Guidance Issued for Allocating After-Tax Amounts to Rollovers

According to Notice 2014-54, the rules also apply to distributions from a Section 403(b) plan or a Section 457(b) plan maintained by a governmental employer.

In conjunction with the guidance, the IRS issued proposed regulations that would limit the applicability of the rule regarding the allocation of after-tax amounts when distributions are made to multiple destinations so the allocation rule applies only to distributions made before the earlier of January 1, 2015, or on or after September 19, 2014. Currently, the rules state if a participant takes a distribution of retirement account assets and wants the assets to go to different destinations—for example, a portion to the participant as cash and a portion rolled over into a new account—then each portion would be counted as a separate distribution and each would include a pro-rata share of pre-tax and after-tax assets. In addition, the current rules say the maximum portion of an eligible rollover distribution cannot exceed the portion of the distribution that is otherwise includible in gross income (pre-tax).

According to Notice 2014-54, for purposes of determining the portion of a distribution from a plan to a participant, beneficiary, or alternate payee that is not includible in gross income, all distributions of benefits from the plan to the recipient that are scheduled to be made at the same time are treated as a single distribution without regard to whether the recipient has directed that the distributions be made to a single destination or multiple destinations.

If the pre-tax amount of the distribution is less than the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the entire pre-tax amount is assigned to the amount of the distribution that is directly rolled over. In such a case, if the direct rollover is to two or more plans, then the recipient can select how the pre-tax amount is allocated among these plans. The remaining amount rolled over is considered after-tax money.

If the pre-tax amount equals or exceeds the amount of the distribution that is directly rolled over to one or more eligible retirement plans, the pre-tax 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 pre-tax amounts). Any remaining pre-tax 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 pre-tax amount is less than the amount rolled over in 60-day rollovers, the recipient can select how the pre-tax amount is allocated among the plans that receive 60-day rollovers.

If, after the assignment of the pre-tax amount to direct rollovers and 60-day rollovers, there is a remaining pre-tax amount, that amount is includible in the participant’s gross income. But, if the amount rolled over to an eligible retirement plan exceeds the portion of the pre-tax amount assigned or allocated to the plan, the excess is an after-tax amount.

Text of Notice 2014-54 is here.