Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

If the participant is self-employed, the distribution must be made either:

 On account of the employee’s death; or  After the employee attains age 59½; or  After the employee has become disabled within the meaning of § 72(m)(7) . § 402(e)(4)(D)(i) , I–II , IV . A person is “disabled,” according to § 72(m)(7) , if he is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” These LSD “triggering events” are of significance primarily for determining whether there has been a distribution of 100 percent of the balance to the credit of the employee ( ¶ 2.4.04 ). Distributions before the triggering event are irrelevant for this purpose; see, e.g. , PLR 8541089 (distributions before age 59½ did not adversely affect LSD status of distribution occurring after reaching age 59½). A treatise could be written on the subject of what constitutes “separation from service.” “An employee will be considered separated from the service within the meaning of section 402(e)(4)(A) of the Code, only upon the employee’s death, retirement, resignation or discharge, and not when the employee continues on the same job for a different employer as a result of the liquidation, merger or consolidation, etc., of the former employer.” Rev. Rul. 79-336, 1979-2 CB 187. See, e.g. , PLRs 9844040, 1999-27048, 2001-48077. See PLR 2000-38050 holding that an executive employee who transitioned to being a consultant (independent contractor) had “separated from service” for LSD purposes. Defining “separation from service” is beyond the scope of this book. See instead The Pension Answer Book ( Appendix C ). The frustrating technicalities of the term “separation from service” caused Congress to change to a different term—“severance from employment”—in defining when an elective deferral account may properly be distributed from a 401(k) plan (a subject not covered in this book); see § 401(k)(2)(B)(i)(I) , effective for distributions after 2001. Unfortunately, Congress did not similarly amend § 402(e) , so “separation from service” is still the term applicable in the definition of LSD. Most cases and rulings on the meaning of separation from service dealt with 401(k) plans; see, e.g. , PLR 2001-27053. Post-2001 401(k) pronouncements will no longer help on this question, since the two Code sections now use different terms. Occasionally taxpayers have had problems asserting that a particular LSD was made “on account of” a triggering event. For example, where the employee died leaving his QRP benefits to his surviving spouse, then she died after taking some distributions from the plan, the children who inherited the remaining QRP benefits at her death were not entitled to LSD treatment, because the payments to them were not “on account of” the employee’s death (they were on account of the surviving spouse’s death). Gunnison , 461 F.2d 496, 499 (7th Cir. 1972). But see PLR 2003-02048, in which a distribution received 10 years after taxpayer’s separation from service was ruled to be “on account of” the separation from service. (a) Landmine: separation from service (b) Landmine: “on account of”