Distributions from your Special Pay Plan are taxable unless the amounts are rolled over. A rollover occurs when you receive a distribution of cash or other assets from one qualified retirement plan and contribute all or part of the distribution within 60 days to another qualified retirement plan or traditional IRA. Rollovers are not taxable but are reportable on Form 1099-R.
Any taxable amount that is not rolled over must be included in income in the year you receive it. If the distribution is paid to you, you have 60 days from the date you receive it to roll it over.
Any taxable distribution paid to you is subject to mandatory Federal withholding of 20%, even if you intend to roll the distribution over later. State withholding may also apply if required by your state. If the distribution is rolled over, and you want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have your Special Pay Plan transfer a distribution directly to another eligible plan or to an IRA. Under this option, no taxes are withheld.
If you are under age 59 ½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions. Consult your tax professional if you are not sure if the 10% penalty applies to you or if you think you qualify for an exception.