Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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If the triggering event is reaching age 59½, or becoming disabled, then the distribution does not have to be “on account of” the triggering event; it merely has to be “after” it. PLR 8541089. The treatment is available for someone who has attained age 59½ even if he has not terminated employment; see PLR 2004-10023.

Third hurdle: Distribution all in one taxable year

For the distribution to qualify as an LSD, the employee’s entire balance must be distributed to him in one calendar year. As the Code puts it, there must be a “distribution or payment within one taxable year of the recipient of the balance to the credit of...[the] employee...” from the plan. § 402(e)(4)(D)(i) . The “balance to the credit” includes all the participant’s accounts in that plan— employ ee contribution, employ er contribution, rollover, and designated Roth! LSD treatment is NEVER available for a partial distribution. See PLRs 2006-34017 through 2006-34022. This hurdle is surrounded by land mines. Clearly, if an employee takes out, say, one-third of his plan balance in Year 1 and leaves two-thirds in the plan, the distribution of the one-third portion in Year 1 does not qualify for LSD treatment because it is not a distribution of the entire balance. Now suppose the employee takes out the remaining two-thirds of his balance in Year 2. He has taken out 100 percent of his (remaining) plan balance in Year 2. Is the Year 2 distribution an LSD? It would be, if the “balance to his credit” simply meant the balance as of the date of distribution—but that is not what it means. Rather, the rule means that the balance to the credit of the employee as of the first distribution following the most recent triggering event ( ¶ 2.4.03 ) must be distributed within one taxable year. See Notice 89-25, 1989-1 CB 662, A-6; Prop. Reg. § 1.402(e)-2(d)(1)(ii); Rev. Rul. 69-495, 1969-2 CB 100. Elaine Example: After Elaine retired from Acme in Year 1 at age 64, she withdrew $60,000 from her $800,000 Acme Profit-sharing Plan account in order to fulfill her dream of traveling around the world in a submarine. Returning to the U.S. in Year 2, she withdraws the rest of her account. This final distribution would not qualify for LSD treatment because the entire balance that existed on the date of the most recent triggering event (separation from service) was not distributed all in one calendar year. In contrast, suppose Elaine, upon returning from her cruise, died on her way to the Acme benefits office. Now there is a new triggering event, the employee’s death. Her beneficiary can elect LSD treatment for her remaining plan balance even though Elaine, had she lived, could not have done so. Or suppose Elaine had withdrawn the $60,000 for her cruise before she retired. Then her later separation from service would have been a new triggering event, and the final distribution would qualify for LSD treatment. The IRS Instructions for Form 4972 (2016) make no reference to this requirement. Prior distributions from the same plan are referred to only in connection with the rule that if any prior distribution from the same plan was rolled over, subsequent distributions cannot receive special averaging treatment (see ¶ 2.4.06 ). These instructions give the impression that the IRS regards the triggering events as obsolete. However, unless the IRS has had an unpublicized change of heart, Notice 89-25 is still in effect. The Code’s definition of LSD still includes the requirement that the distribution be of the “balance to the credit” of the employee which becomes payable “after the For exceptions to the all-in-one-year rule, see ¶ 2.4.05 .