Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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beneficiary) the plan benefits minus the loan amount. The plan’s repayment to itself is called a loan offset, and it is considered an actual distribution, includible in income ( ¶ 2.1.01 ) when the offset occurs (except to the extent it is rolled over). Reg. § 1.72(p)-1 , A- 13(b). As an “actual distribution,” the plan loan offset:

 Does count towards the required minimum distribution (RMD) (if any) for the year. Reg. § 1.401(a)(9)-5 , A-9(a); see ¶ 1.2.02 .

 Is subject to the 10 percent early distributions penalty ( § 72(t) ), unless an exception applies (¶ 9.4) . For example, if the employee has retired at age 55 or later at the time the plan loan offset distribution to him occurs, there is no penalty; ¶ 9.4.04 .  Is an eligible rollover distribution ( ¶ 2.6.02 ), except to the extent it represents an RMD ( ¶ 2.6.03 ). The participant can “roll over” the non RMD portion of the offset distribution using substituted funds. Reg. § 1.402(c)-2 , A-9; PLR 2006-17037; IRS Instructions for Forms 1099-R and 5498 (2016), p. 4. See Tilley , TC Summary 2008-86, in which the Tax Court ruled that the offset distribution was deemed to have occurred upon expiration of the loan’s 90-day cure period. See PLR 2009- 30051, in which an employee was granted a hardship waiver ( ¶ 2.7.05 ) of the 60- day rollover deadline for a plan loan offset distribution.  Is treated as an “eligible rollover distribution” (or as part of such a distribution) for purposes of the mandatory 20 percent income tax withholding on eligible rollover distributions ( ¶ 2.3.02 (C)). However, the plan is not obligated to withhold more than the cash ( i.e., the non-offset) portion of the distribution. Reg. § 31.3405(c)-1 , A-11. The plan does not have to offer the direct rollover option (see ¶ 2.6.01 (C)) for this type of distribution as it does for other eligible rollover distributions. Reg. § 1.401(a)(31)-1 , A-16. D. Who gets the “offset” when participant dies? If the decedent had borrowed money from his employer’s QRP, the plan will typically “pay itself back” out of the employee’s account before distributing the (net amount) to the beneficiary of the account, thereby creating a “plan offset distribution” (see “C”) and its resulting phantom income. The question is, to whom is the offset amount deemed distributed in this case? One possibility is that this is considered a distribution to the participant’s estate , because it is discharging a debt of the decedent. Another view is that this is a distribution to the beneficiary(ies) of the account. Reg. § 1.402(c)-2 , A-9(a), seems to support the “beneficiary” view, since it says that the plan offset distribution “can be rolled over by the employee (or spousal distributee ).” Emphasis added. There is no other guidance.

Excess IRA contributions; corrective distributions

The Code imposes a tax on excess IRA contributions. The tax is six percent of the amount of the contribution, imposed annually until the excess contribution is either distributed or “absorbed” into a later year’s contribution. The tax cannot exceed in any year six percent of the total value of the account. § 4973(a) , (b) .