Recently, the Internal Revenue Service (IRS) released Notice 2014-54 concerning the allocation of taxable and non-taxable amounts among rollover distributions to multiple destinations. It also issued a proposed rule that applies to the allocation of those rollover amounts from designated Roth accounts. This guidance applies to distributions from qualified plans, 403(b) plans, and governmental 457(b) plans. The notice and proposed rule clear up an issue that arose when the IRS issued safe harbor language for the Special Tax Notice in 2009, which suggested that participants could not direct pre- and after-tax amounts to separate destinations without applying the pro-rata allocation rule to the amount sent to each location. In practice, however, this interpretation was not always followed.
Guidance Issued on Allocation of After-Tax Amounts to Rollovers
The IRS confirms for purposes of determining the proration of a distribution that consists of after-tax (including Roth) and pre-tax amounts, that multiple distributions made at the same time (or within a reasonable time due to administrative issues) are treated as a single distribution whether or not they go to multiple destinations.
The notice provides several examples to demonstrate how the allocation of pre- and after-tax amounts is to be handled. If the amount rolled over to an eligible retirement plan is less than or equal to the portion of the distribution that is pre-tax, then the entire rollover is considered to be made from the pre-tax account. If the rollover is being made to two or more plans or individual retirement accounts (IRA), the participant may direct how the allocations are to be made. Rollovers of after-tax amounts must be made to an IRA or a plan that separately accounts for the after-tax amount.
Proposed Changes for Roth Accounts
In conjunction with Notice 2014-54, proposed regulations were issued to remove the requirement that direct rollovers from Roth accounts be treated as separate distributions when multiple payments are made as part of a single event. Thus, the treatment of distributions from Roth accounts will mirror the rules for non-Roth distributions.
The proposed regulations are effective for Roth distributions on or after January 1, 2015, but may be relied on for distributions on or after September 18, 2014. The allocation rules in the notice may be used for non-Roth distributions immediately, but can also be relied on retroactively, which provides relief for any past practices that relied on the Code, rather than the Special Tax Notice.
Reporting and Disclosures
Even though a payment rolled over to multiple destinations will now be considered a single distribution, separate 1099-R forms will be required. The forms must reflect how the rollover was split between the destinations. Notices to participants describing available rollover options will need to be updated. The IRS has indicated that a new Special Tax Notice will be forthcoming, although no date has been provided.