Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

403(b) plans and government plans have mandatory employee contributions or permit participants to contribute their own after-tax money to the plan to purchase “past service credits”; these nondeductible contributions are added to the employee’s investment in the contract. Regardless of the reason for the nondeductible contributions, the earnings on such contributions are not part of the employee’s basis; the earnings are pretax money. B. Employer plan contributions when plan was not qualified. If the retirement plan was not a “qualified plan” at some time(s) during its history, employer contributions to the employee’s account in the plan may have been treated as taxable income to the employee at the time of the contribution. Any such previously-taxed contribution becomes part of the participant’s “investment in the contract.” Reg. § 1.402(a)-1(a)(1)(iv) . This would be very rare.

Plan loans that become deemed distributions. See ¶ 2.1.07 (A), (B).

C.

It is unusual for an employee to have any basis in a QRP, since most employees do not have defaulted or improper plan loans, previously-taxed employer contributions, or nondeductible employee contributions. When an employee does have basis in a QRP or 403(b) account, consider converting the after-tax money to a Roth IRA; see ¶ 2.2.05 .

QRP distributions from account that contains after-tax money

Under the “cream-in-the-coffee” rule of § 72 ( ¶ 2.2.02 ), a distribution from a QRP generally carries out a pro rata share of the participant’s pre- and after-tax money in the plan. § 72(e)(8)(A) , (B) , (5)(D) . Thus, for example, the employee cannot tell the plan administrator, “Send me a check for all my after-tax money, and keep the pretax money inside the plan for now”; the plan administrator generally cannot distribute the after-tax money separately from the pretax money or vice versa. If the participant doesn’t have any after-tax money in his retirement plan, you can skip this ¶ 2.2.04 : All distributions from his account will consist entirely of pretax money...there is no after- tax money to be prorated or allocated. On the bright side, unlike with IRAs (see ¶ 2.2.08 ), there is no “aggregation rule” requiring multiple nonIRA plans to be considered as “one plan” for purposes of determining howmuch of any distribution constitutes after-tax money. Thus, for example, a solo practitioner lawyer who has both a 401(k) plan and a defined benefit plan does not aggregate his two plans for purposes of determining the taxable proportion of a distribution from one or the other. Now we know the general rule: Distributions from the plan carry out pre- and after-tax money pro-rata. There are two exceptions to the general rule, one for separate accounts maintained by the plan (see “A”) and one for pre-1987 after-tax contributions (see “B”). If a single distribution contains both pre- and after-tax money, the two types of money can be sent to different “destinations”; see “C.” This Section Matters Only if Plan Account has After-tax Money