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.
Many participants, however, don’t fully understand their distribution options or the associated tax consequences. A 2024 Government Accountability Office (GAO) report found that more than half of participants surveyed didn’t know they could leave their savings in a former employer’s plan, and only 38% indicated they understood the tax implications of indirect rollovers.
The IRS recently issued a guidance document aimed at helping sponsors shepherd participants through this process. IRS Notice 2026-13 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, allowing assets to continue growing under applicable tax rules. 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 the participant is under age 59½.
Among the first three options, the decision to keep assets in a former employer’s plan versus rolling them over can be a consequential financial choice, given potential differences in fees, investment options, and other characteristics of the former employer plan, new employer plan, and an IRA.
The Safe Harbor Guidance
In the 2024 report, the GAO recommended that Section 402(f) notices provide clearer and more concise information about the four distribution options and their associated tax consequences. The report also included recommendations for the timing of these disclosures.
In response, the IRS issued Notice 2026-13, which updates and clarifies the safe harbor explanations under Section 402(f). The revised guidance aims to help plan administrators meet the written notification requirement in light of recent statutory changes.
The notice includes two separate safe harbor explanations: one for Roth accounts and one for non-Roth accounts. Both meet the requirements of Section 402(f) for an eligible rollover distribution if they’re provided to the recipient within a “reasonable period of time” (as defined in regulations) before the distribution is made.
The guidance also addresses changes to the law, including updates related to:
The 10% additional tax on early withdrawals from retirement plans
Required minimum distribution rules for surviving spouses
The increased age for determining dates for beginning required minimum distributions
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, provided the modifications don’t affect the substantive requirements of the safe harbor explanation. For example, plans without after-tax employee contribution options may remove that portion of the language.
The new safe harbors, however, may have a limited shelf life. The IRS is already anticipating updates to reflect future changes, including provisions of the SECURE 2.0 Act that become effective for taxable years beginning after December 31, 2026. Also, the updated explanations will not satisfy Section 402(f) to the extent the explanations are no longer accurate if there are changes in relevant law occurring after January 15, 2026.
Sources:
https://www.irs.gov/pub/irs-drop/n-26-13.pdf
https://www.irs.gov/irb/2026-06_IRB
https://www.gao.gov/products/gao-24-107167
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