United States: Guidance Issued On Allocation Of After-Tax Amounts To Rollovers

The IRS provided rules on Sept. 18 for allocating pretax and after-tax amounts among disbursements made to multiple destinations from a qualified retirement plan. Notice 2014-54 and an accompanying proposed regulation ( REG-105739-11) provide more details and apply to disbursements from a Section 403(b) plan or a Section 457(b) plan maintained by a governmental employer.

If a participant's account balance in a qualified retirement plan or in a Section 403(b) plan includes both after-tax and pretax amounts, each distribution from the account includes a pro-rata share of both after-tax and pretax amounts. If the distribution is made to multiple destinations, the after-tax and pretax amounts must be determined for each destination.

The notice provides that in determining the portion of a disbursement from a plan, all disbursements from the plan to the recipient that are scheduled to be made at the same time are treated as a single distribution regardless of whether the recipient has directed that the disbursements be made to a single destination or multiple destinations.

Regarding the allocation of the disbursement between after-tax and pretax amounts, if the pretax amount (related to the aggregated disbursements that are treated as a single distribution) is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pretax amount is assigned to the amount of the distribution that is directly rolled over. In that case, if the direct rollover is to two or more plans, the recipient can select how the pretax amount is allocated among these plans. To make this selection, the recipient must inform the plan administrator of the allocation before the direct rollovers.

In addition, if the pretax amount related to the aggregated disbursements in a distribution equals or exceeds the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the pretax amount is assigned to the portion of the distribution that is directly rolled over, up to the amount of the direct rollover (so that each direct rollover consists entirely of pretax amounts).

Any remaining pretax amount is next assigned to any 60-day rollovers (that is, rollovers that are not direct rollovers) up to the amount of the 60-day rollovers. If the remaining pretax amount is less than the amount rolled over in 60-day rollovers, the recipient can select how the pretax amount is allocated among the plans that receive 60-day rollovers. If, after the assignment of the pretax amount to direct rollovers and 60-day rollovers, there is a remaining pretax amount, that amount can be included in the distributee's gross income. If the amount rolled over to an eligible retirement plan exceeds the portion of the pretax amount assigned or allocated to the plan, the excess is an after-tax amount.

The notice points out that even though certain multiple disbursements to different destinations are treated as a single aggregated distribution, each disbursement may be required to be reported on a separate Form 1099-R, "Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.," in accordance with the instructions to Form 1099-R.

The preparer of Form 1099-R must consider the assignment and allocation rules under the notice in determining the amount of pretax contributions assigned or allocated among direct rollovers and any amounts paid to the recipient.

The rules in the notice and proposed regulations apply to distributions made on or after Jan. 1, 2015. For distributions made before Jan. 1, 2015, taxpayers may apply a reasonable interpretation of Section 402(c)(2) to allocate after-tax and pretax amounts among disbursements to multiple locations, including applying the allocation rules prescribed under the notice.

However, for distributions made from Roth accounts before Sept. 18, 2014, taxpayers must continue to apply existing Roth account distribution rules. These rules require that any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee. This separate distribution rule is eliminated under the proposed regulation by replacing the separate distribution rule with the rules previously described.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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