Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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changed is that he can now separate the pre- and after-tax portions of any particular distribution and have them sent to different destinations (see ¶ 2.2.05 ).

The Bad Old Rule: Notice 2009-68 Prior to issuance of Notice 2014-54, the IRS’s position was that a distribution that was sent to multiple different “destinations” would be treated as multiple distributions, one separate distribution to each “destination.” See Notice 2009-68, 2009-39 IRB 423 (9/28/09). If the money sent to each separate destination is treated as a separate distribution, then each “destination” would receive a pro rata share of the pre- and after-tax money in the employee’s account, with no ability to send the pre- and after-tax money to different “destinations.” This IRS rule was controversial— for one thing, it contradicted other IRS pronouncements. For example, the IRS’s own regulation dealing with income tax withholding treats the direct rollover and outright payment as two portions of a single eligible rollover distribution , when the “distributee elects to have a portion of an eligible rollover distribution paid to an eligible retirement plan in a direct rollover and to receive the remainder of the distribution….” Reg. § 31.3405(c)-1 , A-6. See also PLR 2009-26041, in which the IRS blessed a “direct rollover of the [participant’s] entire account balance from Plan X into Plan Y, except the after-tax contributions…which were to be distributed directly to” the participant; such a split-up of the pre- and after-tax money is not possible if the direct rollover and outright distribution must be treated as two separate distributions as was stated in Notice 2009-68. According to anecdotal evidence, some plan administrators simply ignored the Notice 2009-68 rule on this point (they have been well rewarded; see ¶ 2.2.05 (G)). Notice 2014-54 formally reversed the rule. This ¶ 2.2.05 explains what happens to the pre- and after-tax portions of a distribution made from a “traditional” QRP account to the participant if the distribution is sent via direct rollover to both a traditional and a Roth IRA, or if only part of the distribution is rolled over to an IRA. Most of these rules come from IRS Notice 2014-54, 2014-41 IRB 670 (“Notice 2014-54”) (also discussed at ¶ 2.2.04 (C)). This ¶ 2.2.05 does not tell you what constitutes a “distribution”; see ¶ 2.1.03 for that. Nor does it tell you how much of a particular distribution constitutes after-tax or pretax money; for that, see ¶ 2.2.04 . Once you have identified a particular distribution made from the participant’s account, and you have determined how much of that distribution is after-tax money, this ¶ 2.2.05 tells you what happens to the pre- and after-tax money included in that distribution when the distribution is sent to different destinations, or (following the distribution) is partly rolled over: A. Introduction: Please read this first. Partial and split rollovers, conversions: QRP distributions

“B” explains what happens when a single distribution is sent, via direct rollover, partly to a Roth IRA and partly to a traditional IRA.

“C” explains the tax treatment of a QRP distribution that is partly paid outright to the participant and partly sent via direct rollover to an IRA.