IRS Issues New Guidance on Plan Distribution Safe Harbors

IRS Issues New Guidance on Plan Distribution Safe Harbors

When employees leave an organization, they face an important decision about their retirement savings. Do they leave them in their former employer’s plan? Roll them into an IRA or into their new employer’s plan? Or cash out? The decision a participant makes can have a lasting impact on their retirement savings trajectory.

The IRS recently issued IRS Notice 2026-13, which provides safe harbor language sponsors can use to deliver certain written explanations to eligible participants about distribution options required under IRC Section 402(f).

What Happens When a Participant Departs?

When participants leave their jobs, they generally have four options for their 401(k) and other workplace defined contribution retirement plan account balances:

• Leave the assets in their former employer’s plan

• Roll them into a plan sponsored by their new employer

• Roll them into an IRA

• Cash out via a lump-sum distribution

The first three options preserve the tax-advantaged status of retirement savings. With the fourth option, however, participants may owe income taxes on the taxable portion of the distribution and may be subject to an additional 10% early distribution penalty if under age 59½.

The Safe Harbor Guidance

IRS Notice 2026-13 updates and clarifies the safe harbor explanations under Section 402(f). The revised guidance includes two separate safe harbor explanations—one for Roth accounts and one for non-Roth accounts—and addresses updates related to the 10% additional tax on early withdrawals, required minimum distribution rules for surviving spouses, and the increased age for beginning RMDs.

Next Steps for Plan Sponsors

Sponsors can use the safe harbor language to meet Section 402(f) requirements when providing departed participants with an explanation of their distribution options. The language may be customized based on plan design. Note that the IRS is already anticipating further updates to reflect SECURE 2.0 Act provisions effective for taxable years beginning after December 31, 2026.

To learn more, schedule a meeting with one of our financial professionals today.