth IRA, all of your Roth IRAs will be
considered for purposes of determining whether you have satisfied the
5-year rule (counting from January 1 of the year for which your first
contribution was made to any of your Roth IRAs).
• If you do a rollover to a Roth IRA, you will not be required to take a
distribution from the Roth IRA during your lifetime and you must keep
track of the aggregate amount of the after-tax contributions in all of
your Roth IRAs (in order to determine your taxable income for later
Roth IRA payments that are not qualified distributions).
• Eligible rollover distributions from a Roth IRA can only be rolled over to
another Roth IRA.

How do I do a rollover?

There are two ways to do a rollover. You can either do a direct rollover or a 60-
day rollover.

If you do a direct rollover, the Plan will make the payment directly to your Roth
IRA or designated Roth account in an employer plan. You should contact the
Roth IRA sponsor or the administrator of the employer plan for information on
how to do a direct rollover.

If you do not do a direct rollover, you may still do a rollover by making a deposit
within 60 days into a Roth IRA, whether the payment is a qualified or nonqualified
distribution. In addition, you can do a rollover by making a deposit within 60 days

18

into a designated Roth account in an employer plan if the payment is a
nonqualified distribution and the rollover does not exceed the amount of the
earnings in the payment. You cannot do a 60-day rollover to an employer plan of
any part of a qualified distribution. If you receive a distribution that is a
nonqualified distribution and you do not roll over an amount at least equal to the
earnings allocable to the distribution, you will be taxed on the amount of those
earnings not rolled over, including the 10% additional income tax on early
distributions if you are under age 59½ (unless an exception applies).

If you do a direct rollover of only a portion of the amount paid from the Plan and a
portion is paid to you at the same time, the portion directly rolled over consists
first of earnings.

If you do not do a direct rollover and the payment is not a qualified distribution,
the Plan is required to withhold 20% of the earnings for federal income taxes (up
to the amount of cash and property received other than employer stock). This
means that, in order to roll over the entire payment in a 60-day rollover to a Roth
IRA, you must use other funds to make up for the 20% withheld.

How much may I roll over?

If you wish to do a rollover, you may roll over all or part of the amount eligible for
rollover. Any payment from the Plan is eligible for rollover, except:

• Certain payments spread over a period of at least 10 years or over your
life or life expectancy (or the lives or joint life expectancy of you and your
beneficiary)
• Required minimum distributions after age 70½ (or after death)
• Hardship distributions
• ESOP dividends
• Corrective distributions of contributions that exceed tax law limitations
• Loans treated as deemed distributions (for example, loans in default due
to missed payments before your employment ends)
• Cost of life insurance paid by the Plan
• Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution
• Amounts treated as distributed because of a prohibited allocation of S
corporation stock under an ESOP (also, there will generally be adverse
tax consequences if S corporation stock is held by an IRA).

The Plan administrator or the payor can tell you what portion of a payment is
eligible for rollover.

If I don’t do a rollover, will I have to pay the 10% additional income tax on
early distributions?

19

If a payment is not a qualified distribution and you are under age 59½, you will
have to pay the 10% additional income tax on early distributions with respect to
the earnings allocated to the payment that you do not roll over (including
amounts withheld for income tax), unless one of the exceptions listed below
applies. This tax is in addition to the regular income tax on the earnings not
rolled over.

The 10% additional income tax does not apply to the following payments from the
Plan:

• Payments made after you separate from service if you will be at least age
55 in the year of the separation
• Payments that start after you separate from service if paid at least
annually in equal or close to equal amounts over your life or life
expectancy (or the lives or joint life expectancy of you and your
beneficiary)
• Payments made due to disability
• Payments after your death
• Payments of ESOP dividends
• Corrective distributions of contributions that exceed tax law limitations
• Cost of life insurance paid by the Plan
• Payments made directly to the government to satisfy a federal tax levy
• Payments made under a qualified domestic relations order (QDRO)
• Payments up to the amount of your deductible medical expenses
• Certain payments made while you are on active duty if you were a
member of a reserve component called to duty after September 11, 2001
for more than 179 days
• Payments of certain automatic enrollment contributions requested to be
withdrawn within 90 days of the first contribution.
If I do a rollover to a Roth IRA, will the 10% additional income tax apply to
early distributions from the IRA?

If you receive a payment from a Roth IRA when you are under age 59½, you will
have to pay the 10% additional income tax on early distributions on the earnings
paid from the Roth IRA, unless an exception applies or the payment is a qualified
distribution. In general, the exceptions to the 10% additional income tax for early
distributions from a Roth IRA listed above are the same as the exceptions for
early distributions from a plan. However, there are a few differences for
payments from a Roth IRA, including:

• There is no special exception for payments after separation from service.
• The exception for qualified domestic relations orders (QDROs) does not
apply (although a special rule applies under which, as part of a divorce or
separation agreement, a tax-free transfer may be made directly to a Roth
IRA of a spouse or former spouse).

20

• The exception for payments made at least annually in equal or close to
equal amounts over a specified period applies without regard to whether
you have had a separation from service.
• There are additional exceptions for (1) payments for qualified higher
education expenses, (2) payments up to $10,000 used in a qualified first-
time home purchase, and (3) payments for health insurance premiums
after you have received unemployment compensation for 12 consecutive
weeks (or would have been eligible to receive unemployment
compensation but for self-employed status).

Will I owe State income taxes?

This notice does not describe any State or local income tax rules (including
withholding rules).

SPECIAL RULES AND OPTIONS

If you miss the 60-day rollover deadline

Generally, the 60-day rollover deadline cannot be extended. However, the IRS
has the limited authority to waive the deadline under certain extraordinary
circumstances, such as when external events prevented you from completing the
rollover by the 60-day rollover deadline. To apply for a waiver, you must file a
private letter ruling request with the IRS. Private letter ruling requests require the
payment of a nonrefundable user fee. For more information, see IRS Publication
590-A, Contributions to Individual Retirement Arrangements (IRAs).

If your payment includes employer stock that you do not roll over

If you receive a payment that is not a qualified distribution and you do not roll it
over, you can apply a special rule to payments of employer stock (or other
employer securities) that are paid in a lump sum after separation from service (or
after age 59½, disability, or the participant’s death). Under the special rule, the
net unrealized appreciation on the stock included in the earnings in the payment
will not be taxed when distributed to you from the Plan and will be taxed at capital
gain rates when you sell the stock. If you do a rollover to a Roth IRA for a
nonqualified distribution that includes employer stock (for example, by selling the
stock and rolling over the proceeds within 60 days of the distribution), you will not
have any taxable income and the special rule relating to the distributed employer
stock will not apply to any subsequent payments from the Roth IRA or employer
plan. Net unrealized appreciation is generally the increase in the value of the
employer stock after it was acquired by the Plan. The Plan administrator can tell
you the amount of any net unrealized appreciation.

If you receive a payment that is a qualified distribution that includes employer
stock and you do not roll it over, your basis in the stock (used to determine gain

21

or loss when you later sell the stock) will equal the fair market value of the stock
at the time of the payment from the Plan.

If you have an outstanding loan that is being offset

If you have an outstanding loan from the Plan, your Plan benefit may be offset by
the amount of the loan, typically when your employment ends. The loan offset
amount is treated as a distribution to you at the time of the offset and, if the
distribution is a nonqualified distribution, the earnings in the loan offset will be
taxed (including the 10% additional income tax on early distributions, unless an
exception applies) unless you do a 60-day rollover in the amount of the earnings
in the loan offset to a Roth IRA or designated Roth account in an employer plan.

If you receive a nonqualified distribution and you were born on or before
January 1, 1936

If you were born on or before January 1, 1936, and receive a lump sum
distribution that is not a qualified distribution and that you do not roll over, special
rules for calculating the amount of the tax on the earnings in the payment might
apply to you. For more information, see IRS Publication 575, Pension and
Annuity Income.

If you receive a nonqualified distribution, are an eligible retired public
safety officer, and your pension payment is used to pay for health coverage
or qualified long-term care insurance

If the Plan is a governmental plan, you retired as a public safety officer, and your
retirement was by reason of disability or was after normal retirement age, you
can exclude from your taxable income nonqualified distributions paid directly as
premiums to an accident or health plan (or a qualified long-term care insurance
contract) that your employer maintains for you, your spouse, or your dependents,
up to a maximum of $3,000 annually. For this purpose, a public safety officer is a
law enforcement officer, firefighter, chaplain, or member of a rescue squad or
ambulance crew.

If you are not a plan participant

Payments after death of the participant. If you receive a distribution after the
participant’s death that you do not roll over, the distribution will generally be
taxed in the same manner described elsewhere in this notice. However, whether
the payment is a qualified distribution generally depends on when the participant
first made a contribution to the designated Roth account in the Plan. Also, the
10% additional income tax on early distributions and the special rules for public
safety officers do not apply, and the special rule described under the section “If
you receive a nonqualified distribution and you were born on or before

22

January 1, 1936” applies only if the participant was born on or before
January 1, 1936.

If you are a surviving spouse. If you receive a payment from the Plan
as the surviving spouse of a deceased participant, you have the same
rollover options that the participant would have had, as described
elsewhere in this notice. In addition, if you choose to do a rollover to a
Roth IRA, you may treat the Roth IRA as your own or as an inherited Roth
IRA.

A Roth IRA you treat as your own is treated like any other Roth IRA of
yours, so that you will not have to receive any required minimum
distributions during your lifetime and earnings paid to you in a nonqualified
distribution before you are age 59½ will be subject to the 10% additional
income tax on early distributions (unless an exception applies).

If you treat the Roth IRA as an inherited Roth IRA, payments from the
Roth IRA will not be subject to the 10% additional income tax on early
distributions. An inherited Roth IRA is subject to required minimum
distributions. If the participant had started taking required minimum
distributions from the Plan, you will have to receive required minimum
distributions from the inherited Roth IRA. If the participant had not started
taking required minimum distributions, you will not have to start receiving
required minimum distributions from the inherited Roth IRA until the year
the participant would have been age 70½.

If you are a surviving beneficiary other than a spouse. If you receive a
payment from the Plan because of the participant’s death and you are a
designated beneficiary other than a surviving spouse, the only rollover
option you have is to do a direct rollover to an inherited Roth IRA.
Payments from the inherited Roth IRA, even if made in a nonqualified
distribution, will not be subject to the 10% additional income tax on early
distributions. You will have to receive required minimum distributions from
the inherited Roth IRA.

Payments under a qualified domestic relations order. If you are the spouse or a
former spouse of the participant who receives a payment from the Plan under a
qualified domestic relations order (QDRO), you generally have the same options
the participant would have (for example, you may roll over the payment as
described in this notice).

If you are a nonresident alien

If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or
U.S. employer plan, instead of withholding 20%, the Plan is generally required to
withhold 30% of the payment for federal income taxes. If the amount withheld

23

exceeds the amount of tax you owe (as may happen if you do a 60-day rollover),
you may request an income tax refund by filing Form 1040NR and attaching your
Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced
rate of withholding under an income tax treaty. For more information, see also
IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515,
Withholding of Tax on Nonresident Aliens and Foreign Entities.

Other special rules

If a payment is one in a series of payments for less than 10 years, your choice
whether to make a direct rollover will apply to all later payments in the series
(unless you make a different choice for later payments).

If your payments for the year (only including payments from the designated Roth
account in the Plan) are less than $200, the Plan is not required to allow you to
do a direct rollover and is not required to withhold for federal income taxes.
However, you can do a 60-day rollover.

Unless you elect otherwise, a mandatory cashout from the designated Roth
account in the Plan of more than $1,000 will be directly rolled over to a Roth IRA
chosen by the Plan administrator or the payor. A mandatory cashout is a
payment from a plan to a participant made before age 62 (or normal retirement
age, if later) and without consent, where the participant’s benefit does not exceed
$5,000 (not including any amounts held under the plan as a result of a prior
rollover made to the plan).

You may have special rollover rights if you recently served in the U.S. Armed
Forces. For more information, see IRS Publication 3, Armed Forces’ Tax Guide.

FOR MORE INFORMATION

You may wish to consult with the Plan administrator or payor, or a professional
tax advisor, before taking a payment from the Plan. Also, you can find more
detailed information on the federal tax treatment of payments from employer
plans in: IRS Publication 575, Pension and Annuity Income; IRS Publication
590-A, Contributions to Individual Retirement Arrangements (IRAs); IRS
Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs);
and IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans). These
publications are available from a local IRS office, on the web at www.irs.gov
, or
by calling 1-800-TAX-FORM.