81 FR 31165 - Removal of Allocation Rule for Disbursements From Designated Roth Accounts to Multiple Destinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 81, Issue 96 (May 18, 2016)

This document contains final regulations eliminating the requirement that each disbursement from a designated Roth account that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount paid directly to the employee and therefore separately subject to the rule in section 72(e)(2) of the Internal Revenue Code (the Code) allocating pretax and after-tax amounts to each distribution. As a result of this change, if disbursements are made from a taxpayer's designated Roth account to the taxpayer and also to the taxpayer's Roth IRA or designated Roth account in a direct rollover, then pretax amounts will be allocated first to the direct rollover, rather than being allocated pro rata to each destination. Also, a taxpayer will be able to direct the allocation of pretax and after-tax amounts that are included in disbursements from a designated Roth account that are directly rolled over to multiple destinations, applying the same allocation rules to distributions from designated Roth accounts that apply to distributions from other types of accounts. These regulations affect participants in, beneficiaries of, employers maintaining, and administrators of designated Roth accounts under tax-favored retirement plans.

[Federal Register Volume 81, Number 96 (Wednesday, May 18, 2016)]
[Rules and Regulations]
[Pages 31165-31166]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-11647]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9769]
RIN 1545-BK08


Removal of Allocation Rule for Disbursements From Designated Roth 
Accounts to Multiple Destinations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations eliminating the 
requirement that each disbursement from a designated Roth account that 
is directly rolled over to an eligible retirement plan be treated as a 
separate distribution from any amount paid directly to the employee and 
therefore separately subject to the rule in section 72(e)(2) of the 
Internal Revenue Code (the Code) allocating pretax and after-tax 
amounts to each distribution. As a result of this change, if 
disbursements are made from a taxpayer's designated Roth account to the 
taxpayer and also to the taxpayer's Roth IRA or designated Roth account 
in a direct rollover, then pretax amounts will be allocated first to 
the direct rollover, rather than being allocated pro rata to each 
destination. Also, a taxpayer will be able to direct the allocation of 
pretax and after-tax amounts that are included in disbursements from a 
designated Roth account that are directly rolled over to multiple 
destinations, applying the same allocation rules to distributions from 
designated Roth accounts that apply to distributions from other types 
of accounts. These regulations affect participants in, beneficiaries 
of, employers maintaining, and administrators of designated Roth 
accounts under tax-favored retirement plans.

DATES: Effective Date: These regulations are effective on May 18, 2016.
    Applicability Date: These regulations generally apply to 
distributions on or after January 1, 2016 (or an earlier date chosen by 
the taxpayer that is on or after September 18, 2014). For more 
information see the ``Effective/Applicability Dates'' section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: Michael Brewer at (202) 317-6700 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 402(a) provides generally that any amount distributed from 
a trust described in section 401(a) that is exempt from tax under 
section 501(a) is taxable to the distributee under section 72 in the 
taxable year of the distributee in which distributed. Under section 
403(b)(1), any amount distributed from a section 403(b) plan is also 
taxable to the distributee under section 72.
    If a participant's account balance in a plan qualified under 
section 401(a) or in a section 403(b) plan includes both after-tax and 
pretax amounts, then, under section 72(e)(8), each distribution (other 
than a distribution that is paid as part of an annuity) from the plan 
will include a pro rata share of both after-tax and pretax amounts. 
(Under section 72(d), a different allocation method applies to annuity 
distributions.)
    Section 402(c) prescribes rules for amounts that are rolled over 
from qualified trusts to eligible retirement plans, including 
individual retirement accounts or annuities (``IRAs''). Subject to 
certain exceptions, section 402(c)(1) provides that if any portion of 
an eligible rollover distribution paid to an employee from a qualified 
trust is transferred to an eligible retirement plan, the portion of the 
distribution so transferred is not includible in gross income in the 
taxable year in which paid.
    Under section 402(c)(2), the maximum portion of an eligible 
rollover distribution that may be rolled over in a transfer to which 
section 402(c)(1) applies generally cannot exceed the portion of the 
distribution that is otherwise includible in gross income. However, 
under section 402(c)(2)(A) and (B), the general rule does not apply to 
such a distribution to the extent that such portion is transferred in a 
direct trustee-to-trustee transfer to a qualified trust or to an 
annuity contract described in section 403(b) and such trust or contract 
provides for separate accounting for amounts so transferred (and 
earnings thereon), including separately accounting for the portion of 
such distribution which is includible in gross income and the portion 
of such distribution which is not so includible, or such portion is 
transferred to an IRA.
    In addition, section 402(c)(2) provides that, in the case of a 
transfer described in subparagraph (A) or (B), the amount transferred 
shall be treated as consisting first of the portion of such 
distribution that is includible in gross income (determined without 
regard to section 402(c)(1)).
    Under section 402A, an applicable retirement plan may include a

[[Page 31166]]

designated Roth account. An applicable retirement plan is defined in 
section 402A(e)(1) to mean a plan qualified under section 401(a), a 
section 403(b) plan, and a governmental section 457(b) plan. Section 
402A(d) provides that a qualified distribution (as defined in section 
402A(d)(2)) from a designated Roth account is not includible in gross 
income.
    Under section 402A(d)(4), section 72 is applied separately with 
respect to distributions and payments from a designated Roth account 
and other distributions and payments from the plan.
    Section 1.402A-1, Q&A-5(a), of the Income Tax Regulations 
prescribes taxability rules for a distribution from a designated Roth 
account that is rolled over. Q&A-5(a) provides, in part, that ``any 
amount paid in a direct rollover is treated as a separate distribution 
from any amount paid directly to the employee'' (the ``separate 
distribution rule'').
    Proposed regulations limiting the applicability of the separate 
distribution rule of Sec.  1.402A-1, Q&A-5(a), were published on 
September 19, 2014 (REG-105739-11, 79 FR 56310). The proposed 
regulations achieved this result by adding, after the separate 
distribution rule in paragraph A-5(a), the following sentence: ``The 
preceding sentence does not apply to distributions made on or after 
January 1, 2015; in addition, a taxpayer may elect not to apply the 
preceding sentence to distributions made on or after an earlier date 
that is no earlier than September 18, 2014.'' Thus, under the proposed 
regulations, an amount paid in a direct rollover is not required to be 
treated as a separate distribution from any amount paid directly to the 
employee.
    The proposed regulations were issued in conjunction with Notice 
2014-54 (2014-41 IRB 670 (October 6, 2014)), which specified that a 
taxpayer may direct after-tax and pretax amounts that are 
simultaneously disbursed to multiple destinations so as to allocate 
them to specific destinations. Under Notice 2014-54, a taxpayer may 
direct the allocation of after-tax and pretax amounts in connection 
with disbursements that are directly rolled over, as well as in 
connection with disbursements that are rolled over in 60-day rollovers.
    No comments were received regarding the proposed regulations.

Explanation of Provisions

    These regulations finalize the proposed regulations, with a 1-year 
delay of the applicability date (from January 1, 2015, to January 1, 
2016). They are substantively the same as the proposed regulations, but 
express the rule differently to better reflect the ongoing rule and the 
transition rule. For distributions made on or after January 1, 2016, 
the final regulations remove the sentence in the existing regulations 
that provided the separate distribution rule. For earlier 
distributions, the final regulations add a sentence at the end of the 
paragraph which provides that a separate distribution rule applies to 
distributions made prior to January 1, 2016, unless a taxpayer elects 
not to apply that rule with respect to a distribution made on or after 
September 18, 2014.

Effective/Applicability Dates

    These regulations apply to distributions from designated Roth 
accounts made on or after January 1, 2016, and for such distributions 
taxpayers are required to follow the allocation rules described in 
Notice 2014-54.
    These regulations also preserve the separate distribution rule for 
distributions made prior to the January 1, 2016, applicability date, 
except that a taxpayer is permitted to choose not to apply the separate 
distribution rule to distributions that are made on or after September 
18, 2014, and before January 1, 2016. Taxpayers choosing not to apply 
the separate distribution rule to distributions made during that 
transition period, must apply a reasonable interpretation of the last 
sentence of section 402(c)(2) (generally requiring that pretax amounts 
be treated as rolled over first) to allocate pretax and after-tax 
amounts among disbursements made to multiple destinations. For this 
purpose, a reasonable interpretation of the last sentence of section 
402(c)(2) includes the rules described in Notice 2014-54.

Statement of Availability of IRS Documents

    Notice 2014-54 is published in the Internal Revenue Bulletin and is 
available from the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402, or by visiting the IRS Web site 
at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Michael Brewer, Office 
of the IRS Associate Chief Counsel (Tax Exempt and Government 
Entities). However, other personnel from the IRS and the Department of 
Treasury participated in the development of the regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.402A-1 is amended by removing the third sentence of 
paragraph A-5(a) and adding a new sentence to the end of paragraph A-
5(a) to read as follows:


Sec.  1.402A-1  Designated Roth Accounts.

* * * * *
    A-5. (a) * * * For distributions made prior to January 1, 2016, any 
amount paid in a direct rollover is treated as a separate distribution 
from any amount paid directly to the employee, except that taxpayers 
may choose not to apply this sentence to distributions made on or after 
September 18, 2014, and before January 1, 2016.
* * * * *

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: March 24, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-11647 Filed 5-17-16; 8:45 am]
BILLING CODE 4830-01-P