Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

separation from service, subparagraph (A) [of § 72(e)(8) ] shall apply only to the extent that amounts received before the annuity starting date (when increased by amounts previously received under the contract after December 31, 1986) exceed the investment in the contract as of December 31, 1986.” § 72(e)(8)(D) . In other words, to the extent the money in the employee’s account consists of the employee’s pre-1987 nondeductible contributions (and this can be documented in the plan’s accounting for such funds), the employee can withdraw that money separately from other money in the account. The employee can indeed say with respect to these funds, “Send me a check for an amount equal to my pre-1987 contributions, and keep all the earnings thereon (and other pretax money) inside the plan for now.” In the form of notice the IRS provides to plan administrators (to give to a retiring employee receiving a distribution from his account), the IRS suggests telling the employee “If a payment is only part of your benefit, an allocable portion of your after-tax contributions is generally included in the payment. If you have pre-1987 after-tax contributions maintained in a separate account, a special rule may apply to determine whether the after-tax contributions are included in a payment”—but there’s no statement of what that “special rule” is. Notice 2009-68 (9/28/09), 2009- 39 IRB 423, p. 428. C. One “distribution” may be sent to multiple destinations ; Notice 2009-68 reversed When an employee is entitled to a distribution from the employer’s qualified retirement plan, the employee can request that the employer divide the distribution and send varying amounts of it to different “destinations.” The potential destinations are: outright to the participant; direct rollover to one or more traditional IRAs; direct rollover to one or more Roth IRAs; and direct rollover to another qualified plan. If the multiple checks or transfers sent to multiple destinations are all part of a single distribution event, the multiple checks and transfers will be considered a single distribution for purposes of the cream-in-the-coffee rule. The pre- and after-tax portions of that distribution can then go separately to the different “destinations” to the extent explained in ¶ 2.2.05 . From the Notice: “For purposes of determining the portion of a disbursement of benefits from a plan to a participant, beneficiary, or alternate payee that is not includible in gross income under the rules of § 72 , all disbursements of benefits from the plan to the recipient that are scheduled to be made at the same time (disregarding differences due to reasonable delays to facilitate plan administration) are treated as a single distribution without regard to whether the recipient has directed that the disbursements be made to a single destination or multiple destinations.” Notice 2014-54, 2014-41 IRB 670 (10/6/14) (“Guidance on the Allocation of After- tax and Pretax Amounts”). Darcy Example: Darcy works for Omega Widget Co. Darcy has $250,000 in his account in the Omega Profit-Sharing Plan, of which $50,000 (20%) is after-tax money and $200,000 (80%) is pretax money. The funds are all in a single plan account [see “A” for why this matters] and none of his account is attributable to pre-1987 contributions [see “B” for why this matters]. None of the money is in a designated Roth account (¶ 5.7) . Darcy leaves the employment of Omega and requests a distribution of $100,000 from his plan account. Under the cream-in-the-coffee rule of § 72, this distribution carries out proportionate amounts of the pre- and after-tax money in his account, so the pretax portion of the distribution is $80,000 (80%) and the tax-free after-tax portion