IRC 402: Qualified Plan Distributions, Rollovers, NUA, and Withholding

Overview: The IRC 402 Distribution Framework

IRC 402 is the statutory hub for the federal income tax treatment of distributions from qualified trusts and employer-sponsored retirement plans. When a participant in a 401(k), 403(b), pension, profit-sharing, or stock bonus plan takes a distribution, IRC 402 determines what portion is taxable, when it is taxable, whether it can be deferred through a rollover, and what withholding obligations apply to both the plan and the distributee. The statute also carves out preferential treatment for employer stock through the net unrealized appreciation rules and provides a mechanism for lump-sum averaging for a narrow class of older participants.

For practitioners advising clients approaching retirement, changing jobs, or facing financial hardship, understanding IRC 402 is foundational. A distribution decision made without understanding the rollover rules, the withholding mechanics, or the NUA election cannot be undone once processed. The tax cost of a wrong choice is often immediate, certain, and permanent.

This guide addresses each major subsection of IRC 402 in practitioner depth, with particular attention to the distribution code reporting obligations that flow through Form 1099-R, and to the interaction between IRC 402 and IRC 72(t), IRC 401(a)(9), and the OBBBA changes to hardship distribution availability.

IRC 402(a): Gross Income Inclusion -- The General Rule

The baseline rule of IRC 402(a) is straightforward: any amount distributed to an employee from a qualified trust is includible in the distributee's gross income for the taxable year in which the distribution is actually received. The trust here is the trust described in IRC 501(a) that forms part of a plan qualified under IRC 401(a). This covers distributions from 401(k) plans, profit-sharing plans, stock bonus plans, and defined benefit pension plans funded through qualifying trusts.

The IRC 72 Overlay: Basis Recovery

Where a participant has made after-tax (nondeductible) employee contributions to the plan, the participant has a cost basis in the plan and may exclude that basis from gross income when it is distributed. The exclusion ratio and basis recovery method for qualified plan distributions follow IRC 72, which generally allocates each distribution proportionately between taxable and nontaxable amounts based on the ratio of the employee's total investment in the contract to the total expected return. For most participants who made only pre-tax elective deferrals and received pre-tax employer contributions, the cost basis is zero and the entire distribution is taxable. Verify the current IRC 72 basis recovery rules and any IRS guidance on after-tax sub-account distributions at IRS.gov.

Year of Inclusion: Actual Receipt

The taxable year for inclusion under IRC 402(a) is the year in which the participant actually receives the distribution -- not the year in which the distribution is authorized by the plan, the year in which the check is issued, or the year in which the participant requests the distribution. Constructive receipt applies: if a distribution is available to the participant and credited to an account accessible to the participant without substantial limitation or restriction, it may be constructively received even if not physically obtained. Verify the current constructive receipt rules applicable to plan distributions at IRS.gov.

Employer Securities: The IRC 402(e)(4) NUA Carve-Out

A critical exception to the general IRC 402(a) inclusion rule applies when employer securities are distributed as part of a qualifying lump-sum distribution. Under IRC 402(e)(4), the net unrealized appreciation (NUA) in those securities is excluded from gross income at distribution and is deferred until the securities are sold. This exception is addressed fully in Section 4 below. Verify the current NUA rules and their interaction with IRC 402(a) at IRS.gov.

Distributions to Beneficiaries

When a participant dies and the plan distributes benefits to a designated beneficiary, the beneficiary steps into the distributee role for IRC 402(a) purposes. The distribution is includible in the beneficiary's gross income in the year received, subject to the same IRC 72 exclusion ratio if the participant had any cost basis. Inherited qualified plan accounts are subject to distinct required minimum distribution rules (discussed in Section 9) and are not eligible for the rollover to an IRA that preserves the ability to "stretch" distributions over the beneficiary's lifetime for most non-spouse beneficiaries under the SECURE Act ten-year rule. Verify the current post-death distribution rules and the applicable beneficiary RMD regime at IRS.gov.

IRC 402(c): Rollover Rules -- 60-Day Rollover and Direct Rollover

IRC 402(c) is the primary statutory mechanism for deferring income inclusion on a qualified plan distribution. When the rules of IRC 402(c) are satisfied, the distribution is not included in gross income, and the tax-deferred character of the funds is preserved in the rollover destination -- an eligible retirement plan or IRA.

Eligible Rollover Distribution: Scope and Exclusions

Not every distribution from a qualified plan is an "eligible rollover distribution" eligible for rollover treatment under IRC 402(c)(4). Distributions that are NOT eligible rollover distributions include:

• Required minimum distributions (RMDs) under IRC 401(a)(9) -- see Section 9;
• Distributions that are part of a series of substantially equal periodic payments over the life or life expectancy of the participant (or the joint lives or life expectancies of the participant and beneficiary) or over a period of ten or more years;
• Hardship distributions as defined in Treasury regulations under IRC 401(k)(2)(B)(i)(IV);
• Any distribution to the extent it is a return of after-tax contributions that is not otherwise treated as eligible rollover (though after-tax amounts may sometimes be rolled over under specific rules);
• Corrective distributions of excess deferrals, excess contributions, or excess aggregate contributions.

Verify the current complete list of excluded distributions and any recently issued IRS guidance on eligible rollover distribution definitions at IRS.gov.

The 60-Day (Indirect) Rollover

Under IRC 402(c)(3), a distributee who receives an eligible rollover distribution may exclude it from gross income if the entire amount (or the maximum eligible portion) is contributed to an eligible retirement plan within 60 days of receipt. For a 60-day (indirect) rollover:

• The plan will withhold 20% of the gross distribution amount as mandatory federal income tax withholding under IRC 402(f) (discussed in Section 5).
• The participant receives a check for 80% of the gross amount.
• To complete a full rollover (and avoid any taxable portion), the participant must contribute 100% of the original gross distribution amount to the eligible retirement plan within 60 days -- including the 20% withheld.
• If the participant contributes only the 80% received, the 20% withheld is treated as a taxable distribution and may be subject to the IRC 72(t) 10% early distribution penalty if the participant is under age 59.5.

Direct Rollover: The Preferred Mechanism

A direct rollover is a distribution that is paid directly from the distributing plan to an eligible retirement plan, without passing through the participant's hands. Under IRC 402(c)(3) and IRC 401(a)(31), plans are required to offer direct rollover as an option for every eligible rollover distribution. Key features of the direct rollover:

• No mandatory 20% withholding applies -- the full pre-tax amount transfers to the receiving plan;
• No 60-day clock runs -- the participant cannot miss the rollover window because no distribution is made to the participant;
• The distributee is not treated as having received a distribution for IRC 402(a) purposes -- gross income inclusion does not occur;
• The receiving plan or IRA steps into the shoes of the distributing plan with respect to basis and pre-tax character (subject to the receiving plan's own rules).

Rollover Destinations: IRA vs. Another Employer Plan

An eligible rollover distribution may be rolled over to either a traditional IRA or to another eligible employer plan (such as a new employer's 401(k) or a 403(b)). The choice between destinations has significant practical consequences:

• Rollover to an IRA: Gives the participant maximum investment flexibility and no ongoing employer plan constraints. However, an IRA rollover eliminates access to the age-55 separation exception to IRC 72(t) -- that exception is available for qualified plan distributions but not IRA distributions. IRA funds also cannot be rolled back into a qualified plan to access the favorable ten-year averaging election on Form 4972, and NUA strategy requires the distribution to come directly from the employer plan.
• Rollover to another employer plan: Preserves access to the age-55 separation exception in the receiving employer's plan, may provide enhanced creditor protection under ERISA, and may offer loan options not available from an IRA. However, the receiving plan must accept rollover contributions (plan administrators may refuse incoming rollovers), and investment choices are limited to the receiving plan's menu. Verify the current rollover acceptance rules and IRS guidance at IRS.gov.

After-Tax Contributions and the Roth IRA Rollover

After-tax employee contributions in a traditional (pre-tax) plan account may generally be rolled over to a Roth IRA, triggering income tax on the pre-tax portion of the account but not on the after-tax basis. When a participant rolls over a traditional plan account to a Roth IRA, the conversion amount (the taxable portion) is includible in gross income in the year of rollover. This is sometimes referred to as an "in-plan Roth conversion" when done within the same plan, or a "Roth IRA conversion rollover" when the destination is a Roth IRA. Verify the current rules for after-tax rollover, pro-rata inclusion rules, and Roth IRA conversion rollover eligibility at IRS.gov before advising any client on this strategy.

The 60-Day Waiver

The IRS has authority under IRC 402(c)(3)(B) to waive the 60-day rollover requirement if the failure to meet the deadline was due to casualty, disaster, or other event beyond the participant's reasonable control. The IRS has also issued a self-certification procedure (Rev. Proc. 2016-47, as updated) that allows taxpayers to self-certify the applicable waiver ground directly to the financial institution receiving the rollover, without requesting a formal IRS letter ruling. Verify the current waiver standards, self-certification grounds, and any updated revenue procedures at IRS.gov.

IRC 402(e)(4): Net Unrealized Appreciation (NUA) on Employer Stock

The net unrealized appreciation (NUA) rules under IRC 402(e)(4) represent one of the more powerful -- and frequently overlooked -- tax planning opportunities available when a participant holds employer stock inside a qualified plan. When the rules are satisfied, appreciation in employer stock that accrued inside the plan is taxed at long-term capital gains rates rather than ordinary income rates, potentially producing significant tax savings for participants holding highly appreciated employer stock.

The Statutory Mechanism

Under IRC 402(e)(4)(A) and (B), when employer securities (defined in IRC 402(e)(4)(E) to include stock of the employer corporation or of any member of a controlled group) are distributed as part of a qualifying lump-sum distribution from a qualified plan, the NUA in those securities is excluded from the distributee's gross income at the time of distribution. The NUA is the excess of the fair market value of the employer securities at the time of distribution over the plan's cost basis in those securities (the aggregate amount paid by the plan for the securities over time). Only the plan's cost basis -- not the NUA -- is includible in gross income in the year of distribution and is taxed at ordinary income rates. The NUA is deferred until the securities are actually sold, at which point it is taxed at long-term capital gains rates, regardless of the actual post-distribution holding period.

Lump-Sum Distribution Requirement

The NUA exclusion under IRC 402(e)(4) is available only if the employer securities are distributed as part of a qualifying lump-sum distribution. Under IRC 402(e)(4)(D), a lump-sum distribution means a distribution within a single taxable year of the participant's entire balance from the plan (and from all plans of the same type maintained by the same employer) following a triggering event. The four triggering events are:

• Separation from service (for employees, not self-employed individuals);
• Reaching age 59.5;
• Death; or
• Disability (available only for self-employed individuals).

The requirement that the entire balance from all plans of the same type be distributed within a single taxable year is strictly enforced. A partial distribution, or a distribution spread across two calendar years, will not satisfy the lump-sum requirement and will disqualify the NUA election for the employer stock. Plan sponsors that offer installment or annuity options must coordinate with participants who are considering the NUA strategy to ensure the distribution timing and form satisfy the statutory requirements. Verify the current lump-sum distribution requirements and IRS guidance at IRS.gov before advising any client to elect the NUA strategy.

Form 1099-R Reporting for NUA Distributions

For a qualifying NUA distribution, the plan reports the transaction on Form 1099-R as follows:

• Box 1 (Gross Distribution): The total fair market value of all distributed assets, including the employer stock at FMV.
• Box 2a (Taxable Amount): The taxable portion -- the plan's cost basis in the employer stock plus the fair market value of any other distributed assets (non-stock cash or other plan assets).
• Box 6 (Net Unrealized Appreciation): The NUA amount -- the total FMV of the employer stock minus the plan's cost basis. This amount is not included in Box 2a and is not taxable at distribution.

The participant reports the Box 2a amount as ordinary income in the year of distribution. When the employer stock is later sold, the participant reports the NUA (and any post-distribution appreciation) as capital gain on Schedule D. Verify the current Form 1099-R instructions and Box 6 reporting requirements at IRS.gov.

Holding Period and Post-Distribution Appreciation

The NUA itself qualifies for long-term capital gains treatment automatically -- the holding period after distribution does not matter for the NUA amount. Any additional appreciation in the stock after the distribution date (the excess of the sale price over the FMV at distribution) is taxed as a short-term or long-term capital gain depending on the actual holding period from the distribution date to the sale date. This post-distribution appreciation is subject to the standard one-year holding period threshold for long-term capital gain classification. Verify the current capital gains rate and holding period rules at IRS.gov.

Estate Planning Consideration: No Basis Step-Up on NUA

A common misconception is that the NUA in distributed employer stock will receive a step-up in basis at death under IRC 1014. In fact, the NUA portion of the basis in distributed employer stock does NOT receive a step-up to date-of-death fair market value -- IRC 1014(c) excludes from the step-up any property that constituted income in respect of a decedent (IRD) under IRC 691. The NUA qualifies as IRD and therefore carries the same built-in gain to the recipient heir as it did to the original participant. Practitioners advising clients on estate planning involving NUA employer stock should account for this IRD carryover. Verify the current IRC 1014(c) and IRD rules at IRS.gov.

IRC 402(f): Mandatory 20% Withholding and the Special Tax Notice

IRC 402(f) imposes two distinct obligations on distributing plans: a mandatory federal income tax withholding requirement on eligible rollover distributions paid directly to a distributee, and a notice requirement that must be satisfied before the distribution is made.

Mandatory 20% Withholding on Eligible Rollover Distributions

Under IRC 3405(c), as implemented through the IRC 402(f) framework, any eligible rollover distribution that is paid directly to a distributee (rather than paid to an eligible retirement plan via direct rollover) is subject to mandatory 20% federal income tax withholding. This withholding rate is mandatory -- the participant cannot elect a different rate or elect out of withholding for an eligible rollover distribution paid to the participant directly. The only way to avoid the 20% withholding is to elect a direct rollover under IRC 401(a)(31) so that the distribution is paid directly to the eligible retirement plan rather than to the participant.

The 20% withholding rate applies to the gross taxable amount of the eligible rollover distribution. For a distribution that includes both pre-tax and after-tax (basis) amounts, withholding generally applies only to the taxable portion. Verify the current withholding computation rules and any special rules for after-tax basis amounts at IRS.gov.

Voluntary Withholding for Non-Eligible-Rollover Distributions: Form W-4R

Distributions that are NOT eligible rollover distributions -- including required minimum distributions, hardship distributions, and substantially equal periodic payments -- are subject to the voluntary withholding rules under IRC 3405(a) and (b). For these distributions, the participant may elect to have no withholding or may elect a different withholding amount or rate using Form W-4R (Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions). For periodic payments (such as annuity payments), the default withholding is computed as if the participant were married claiming three withholding allowances; the participant may adjust this election on Form W-4R. Verify the current Form W-4R instructions and applicable withholding rates for each distribution type at IRS.gov.

The IRC 402(f) Special Tax Notice

Before making any eligible rollover distribution, the plan administrator must provide the participant with a written explanation (the "IRC 402(f) notice" or "special tax notice") at least 30 days before the distribution date. The notice must explain:

• The rules for rolling over the distribution and the tax consequences of not rolling over;
• The mandatory 20% withholding rule and how it applies to indirect distributions;
• The direct rollover option and the plan's obligation to offer it;
• Any special rules applicable to after-tax employee contributions and Roth amounts;
• The difference between rolling over to an IRA versus to another employer plan; and
• The plan's distribution options and any required minimum distribution rules that limit rollover eligibility.

The IRS publishes a Safe Harbor Notice (most recently updated in Notice 2014-74 and subsequent guidance) that satisfies the IRC 402(f) notice requirement. Plan sponsors may use the IRS Safe Harbor Notice verbatim or a compliant substitute. Verify the current version of the Safe Harbor Notice and any updates at IRS.gov before distributing any notice to participants.

IRC 402(g): Elective Deferral Limits

IRC 402(g) sets the annual dollar limit on the elective deferrals an employee may make across all cash-or-deferred arrangements (CODAs), 403(b) plans, and SIMPLE plans. While the mechanics of CODA deferrals and catch-up contributions are addressed in depth in the companion IRC 401(a)/401(k) guide (linked in the Related Guides section below), this section covers the IRC 402(g) limit as it directly governs the exclusion from gross income for elective deferrals and the treatment of excess deferrals.

The IRC 402(g) Limit and Gross Income Exclusion

Under IRC 402(e)(3) and IRC 402(g)(1), elective deferrals are excluded from the employee's gross income up to the applicable annual limit. Research indicates the 2026 limit is $23,500; verify the current inflation-adjusted limit at IRS.gov. This is a per-person limit applied across all plans: an employee who participates in a 401(k) plan at one job and a 403(b) plan at a second job must aggregate deferrals across both and stay within the IRC 402(g) limit. The SIMPLE plan limit is lower and subject to its own statutory ceiling; verify the current SIMPLE deferral limit at IRS.gov.

Catch-Up Contributions Under IRC 414(v)

Catch-up contributions authorized under IRC 414(v) are not counted against the IRC 402(g) annual limit. For participants age 50 or older by the end of the calendar year, the age-50 catch-up allows additional deferrals above the IRC 402(g) limit. Research indicates the 2026 age-50 catch-up for 401(k) and 403(b) plans is $7,500; verify the current inflation-adjusted limit at IRS.gov. SECURE 2.0 Act and OBBBA introduced a higher catch-up for participants reaching age 60, 61, 62, or 63 during the calendar year; research indicates the super catch-up is $11,250 for 2026; verify at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Excess Deferrals: IRC 402(g)(2) and the Correction Deadline

If an employee's elective deferrals across all plans exceed the IRC 402(g) limit for the calendar year, the excess amount must be included in the employee's gross income for the year of deferral. The employee must notify each plan of the excess by April 15 of the following year and request a corrective distribution. If the corrective distribution and allocable income are distributed by April 15, the income on the excess (earnings) is taxable in the year of correction; the excess itself was already taxable in the year of deferral. If the corrective distribution is NOT made by April 15, the excess is taxable in the year of deferral AND is also potentially taxable again at actual distribution, creating a double-taxation problem. Verify the current excess deferral correction procedures and deadline at IRS.gov. For a complete treatment of CODA mechanics, elective deferral limits, and catch-up rules, see the IRC 401(a)/401(k) guide linked in the Related Guides section.

Lump-Sum Distributions and Form 4972 Ten-Year Averaging

A qualifying lump-sum distribution from a qualified plan may be eligible for a special reduced-tax computation under IRC 402(e)(1), reported and computed on Form 4972 (Tax on Lump-Sum Distributions). Ten-year forward averaging is a preferential income-averaging method that can significantly reduce the effective tax rate on a large lump-sum distribution by treating it as if it were received ratably over ten years and applying the tax rates in effect for a single year using 1986 tax brackets.

Eligibility Requirements for Ten-Year Averaging

Ten-year averaging under IRC 402(e)(1) is available only if all of the following requirements are satisfied:

• The participant was born before January 1, 1936. This age restriction effectively limits ten-year averaging to participants who were at least 90 years old in 2026; it remains in the statute but applies to a narrow and diminishing population of current retirees;
• The distribution qualifies as a lump-sum distribution (entire balance in all plans of the same type, distributed within a single taxable year, following a triggering event -- separation from service, age 59.5, death, or disability for self-employed individuals);
• The participant participated in the plan for at least five taxable years before the year of distribution; and
• The taxpayer has not previously elected ten-year averaging (it is a one-time lifetime election; once used, it cannot be elected again for any subsequent distribution).

Interaction Between Lump-Sum and NUA

A participant who qualifies for both the NUA exclusion under IRC 402(e)(4) and ten-year averaging under IRC 402(e)(1) may elect both in the same year for the same distribution. In that case, the NUA is excluded from the lump-sum amount subject to averaging, and the plan's cost basis in the employer stock -- rather than the full FMV -- is included in the averaging computation. This combination can produce a meaningful tax reduction for participants who are eligible for both elections. However, both elections require strict satisfaction of the lump-sum distribution requirements. Verify all eligibility conditions for both elections at IRS.gov and model the combined tax cost against a simple rollover before advising any client.

Inapplicability to Rollovers

A distribution that has been rolled over to an IRA or another employer plan cannot be retrieved for ten-year averaging. The decision to elect ten-year averaging must be made before the distribution is rolled over; a rollover permanently forecloses the averaging election. Similarly, a distribution of employer stock that is rolled over to an IRA forecloses the NUA election. The rollover destination decision and the Form 4972 and NUA elections should be analyzed simultaneously before the distribution is processed. Verify the current Form 4972 instructions and interaction rules at IRS.gov.

Interaction with IRC 72(t): Early Distribution Penalty

The IRC 72(t) 10% additional tax on early distributions applies as a direct overlay on any distribution from a qualified plan that is includible in gross income under IRC 402(a) and that is made before the participant reaches age 59.5, unless a statutory exception applies. Because IRC 402 governs inclusion, and IRC 72(t) piggybacks on included amounts, understanding the interplay between the two provisions is essential for practitioners advising clients who are considering pre-age-59.5 distributions.

Amounts Not Subject to the Penalty

The IRC 72(t) 10% penalty does not apply to the following distributions from qualified plans:

• Amounts that are directly rolled over or timely rolled over under IRC 402(c) -- excluded from gross income, so no penalty applies;
• Distributions made to a participant who is at least age 55 in the year of separation from service (the age-55 rule -- note: this exception applies only to qualified plans, NOT to IRAs; rolling a distribution over to an IRA before taking withdrawals eliminates this exception);
• Distributions made to a participant who dies or becomes disabled;
• Distributions made pursuant to a qualified domestic relations order (QDRO);
• Distributions of dividends from employer securities as described in IRC 404(k);
• Distributions made as substantially equal periodic payments (SEPP) under IRC 72(t)(2)(A)(iv), using one of the IRS-approved calculation methods (required minimum distribution method, fixed amortization, or fixed annuitization);
• Certain distributions to unemployed individuals for health insurance premiums, and distributions for higher education expenses or a first home purchase (these exceptions apply to IRAs, not generally to qualified plans -- verify the scope of each exception for the specific plan type at IRS.gov);
• Distributions for qualified birth or adoption under IRC 72(t)(2)(H) (SECURE Act addition); and
• Distributions for federally declared disasters and certain other exceptions added by SECURE 2.0 Act and OBBBA (verify the current list at IRS.gov and consult independent counsel, as recently enacted provisions may have pending guidance).

For a complete practitioner-level treatment of IRC 72(t), including SEPP methodology, calculation examples, and Form 5329 reporting, see the IRC 72(t) guide linked in the Related Guides section. Verify the current complete list of IRC 72(t) exceptions at IRS.gov.

The Age-55 Rule: Qualified Plans Only

The age-55 rule is one of the most important distinctions between distributions from qualified plans and distributions from IRAs. A participant who separates from service in or after the calendar year in which they turn 55 may take distributions from the distributing employer's qualified plan without the IRC 72(t) 10% penalty, even if they are not yet 59.5. This exception does not apply to IRA distributions. A participant who rolls a qualifying plan distribution to an IRA before taking withdrawals loses the age-55 exception and becomes subject to the general 59.5 rule for any withdrawals from the IRA. This is a permanent decision -- the rolled-over funds cannot be "retrieved" from the IRA to benefit from the plan exception. Verify the current age-55 exception rules, including any coordination with plan distribution requirements, at IRS.gov.

Required Minimum Distributions: IRC 401(a)(9) and IRC 402

IRC 401(a)(9) requires qualified plans to commence distributions to a participant no later than the participant's required beginning date (RBD) and to distribute the participant's remaining account balance over a period not exceeding the participant's life expectancy (or the joint life expectancy of the participant and a designated beneficiary). IRC 402 intersects with IRC 401(a)(9) in a critical way: required minimum distributions are expressly excluded from the definition of eligible rollover distributions under IRC 402(c)(4)(B), which means they cannot be rolled over, are subject only to voluntary withholding under IRC 3405, and are includible in gross income under IRC 402(a) in the year received.

Required Beginning Date and Current RMD Ages

Under SECURE 2.0 Act, the required minimum distribution age was raised from 72 to 73 for individuals who reach age 72 after December 31, 2022. It is scheduled to rise further to age 75 for individuals who reach age 74 after December 31, 2032. Verify the current applicable RMD age at IRS.gov, as these thresholds are subject to statutory change and may be further modified. For a participant who is not a 5%-or-more owner, the required beginning date is April 1 of the calendar year following the later of (a) the year the participant reaches the applicable RMD age, or (b) the year the participant retires. For 5%-or-more owners, the RBD is April 1 of the calendar year following the year the participant reaches the applicable RMD age, regardless of whether they retire. Verify the current RBD rules and the 5%-or-more owner exception at IRS.gov.

Annual RMD Computation

The annual required minimum distribution is computed by dividing the participant's account balance as of December 31 of the preceding year by the applicable life expectancy factor from the IRS life expectancy tables. For most participants, the Uniform Lifetime Table (reflecting the joint life expectancy of the participant and a hypothetical beneficiary 10 years younger) is used. If the participant's sole designated beneficiary is a spouse who is more than 10 years younger, the Joint Life and Last Survivor Table (which yields a longer joint life expectancy) may be used, resulting in a lower annual RMD. Verify the current applicable life expectancy tables and computation rules at IRS.gov, as the IRS periodically updates the tables.

Penalty for Failure to Take RMDs

A participant who fails to take the required minimum distribution for any calendar year is subject to a penalty excise tax under IRC 4974. SECURE 2.0 Act reduced this penalty from 50% to 25% of the shortfall, and further reduced it to 10% if the shortfall is corrected within a two-year correction window. Verify the current penalty rate, correction window, and self-correction procedures at IRS.gov.

Post-Death RMDs: The SECURE Act Ten-Year Rule

For plan participants who die after December 31, 2019, the SECURE Act generally replaced the prior "stretch IRA" regime (allowing non-spouse beneficiaries to take RMDs over their own life expectancy) with a ten-year rule: non-eligible designated beneficiaries (non-spouse beneficiaries who do not qualify as eligible designated beneficiaries) must fully distribute the inherited account within 10 calendar years of the participant's death. Eligible designated beneficiaries (surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the participant) may still use life expectancy distributions. Verify the current post-death distribution rules, eligible designated beneficiary definitions, and IRS guidance (including any SECURE 2.0 modifications) at IRS.gov.

OBBBA: Hardship Distributions and LTPT Cross-Reference

The One Big Beautiful Act (OBBBA), enacted in 2025, made several changes relevant to the IRC 402 distribution framework, primarily through amendments to IRC 401(k)(14) (hardship distributions) and IRC 401(k)(2)(D) (long-term part-time employee eligibility). These changes interact with IRC 402 to the extent they expand the classes of distributions available from qualified plans and potentially affect the Form 1099-R reporting codes applicable to those distributions.

OBBBA Hardship Distribution Expansion: Cross-Reference

OBBBA amended IRC 401(k)(14) to expand hardship distribution eligibility to include personal casualty losses without requiring a federally declared disaster, and introduced a self-certification procedure for demonstrating hardship. Hardship distributions under IRC 401(k) are NOT eligible rollover distributions under IRC 402(c)(4) and therefore cannot be rolled over. They are includible in gross income under IRC 402(a) in the year received and are subject to the IRC 72(t) 10% early distribution penalty unless an applicable exception applies. For a full treatment of the OBBBA hardship distribution expansion -- including the plan amendment requirements, SPD disclosure deadlines, and anti-abuse provisions -- see the IRC 401(a)/401(k) guide linked in the Related Guides section. Verify at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

OBBBA LTPT Rules and Distribution Eligibility

OBBBA amended IRC 401(k)(2)(D) to shorten the long-term part-time (LTPT) employee eligibility window from three consecutive years to two consecutive years of 500-or-more hours of service. LTPT employees who become eligible to make elective deferrals under the amended rule are subject to the same IRC 402 distribution rules as any other participant: their elective deferrals are includible in gross income under IRC 402(a) when distributed, eligible for rollover under IRC 402(c), and subject to mandatory 20% withholding if taken as an indirect distribution. The LTPT amendment does not create a separate distribution category for IRC 402 purposes. Verify the current LTPT rules, effective dates, and IRS transitional guidance at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Form 1099-R Reporting and Box 7 Distribution Codes

Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) is the primary information return for qualified plan distributions. The plan or its administrator must file Form 1099-R with the IRS and furnish a copy to the participant by January 31 of the year following the distribution. Understanding Form 1099-R boxes and Box 7 distribution codes is essential for practitioners preparing returns for clients who received plan distributions.

Key Form 1099-R Boxes

• Box 1 (Gross Distribution): The total amount distributed before any withholding or offset. For NUA distributions, this includes the FMV of employer stock.
• Box 2a (Taxable Amount): The taxable portion of the distribution. For a full rollover, this may be zero. For an NUA distribution, this excludes the NUA amount reported in Box 6. If the plan cannot determine the taxable amount, Box 2b (Taxable amount not determined) is checked.
• Box 4 (Federal Income Tax Withheld): The amount withheld for federal income tax, including mandatory 20% withholding on eligible rollover distributions paid directly to the participant.
• Box 6 (Net Unrealized Appreciation): The NUA amount on employer securities distributed in a qualifying lump-sum distribution. This amount is not taxable in the year of distribution.
• Box 7 (Distribution Code): A one- or two-character code (or combination of codes) that identifies the type of distribution. See the distribution code table below.

Box 7 Distribution Codes: Reference Table

The following table summarizes the primary Box 7 distribution codes used for qualified plan distributions. Verify the current complete list of distribution codes, combination codes, and IRS instructions at IRS.gov and in the current-year Form 1099-R instructions before filing any information return.

All distribution codes and their descriptions reflect the general rule as stated in IRS Form 1099-R instructions. Combinations of codes (e.g., Code 1 combined with Code D for NUA distributions) and special rules for specific distribution types must be verified against the current-year IRS Form 1099-R instructions at IRS.gov before filing any information return.