401(k) ‘Special Tax Notices’ Should Be Reviewed and Updated
TPAs serving 401(k) plans may want to remind their clients that they should review and update their “special tax notices” in the wake of changes to the plan loan offset rules under last year’s tax reform legislation.An article
by Todd Castleton of Kilpatrick Townsend explains that changes to the rollover distribution rules with respect to plan loan offsets under the Tax Cuts and Jobs Act (TCJA) likely rendered plan sponsors’ existing notices inaccurate if they have not updated them to reflect the new rules.
The TCJA extended the 60-day deadline to rollover a plan loan offset to an IRA or employer plan to avoid having the loan be treated as a taxable distribution for individuals who fail to meet the repayment terms because of their separation from service (or in the event of a plan termination). Participants will now have until the individual’s tax return filing due date (including extensions) to repay the loan offset amount, plus any withholding, effective for tax years beginning after 2017.
Castleton explains that the IRS periodically issues model special tax notices that meet the requirements of Code Section 402(f), as well as updates to those models to reflect changes in the law, but the agency has yet to do so reflecting the changes under the TCJA.
The article notes that the IRS last updated the model notices in Notice 2014-74
to incorporate changes in the law since 2009. Castleton emphasizes that the model notices, as reflected by Notice 2014-74, make several references to the 60-day rollover requirement and need to be updated to avoid any inaccuracies or correct any statements that have now become misleading due to the new legislation.
He reiterates that many plan administrators rely on their service providers to prepare and provide the special tax notice when processing distributions to participants, but the plan administrator is ultimately responsible for making the participant disclosure and could face potential fiduciary breach claims under ERISA to the extent a participant relied on any inaccurate statements. As a result, advisors should remind their clients to update their special tax notices or check with their service providers to ensure that the necessary updates have been made.
On a related note, it’s worth revisiting an April 2018
post by Robert Toth, Jr. that originally appeared on his Business of Benefits blog explaining that the TCJA’s participant loan changes and the manner in which ERISA’s fiduciary rules apply to loans and their administration should cause plan sponsors and recordkeepers to consider new choices about their handling of loan defaults.