Source: https://www.fdic.gov/regulations/examinations/trustmanual/appendix_e/irs-notice2007-7-ppa.html
Timestamp: 2017-03-23 02:15:43
Document Index: 78344672

Matched Legal Cases: ['§ 303', '§ 826', '§ 828', '§ 829', '§ 845', '§ 904', '§1102', '§1201', '§ 415', '§ 415', '§ 415', '§ 417', '§ 415', '§ 417', '§ 101', '§ 415', '§ 417', '§ 415', '§ 417', '§ 417', '§ 415', '§ 303', '§ 415', '§ 303', '§ 303', '§ 411', '§ 1107', '§ 411', '§ 303', '§ 415', '§ 415', '§ 415', '§ 303', '§ 303', '§ 415', '§ 303', '§ 303', '§ 303', '§ 303', '§ 415', '§ 303', '§ 415', '§ 303', '§ 1107', '§ 303', '§ 303', '§ 303', '§ 303', '§ 415', '§ 415', '§ 303', '§ 415', '§ 1', '§ 401', '§ 403', '§ 409', '§ 457', '§ 826', '§ 401', '§ 403', '§ 457', '§ 409', '§ 401', '§ 403', '§ 401', '§ 1', '§ 1', '§ 403', '§ 457', '§ 409', '§ 457', '§ 1', '§ 409', '§ 1', '§ 457', '§ 409', '§ 409', '§ 4974', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 72', '§ 402', '§ 829', '§ 408', '§ 402', '§ 408', '§ 401', '§ 402', '§ 401', '§ 401', '§ 1', '§ 402', '§ 1', '§ 403', '§ 457', '§ 402', '§ 401', '§ 2550', '§ 402', '§ 402', '§ 401', '§ 402', '§ 3405', '§ 401', '§ 401', '§ 1', '§ 401', '§ 401', '§ 401', '§ 1', '§ 1', '§ 401', '§ 401', '§ 401', '§ 1', '§ 4974', '§ 1', '§ 1', '§ 401', '§ 1', '§ 402', '§ 408', '§ 401', '§ 401', '§ 402', '§ 845', '§ 414', '§ 401', '§ 403', '§ 403', '§ 457', '§ 402', '§ 402', '§ 402', '§ 1204', '§ 402', '§ 402', '§ 402', '§ 402', '§ 402', '§ 402', '§ 402', '§ 213', '§ 402', '§ 213', '§ 904', '§ 411', '§ 411', '§ 904', '§ 411', '§ 904', '§ 411', '§ 904', '§ 411', '§ 411', '§ 411', '§ 411', '§ 904', '§ 904', '§ 1', '§ 411', '§ 904', '§ 411', '§ 904', '§ 411', '§ 904', '§ 402', '§ 411', '§ 417', '§ 411', '§ 205', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1', '§ 1', '§ 411', '§ 1102', '§ 411', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1102', '§ 1', '§ 408', '§ 408', '§ 170', '§ 408', '§ 170', '§ 170', '§ 170', '§ 509', '§ 4966', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 170', '§ 170', '§ 408', '§ 170', '§ 170', '§ 170', '§ 3405', '§ 3405', '§ 3405', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 408', '§ 170', '§ 170', '§ 170', '§ 408', '§ 4975', '§ 4975', '§ 170', '§ 408', '§ 4975']

Revenue Service Notice 2007-7
III. Administrative, Procedural, and Miscellaneous
notice provides guidance in the form of questions and answers with
respect to certain provisions of the Pension Protection Act of 2006, P.L. 109-280 (“PPA ’06”),
that are effective in 2007 or earlier. The sections of PPA ’06
addressed in this notice, which are primarily related to distributions, are § 303 (relating to interest rate
assumptions for lump sum distributions), § 826 (relating to hardship distributions), § 828 (relating to early distributions to public safety employees), § 829 (relating to rollovers for nonspouse beneficiaries), § 845 (relating to distributions to pay for accident or health insurance for public safety officers), § 904 (relating to vesting of nonelective contributions), §1102 (relating to the notice and consent period for distributions), and §1201 (relating to distributions from IRAs to charitable organizations).
303 of Pension Protection Act of 2006
415(b) of the Code provides limitations on annual benefits under a
defined benefit plan. Under § 415(b)(2)(B), if a benefit is payable in a form other than a
straight life annuity, the benefit is adjusted to an actuarially equivalent
straight life annuity for purposes of determining whether the limitations of § 415(b)
satisfied. Section 415(b)(2)(E) provides limitations on the actuarial assumptions
that can be used in making the adjustment under § 415(b)(2)(B).
Prior to the enactment of PPA ‘06, for purposes of adjusting a benefit payable in a form that is subject to
the minimum present value requirements of § 417(e)(3), § 415(b)(2)(E)(ii) provided that the interest rate assumption must not be less
than the greater of the applicable interest rate as defined in § 417(e)(3) or the rate specified in the plan. However, § 101(b)(4) of the Pension Funding Equity Act of 2004, P.L. 108-218, amended § 415(b)(2)(E)(ii) to provide that, for plan years beginning in 2004 and 2005,
5.5% must be used in lieu of the applicable interest rate (as defined in § 417(e)(3)) for purposes of adjusting the benefit. Section 303(a) of PPA ’06 amended § 415(b)(2)(E)(ii) to provide that the interest rate assumption for purposes of
adjusting a benefit payable in a form that is subject to the minimum present
value requirements of § 417(e)(3) must not be less than the greatest of (i) 5.5%, (ii) the rate that
provides a benefit of not more than 105% of the benefit that would be provided
if the applicable interest rate (as defined in § 417(e)(3)) were the interest rate assumption, or (iii) the rate specified under
What is the effective date of the changes made to § 415 of the Code by§ 303(a) of PPA ‘06? A-1.
The changes to § 415 of the Code made by § 303(a) of PPA ‘06 apply to distributions made in plan years beginning after December 31, 2005.
changes do not apply to a plan with a termination date that is on or before
August 17, 2006, the date of enactment of PPA ‘06.
May a plan be amended retroactively to comply with the requirements
of§ 303(a) of PPA ‘06 without violating the anti-cutback rules provided in § 411(d)(6) of
Yes. Under § 1107 of PPA ’06, a plan does not violate the anti-cutback rules of § 411(d)(6) of the Code if it is amended retroactively to comply with § 303(a) of
PPA ’06, provided the amendment is adopted on or before
the last day of the first plan year beginning on or after January 1, 2009 (2011
in the case of a governmental plan), and the plan is operated as if such amendment
were in effect as of the first date the amendment is effective.
If a plan made a distribution in a plan year beginning in 2006 that
satisfied the limitations of § 415(b) prior to the enactment of PPA ’06 but which is in excess of the
limitations of § 415(b) taking into account the
amendments to § 415 made by § 303(a) of PPA ’06 (a “§ 303 excess distribution”), does the distribution violate the requirements of § 415(b)?
Yes. However, three methods are available for correcting a § 303 excess distribution. First, Q&A-4 of this notice sets forth a special correction method that is
available for a § 303 excess distribution made
prior to September 1, 2006, provided that the correction is completed by March
15, 2007. Second, if correction is completed by December 31, 2007 (even if
the § 303 excess distribution occurs after September 1, 2006), a plan may correct
a § 303 excess distribution by using the correction method for a § 415(b) excess distribution described in the Employee Plans Compliance Resolution
System (“EPCRS”) (see section 2.04(1) in Appendix B in Rev. Proc. 2006-27, 2006-22 IRB 945)
even if the plan does not meet the requirements specified in Rev. Proc. 2006-
27, including the special requirements for self correction under Part IV of
Rev. Proc. 2006-27. Finally, a plan that meets the requirements of Rev. Proc.
2006-27 may correct § 303 excess distributions by using the correction method for § 415(b) excess distributions under EPCRS even after December 31, 2007. A plan
that is amended retroactively to comply with § 303(a) of PPA ’06 will not fail to satisfy the requirement in§ 1107(b)(2)(A) of PPA '06 (that the plan be operated in accordance with the terms
of the amendment) merely because it made a § 303 excess distribution, provided the§ 303 excess distribution is corrected using one of these three correction methods.
What special correction method is available to correct a § 303 excess distribution made prior to September 1, 2006?
A special correction method is available for a § 303 excess distribution made prior to September 1, 2006, provided the correction
is completed by March 15, 2007. Under the special correction method, a plan may use the EPCRS correction
method for a § 415(b) excess distribution (as described in section 2.04(1) in Appendix B
in Rev. Proc. 2006-27, even if the plan does not otherwise meet the requirements
of Rev. Proc. 2006-27, including the special requirements for self correction)
following modifications. The excess amount (i.e., the amount by which the distribution
actually made exceeds the distribution permitted using the interest assumption
specified in § 415(b)
as amended by PPA '06) is not required to be returned to the plan (as otherwise
required under the EPCRS correction method). Instead, a plan must issue two
Forms 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.) to a participant who has received a § 303 excess distribution. The first Form 1099-R should include only the amount
that would have been distributed had the benefit payable been adjusted using
the interest assumptions specified in § 415(b) as amended by PPA ‘06. The second Form 1099-R should include only the excess amount that was distributed,
and should include code“ E” in box 7 to identify the amount as an excess distribution. As provided in the
EPCRS correction, this excess amount is not an eligible rollover distribution,
and therefore must be included in gross income in the year distributed from
III. Section 826 of
employee’s elective contributions under a cash or deferred arrangement can only be distributed
upon the occurrence of certain events, one of which is the
employee’s hardship. A distribution is made on account
of hardship only if the distribution both is made on account of an immediate
and heavy financial need of the employee and is necessary to satisfy the financial
need. A distribution made for any of the expenses listed in Regulation § 1.401(k)-1(d)(3)(iii)(B) is deemed to be on account of an immediate and heavy
financial need of the employee. Several of these listed expenses can be expenses
of the employee’s spouse or dependents.
Section 826 of PPA ’06 directs the Secretary
of the Treasury to modify the rules relating to distributions from § 401(k), § 403(b), § 409A, and § 457(b) plans on account
of a participant’s hardship or unforeseeable
financial emergency to permit such plans to treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred a hardship
or unforeseeable financial emergency.
What changes are being made pursuant to § 826 of PPA ’06 in the rules relating to hardship distributions from § 401(k) plans and § 403(b) plans and relating to
distributions on account of an unforeseeable financial emergency from a plan
described in § 457(b)
or § 409A?
(a) Hardship distributions from § 401(k) plans and § 403(b) plans. A § 401(k) plan that permits hardship distributions of elective contributions to
only for expenses described in § 1.401(k)-1(d)(3)(iii)(B)
may, beginning August 17, 2006, permit distributions for expenses described
in § 1.401(k)-1(d)(3)(iii)(B)(1), (3), or
(5) (relating to medical, tuition, and funeral expenses, respectively) for
a primary beneficiary
under the plan. For this purpose, a “primary beneficiary under the plan” is
an individual who is named as a beneficiary under the plan and has an unconditional
right to all or a portion of the participant’s
account balance under the plan upon the
death of the participant. A plan that adopts these expanded hardship provisions
must still satisfy all the other requirements applicable to hardship distributions,
such as the requirement that the distribution be necessary to satisfy the financial
need. These rules also apply to § 403(b)
Distributions on account of an unforeseeable financial emergency from
a plan described in § 457(b) or § 409A. In applying § 457(d)(1)(A)(iii), § 1.457-6(c)(2)(i),
§ 409A(a)(2)(A)(vi), and Proposed Regulation § 1.409A-3(g)(3)(i),
a plan described in § 457(b) or § 409A may treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred an
unforeseeable financial emergency. This will be reflected in the upcoming final
regulations under § 409A.
IV. Section
828 of Pension Protection Act of 2006
72(t)(1) of the Code provides for a 10% additional tax on an early
distribution from a qualified retirement plan (as defined in § 4974(c)), unless the early
distribution qualifies for one of the exceptions listed in § 72(t)(2).
For example,§ 72(t)(2)(A)(v) provides an exception to the 10% additional tax for distributions
an employee who separates from service after attainment of age 55. Under§ 72(t)(3)(A), § 72(t)(2)(A)(v)
does not apply to individual retirement plans. Section 828 of PPA ’06 amended § 72 of the Code by adding § 72(t)(10), which provides that in the case of a distribution to a qualified
public safety employee from a governmental defined benefit plan, § 72(t)(2)(A)(v) is applied by substituting age 50 for age 55. Thus, the 10% additional
tax on early distributions under § 72(t)(1) does not apply to a distribution from a governmental defined benefit
plan made to a qualified public safety employee who separates from service
after attainment of age 50. This exception to the 10% additional tax applies
to distributions made after August 17, 2006 (the date of enactment of PPA ’06).
Who is a qualified public safety employee?
For purposes of § 72(t)(10), the term “qualified public safety employee” means an employee of a State or of a political subdivision of a State (such
or city) whose principal duties include services requiring specialized training
in the area of police protection, firefighting services, or emergency medical
services for any area within the jurisdiction of the State or the political
How does a qualified public safety employee qualify for the exception
to the 10% additional tax under § 72(t)(10)?
In order to qualify for the exception to the 10% additional tax under§ 72(t)(10), a qualified public safety employee (i) must have received the distribution
from a governmental defined benefit plan after separating from service
with the employer maintaining the plan and (ii) the separation from
service must have occurred during or after the calendar year in which
the qualified public safety employee attained age 50. For example,
a qualified public safety employee who separated from service on
June 30, 2006, and attained age 50 on December 12, 2006, is eligible for the
exception under § 72(t)(10)
with respect to distributions made after August 17, 2006.
What are the consequences if, before August 18, 2006, a qualified
public safety employee began receiving substantially equal periodic
payments that qualify for
the exception to the 10% additional tax described in § 72(t)(2)(A)(iv)
and then modified the periodic payments after August 17, 2006?
If the payments satisfy the requirements in Q&A-7 of this notice, payments received by the qualified public safety employee
after August 17, 2006, would qualify for
the exception to the 10% additional tax under § 72(t)(10).
However, if the modification would result in the imposition of the recapture
tax under the rules of § 72(t)(4), then the recapture tax applies to the payments made before August
Does the exception to the 10% additional tax under § 72(t)(10) apply if the qualified public safety employee rolls over distributions
from a governmental defined
benefit plan into an IRA or a defined contribution plan and subsequently takes
an early distribution from the IRA or defined contribution plan?
No. The exception to the 10% additional tax under § 72(t)(10) applies only to amounts distributed from a governmental defined benefit
plan and does not apply to
distributions from a defined contribution plan or an individual retirement
How does a payer report distributions that qualify for the exception
to the 10% additional tax under § 72(t)(10) on Form 1099-R?
A payer is permitted to use distribution code 2 (early distribution,
exception applies) in box 7 of Form 1099-R. However, a payer is also
permitted to use distribution
code 1 (early distribution, no known exception) in box 7 of Form 1099-R, if
the payer does not know whether the exception under § 72(t)(10)
applies. For further information on reporting, see Instructions for Forms 1099-R
and 5498.
V. Section
829 of Pension Protection Act of 2006
Under § 402(c)(11)
of the Code, which was added by § 829 of PPA ‘06, if a direct trustee-to-trustee transfer of any portion of a distribution
is made to an individual retirement plan described in § 408(a)
or (b) (an “IRA”) that is established for the purpose of receiving the distribution on behalf
of a designated
beneficiary who is a nonspouse beneficiary, the transfer is treated as a direct
rollover of an eligible rollover distribution for purposes of § 402(c).
The IRA of the nonspouse beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)(C). Section 402(c)(11) applies to distributions made after December
Can a qualified plan described in § 401(a) offer a direct rollover of a distribution to a nonspouse beneficiary?
Yes. Under § 402(c)(11), a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary
who is a designated
beneficiary within the meaning of § 401(a)(9)(E),
provided that the distributed amount satisfies all the requirements to be an
eligible rollover distribution other than the
requirement that the distribution be made to the participant or the participant’s
spouse. (See § 1.401(a)(9)-4 for rules regarding designated beneficiaries.) The direct rollover
must be made to an IRA established on behalf of the designated beneficiary
that will be treated as an inherited IRA pursuant to the provisions of § 402(c)(11). If a nonspouse beneficiary elects a direct rollover, the amount
directly rolled over is not includible in gross income in the year of the distribution.
See § 1.401(a)(31)-1, Q&A-3 and-4, for procedures for making a direct rollover.
Can other types of plans offer a direct rollover of a distribution
to a nonspouse beneficiary?
Yes. Section 402(c)(11) also applies to annuity plans described in§ 403(a) or (b) and to eligible governmental plans under § 457(b).
How must the IRA be established and titled?
The IRA must be established in a manner that identifies it as an IRA
with respect to a deceased individual and also identifies the deceased
beneficiary, for example, “Tom Smith
as beneficiary of John Smith.”
Is a plan required to offer a direct rollover of a distribution to
a nonspouse beneficiary pursuant to § 402(c)(11)?
No. A plan is not required to offer a direct rollover of a distribution
to a nonspouse beneficiary. If a plan does offer direct rollovers
to nonspouse beneficiaries
of some, but not all, participants, such rollovers must be offered on a nondiscriminatory
basis because the opportunity to make a direct rollover is a benefit, right,
or feature that is subject to § 401(a)(4).
In the case of distributions from a terminated defined contribution plan pursuant
to 29 C.F.R. § 2550.404a-3(d)(1)(ii), the plan will be
considered to offer direct rollovers pursuant to § 402(c)(11)
with respect to such distributions without regard to plan terms.
For what purposes is the direct rollover of a distribution by a nonspouse
beneficiary treated as a rollover of an eligible rollover distribution?
Section 402(c)(11) provides that a direct rollover of a distribution
by a nonspouse beneficiary is a rollover of an eligible rollover distribution
only for purposes
of § 402(c). Accordingly, the distribution is not subject
to the direct rollover requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory
withholding requirements of § 3405(c).
If an amount distributed from a plan is received by a nonspouse beneficiary,
the distribution is not eligible for rollover.
If the named beneficiary of a decedent is a trust, is a plan permitted
to make a direct rollover to an IRA established with the trust as
Yes. A plan may make a direct rollover to an IRA on behalf of a trust
where the trust is the named beneficiary of a decedent, provided the
trust meet the requirements to be designated beneficiaries within the meaning
of§ 401(a)(9)(E).
The IRA must be established in accordance with the rules in Q&A-13 of
this notice, with the trust identified as the beneficiary. In such a case,
the beneficiaries of the trust are treated as having been designated as beneficiaries
of the decedent for purposes of determining the distribution period under § 401(a)(9),
if the trust meets the requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.
How is the required minimum distribution (an amount not eligible for
rollover) determined with respect to a nonspouse beneficiary if the
before his or her required beginning date within the meaning of § 401(a)(9)(C)?
(a) General rule. If the employee dies before his or her required
beginning date, the required minimum distributions for purposes of
determining the amount eligible
for rollover with respect to a nonspouse beneficiary are determined under either
the 5-year rule described in § 401(a)(9)(B)(ii)
or the life expectancy rule described in
§ 401(a)(9)(B)(iii). See Q&A-4
of § 1.401(a)(9)-3 to determine which rule applies to a particular designated beneficiary.
Under either rule, no amount is a required minimum
distribution for the year in which the employee dies. The rule in Q&A-7(b)
of§ 1.402(c)-2 (relating to distributions before an employee has attained age 70½) does not apply to nonspouse beneficiaries.
Five-year rule. Under the 5-year rule described in § 401(a)(9)(B)(ii), no amount is required to be distributed until the fifth calendar
year following the year of the
employee’s death. In that year, the entire amount to
which the beneficiary is entitled under the plan must be distributed. Thus,
if the 5-year rule applies with respect to a
nonspouse beneficiary who is a designated beneficiary within the meaning of§ 401(a)(9)(E),
for the first 4 years after the year the employee dies, no amount payable
to the beneficiary is ineligible for direct rollover as a required minimum
distribution. Accordingly, the beneficiary is permitted to directly roll over
benefit until the end of the fourth year (but, as described in Q&A-19
of this notice, the 5-year rule must also apply to the IRA to which the rollover
contribution is made). On or after January 1 of the fifth year following the
year in which the employee died, no amount payable to the beneficiary is eligible
for rollover.
Life expectancy rule. (1) General rule. If the life expectancy rule
described in§ 401(a)(9)(B)(iii) applies, in the year following the year of death and each
year, there is a required minimum distribution. See Q&A-5(c)(1)
of § 1.401(a)(9)-5 to determine the applicable distribution period for the nonspouse
beneficiary. The amount not eligible for rollover includes all undistributed
required minimum distributions for the year in which the direct rollover occurs
and any prior year (even if the excise tax under§ 4974 has been paid with respect to the failure in the prior years). See the
last sentence of § 1.402(c)-2, Q&A-7(a).
Special rule. If, under paragraph (b) or (c) of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary
may determine the required
minimum distribution under the plan using the life expectancy rule in the case
of a distribution made prior to the end of the year following the year of death.
order to use this rule, the required minimum distributions under the IRA to
which the direct rollover is made must be determined under the life expectancy
rule using the
same designated beneficiary.
How is the required minimum distribution with respect to a nonspouse
beneficiary determined if the employee dies on or after his or her
required beginning
If an employee dies on or after his or her required beginning date,
within the meaning of § 401(a)(9)(C), for the year of the employee’s death, the required
minimum distribution not eligible for rollover is the same as the amount that
would have applied if the employee were still alive and elected the direct
rollover. For the year after the year of the employee’s
death and subsequent years, see Q&A-5 of § 1.401(a)(9)-5 to determine the applicable distribution period to use in calculating
the required minimum distribution. As in the case of death before the employee’s required beginning date, the amount not eligible for rollover includes all
undistributed required minimum distributions for the year in which the direct
rollover occurs and any prior year, including years before the employee’s death.
After a direct rollover by a nonspouse designated beneficiary, how
is the required minimum distribution determined with respect to the
IRA to which the rollover
contribution is made?
Under § 402(c)(11), an IRA established to receive a direct rollover on behalf of a nonspouse
designated beneficiary is treated as an inherited IRA within the
meaning of § 408(d)(3)(C). The required minimum distribution
requirements set forth in§ 401(a)(9)(B) and the regulations thereunder apply to the inherited IRA. The
rules for determining the required minimum distributions under the plan with
respect to the nonspouse beneficiary also apply under the IRA. Thus, if the
employee dies before his or her required beginning date and the 5-year rule
in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan
making the direct rollover, the 5-year rule applies for purposes of determining
required minimum distributions under the IRA. If the life expectancy rule applied
to the nonspouse designated beneficiary under the plan, the required minimum distribution under the IRA must be determined using
the same applicable distribution period as would have been used under the plan
if the direct rollover had not occurred. Similarly, if the employee dies on
or after his or her required beginning date, the required minimum distribution
under the IRA for any year after the year of death must be determined using
if the direct rollover had not occurred.
VI. Section
845 of Pension Protection Act of 2006
Code § 402(l),
which was added by § 845(a) of PPA ’06, provides for an exclusion from gross income for distributions from certain
retirement plans (referred to
in this notice as “Eligible Government Plans”)
used to pay qualified health insurance premiums of an eligible retired public
safety officer. The exclusion applies with respect to an eligible retired public
safety officer who elects to have qualified health insurance premiums deducted
from amounts distributed from an Eligible Government Plan and paid directly
to the insurer. Qualified health insurance premiums include premiums for accident
and health insurance or qualified long-term care insurance contracts for the
eligible retired public safety officer and his or her spouse and dependents.
The distribution is excluded from gross income to the extent that the aggregate
amount of the distributions does not exceed the amount used to pay the qualified
health insurance premiums of the eligible retired public safety officer and
his or her spouse and dependents. An “Eligible Government Plan” is a governmental plan described in§ 414(d) that is either: a § 401(a), § 403(a), or § 403(b) plan; or an eligible governmental plan under § 457(b). Section 402(l) applies to distributions in taxable years beginning after
Who is an eligible retired public safety officer for purposes of the
exclusion under § 402(l)?
An employee is an eligible retired public safety officer for purposes
of the exclusion under § 402(l) only if the employee is an individual who separated from
service, either by reason of disability or after attainment of normal retirement
age, as a public safety officer with the employer who maintains the Eligible
Government Plan from which the distributions to pay qualified health insurance
premiums are made. Thus, a public safety officer who retires before attainment
of normal retirement age is not an eligible retired public safety officer unless
the public safety officer retires by reason of disability. The terms of the
Eligible Government Plan from which the participant will be receiving the distributions
apply in determining whether a public safety officer has separated from service
by reason of disability or after attainment of normal retirement age.
Who is a public safety officer?
For purposes of § 402(l), the term “public safety officer” means an individual serving a public agency in an official capacity, with or
without compensation,
as a law enforcement officer, a firefighter, a chaplain, or as a member of
a rescue squad or
ambulance crew. See § 1204(9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C.
3796b(9)(A)).
Under what circumstances are the provisions of § 402(l) available for eligible retired public safety officers?
The favorable tax treatment under § 402(l) is available only when an eligible retired public safety officer elects
to have an amount subtracted from his or her
distributions from an Eligible Government Plan and such amount is used to pay
qualified health insurance premiums. The employer sponsoring the Eligible Government
Plan is not required to offer such an election.
Can the accident or health plan receiving the payments of qualified
health insurance premiums be a self-insured plan?
No. The accident or health plan must be an accident or health insurance
plan. Thus, the plan must be providing insurance issued by an insurance
regulated by a State (including a managed care organization that is treated
as issuing insurance).
Will an eligible retired public safety officer be entitled to favorable
tax treatment under § 402(l) with respect to benefits attributable to service other than as a
Yes. Benefits attributable to service other than as a public safety
officer are eligible for favorable tax treatment under § 402(l), as long as the individual
separates from service as a public safety officer, by reason of disability
or after attainment of normal retirement age, with the employer maintaining
If an eligible retired public safety officer dies, are amounts subtracted
from distributions made to the decedent’s surviving spouse or dependents eligible for
favorable tax treatment under § 402(l)?
No. Section 402(l) provides that the distribution is not includible
in the gross income of an employee who is an eligible retired public
safety officer. Thus, the
exclusion would not extend to amounts subtracted from distributions to other
Is an eligible retired public safety officer limited in the amount
that the officer can exclude from gross income for distributions from
an Eligible Government
Plan used to pay qualified health insurance premiums?
Yes. The aggregate amount that is permitted to be excluded, with respect
to any taxable year, from an eligible retired public safety officer’s gross income by
reason of § 402(l) is limited to $3,000. For purposes
of applying this $3,000 limitation, distributions with respect to the eligible retired public safety officer that
are used to pay for qualified health insurance premiums from all Eligible Government
Plans are aggregated.
Are amounts used to pay qualified health insurance premiums that are
excluded from gross income under § 402(l) taken into account for purposes of
determining the itemized deduction for medical care expenses under § 213?
No. Amounts used to pay qualified health insurance premiums that are
excluded from gross income under § 402(l) are not taken into account in determining
the itemized deduction for medical care expenses under § 213.
904 of Pension Protection Act 2006
to the effective date of PPA ‘06 § 904, a defined contribution plan satisfied the minimum vesting requirements
of Code § 411(a) with respect to employer
nonelective contributions if it maintained a 5-year vesting schedule or a 3
to 7 year vesting schedule. Section 904 of PPA ‘06
amended the minimum vesting requirements
to require faster vesting of employer nonelective contributions to a defined
contribution plan. Under Code § 411(a)(2)(B)
as amended by § 904 of PPA ‘06, a defined
contribution plan satisfies the minimum vesting requirements with respect to
employer nonelective contributions if it has a 3-year vesting schedule or a
schedule. Code § 411(a)(2)(B) as amended by § 904
of PPA ‘06 generally applies to contributions for plan years beginning after December
If a plan amendment changes the plan’s vesting schedule to satisfy Code § 411(a)(2)(B) as amended by § 904 of PPA ‘06, is the plan amendment required to
satisfy § 411(a)(10).?
Yes. A plan amendment that changes the vesting schedule must satisfy
Code § 411(a)(10). Although § 411(a)(10)(B) would require a participant with at least 3
years of service to elect to have the nonforfeitable percentage of his accrued
benefit determined without regard to the amendment, the plan must ensure that
election satisfies the vesting requirements of § 411(a)(2)(B),
as amended by § 904 of PPA ‘06. Thus, such a participant must be provided, at all times, a vesting percentage
that is no less than the minimum under a vesting schedule that satisfies § 904 and the vesting percentage determined under the plan without regard to the
amendment. Under Temporary Regulation § 1.411(a)-8T, no election need be provided for any participant whose nonforfeitable
percentage under the plan, as amended, at any time cannot be less than such
percentage determined without regard to such amendment.
Can a plan have separate vesting schedules for employer nonelective
contributions that are and are not subject to Code § 411(a)(2)(B), as amended by § 904 of PPA ‘06?
Yes. A plan can have a vesting schedule for employer nonelective contributions
for plan years beginning after December 31, 2006, and another vesting
schedule for other employer nonelective contributions under the plan,
provided that the plan separately accounts for the contributions made
under the vesting schedule in effect prior to the first day of the
first plan year beginning after December 31, 2006, and the vesting
schedule for employer nonelective contributions for plan years beginning
December 31, 2006, satisfies Code § 411(a)(2)(B),
as amended by § 904 of PPA ‘06.
If a plan maintains a bifurcated vesting schedule, how is it determined
whether a contribution is for a plan year beginning before January
1, 2007?
A contribution is for a plan year that begins before January 1, 2007,
if it is allocated under the terms of the plan as of a date in that
plan year and is not subject to
any conditions that have not been satisfied by the end of that plan year. This
applies even if the contribution is not made until the next plan year. Thus,
for example, if a plan with a calendar-year plan year makes a contribution
as of December 31, 2006, based on compensation and service in 2006, and the
contribution is not contingent on the occurrence of an event after 2006, then
the contribution is treated as made for the 2006 plan year and is not subject
to Code § 411(a)(2)(B),
as amended by § 904 of PPA ‘06, even if it is not contributed until 2007. Forfeitures and ESOP allocations
from a suspense account are treated in the same manner for this purpose.
VIII. Section
1102 of Pension Protection Act of 2006
1102 of PPA ‘06 makes certain changes to the notice requirements related to distributions.
Section 1102(a) provides that a notice required to be provided
under § 402(f), § 411(a)(11), or § 417
may be provided to a participant as much as 180 days before the annuity starting
date. Section 1102(b) directs the Secretary to modify the regulations under § 411(a)(11) of the Code and § 205 of ERISA to provide that the description of a participant's right to defer
a distribution must also include a description of the consequences of failing
to defer receipt of a distribution. The modifications made by § 1102 apply to years beginning after December 31, 2006. However, § 1102(b)(2)(B) provides that a plan will not be treated as failing to meet the
new requirements under § 1102(b) if the plan administrator makes a reasonable attempt to comply with
the new requirements under that section during the period that is within 90
days of the issuance of regulations required by § 1102(b).
How does the effective date of § 1102 operate?
The provisions of § 1102 apply to plan years that begin after December 31, 2006. This means that
the new rules relating to the content of the notices apply only to
notices issued in those plan years, without regard to the annuity
starting date for the distributions. Similarly, the 180-day period
for distributing notices applies to notices distributed in a plan
year that begins after December 31, 2006. This change to the 180-day
period also modifies the definition of the maximum QJSA explanation
period under § 1.411(d)-3(g), which is used in applying the timing rules for the effective
date of a plan amendment under the rules of § 1.411(d)-3(c) and (f) in the case of an amendment that is adopted in a plan year that begins after December
Is a plan required to revise the notice under § 411 pursuant to the modifications made by § 1102(b) before the regulations are amended to reflect the
Yes. A plan administrator is required to revise the notice under § 411 to reflect the modifications to the requirements made by § 1102(b) for notices provided in
plan years beginning after December 31, 2006. However, pursuant to § 1102(b)(2)(B)
of PPA ’06, a plan will not be treated as failing to meet the new requirements under
§ 1102(b) if the plan administrator makes a reasonable attempt to
comply with the new requirements under that section in the case of a notice that
is provided prior to the 90th day after the issuance of regulations reflecting
the modifications required by § 1102(b).
Is there a safe harbor available to a plan administrator that would
be considered a reasonable attempt to comply with the requirement
in § 1102(b)(1) that a
description of a participant’s
right to defer receipt of a distribution include a description of the consequences
of failing to defer?
Yes. A description that is written in a manner reasonably calculated
to be understood by the average participant and that includes the
following information is a
reasonable attempt to comply with the requirements of § 1102(b)(2)(B):
(a) in the case of a defined benefit plan, a description of how much larger
benefits will be if the
commencement of distributions is deferred; (b) in the case of a defined contribution
plan, a description indicating the investment options available under the plan
(including fees) that will be available if distributions are deferred; and
(c) the portion of the summary plan description that contains any special rules
that might materially affect a participant’s
decision to defer. For purposes of clause (a), a plan administrator can use
a description that includes the financial effect of deferring distributions,
as described in§ 1.417(a)(3)-1(d)(2)(i), based solely on the normal form of benefit.
IX. Section 1201 of
1201(a) of PPA ‘06 adds § 408(d)(8) to the Code, which is applicable to distributions made in taxable
years 2006 and 2007. Under § 408(d)(8), generally, if a
distribution from an IRA owned by an individual after the individual has attained
age 70½ is
made directly by the trustee to certain organizations described in § 170(b)(1)(A), the distribution is excluded from gross income. The exclusion
is only available to the extent that the distribution would otherwise have
been includible in gross income, and§ 408(d)(8)(D) provides a special rule for determining the amount that would otherwise
be includible in gross income. In addition, the exclusion applies only if the
contribution would otherwise qualify for a charitable contribution deduction
under § 170 (without regard to the percentage limitations of § 170(b)). A distribution that is eligible for this exclusion is called a qualified
charitable distribution.
Is there an overall limit on the amount that may be excluded from
gross income for qualified charitable distributions that are made
Yes. The income exclusion for qualified charitable distributions only
applies to the extent that the aggregate amount of qualified charitable
distributions made during any taxable year with respect to an IRA
owner does not exceed $100,000. Thus, if an IRA owner maintains multiple
IRAs in a taxable year, and qualified charitable
distributions are made from more than one of these IRAs, the maximum total
amount that may be excluded for that year by the IRA owner is $100,000. For
individuals filing a joint return, the limit is $100,000 per individual IRA
Is the exclusion for qualified charitable distributions available
for a distribution made to any organization eligible to receive charitable
contributions that are
deductible by the donor for income tax purposes?
No. Qualified charitable distributions may be made to an organization
described in § 170(b)(1)(A), other than supporting organizations described in § 509(a)(3) or donor advised funds that are described in § 4966(d)(2).
Q-36.
for distributions from any type of IRA?
Generally, the exclusion for qualified charitable distributions is
available for distributions from any type of IRA (including a Roth
IRA described in § 408A and a
deemed IRA described in § 408(q)) that
is neither an ongoing SEP IRA described in § 408(k) nor an ongoing SIMPLE IRA described in § 408(p). For this purpose, a SEP
IRA or a SIMPLE IRA is treated as ongoing if it is maintained under an employer
arrangement under which an employer contribution is made for the plan year
with or within the IRA owner’s
taxable year in which the charitable contributions would be made.
Q-37.
for distributions from an IRA maintained for a beneficiary if the
beneficiary has attained age
70½ before the distribution is made?
Yes. The exclusion from gross income for qualified charitable distributions
is available for distributions from an IRA maintained for the benefit
of a beneficiary after
the death of the IRA owner if the beneficiary has attained age 70½ before
Q-38.
If a 2006 distribution satisfies all the requirements under § 408(d)(8), but it was made before August 17, 2006 (the date PPA ’06 was enacted), is the amount
distributed excludable as a qualified charitable distribution?
Yes. Section 408(d)(8) is applicable to distributions made at any
time in 2006. Thus, a distribution made in 2006 that satisfies the
requirements under § 408(d)(8) is a qualified charitable distribution even if it was made before
Q-39.
Is the amount of a qualified charitable distribution deductible as
a charitable contribution under § 170?
A-39.
No. For purposes of determining the amount of charitable contributions
that may be deducted under § 170, qualified charitable distributions which are excluded
from income under § 408(d)(8) are not taken
into account. However, qualified charitable distributions must still satisfy
the requirements to be deductible charitable
contributions under § 170 (other than the
percentage limits of § 170(b)), including the substantiation requirements under § 170(f)(8).
Is a qualified charitable distribution subject to withholding under § 3405?
No. A qualified charitable distribution is not subject to withholding
under§ 3405 because an IRA owner that requests such a distribution is deemed to have
elected out of withholding under § 3405(a)(2).
For purposes of determining whether a distribution requested by an IRA satisfies
the requirements under § 408(d)(8), the IRA trustee, custodian, or issuer may rely upon reasonable representations
made by the IRA owner.
Is a check from an IRA made payable to a charitable organization described
in § 408(d)(8) and delivered by the IRA owner to the charitable organization a
direct payment to such organization?
Yes. If a check from an IRA is made payable to a charitable organization
described in § 408(d)(8) and delivered by the IRA owner to the charitable organization,
the payment to the charitable organization will be considered a direct payment
by the IRA trustee to the charitable organization for purposes of § 408(d)(8)(B)(i).
Q-42.
Will a qualified charitable distribution be taken into account in
determining whether the required minimum distribution requirements
of §§ 408(a)(6), 408(b)(3), and
408A(c)(5) have been satisfied?
Yes. The amount distributed in a qualified charitable distribution
is an amount distributed from the IRA for purposes of §§ 408(a)(6), 408(b)(3), and 408A(c)(5).
What are the tax consequences of a direct payment of an amount from
a IRA to a charity where the transaction is intended to satisfy the
§ 408(d)(8) but fails to do so?
If an amount intended to be a qualified charitable distribution is
paid to a charitable organization but fails to satisfy the requirements
of § 408(d)(8), the amount
paid is treated as (1) a distribution from the IRA to the IRA owner that is
includible in gross
income under the rules of § 408 or § 408A, as applicable; and (2) a contribution from the IRA owner to the charitable
organization that is subject to the rules under § 170 (including the percentage limits of § 170(b)).
Q-44.
Will a distribution made directly by the trustee to a § 170(b)(1)(A) organization (as permitted by § 408(d)(8)(B)(i)) be treated as a receipt by the IRA owner
under § 4975(d)(9)?
Yes. The Department of Labor, which has interpretive jurisdiction
with respect to § 4975(d), has advised Treasury and the IRS that a distribution made by an
IRA trustee directly to a § 170(b)(1)(A)
organization (as permitted by § 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under § 4975(d)(9), and thus would not
constitute a prohibited transaction. This would be true even if the individual
for whose benefit the IRA is maintained had an outstanding pledge to the receiving
principal author of this notice is Angelique V. Carrington of the
Employee Plans, Tax Exempt and Government Entities Division. For further
this notice, please contact the Employee Plans taxpayer assistance telephone
service at (877) 829-5500 (a toll-free number) between the hours of 8:30 am
Eastern Time, Monday through Friday. Ms. Carrington may be reached at (202)
283-9888 (not a toll-free number).