Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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2.4.05 . If a distribution clears those hurdles it is an LSD. That doesn’t mean much, however, unless it meets further tests to qualify for particular favorable tax treatments:  If the LSD meets additional tests, it can qualify for special averaging treatment. See ¶ 2.4.06 .  If the LSD includes employer stock, see ¶ 2.5 . The following aspects of LSDs are not treated here: LSDs in connection with a QDRO ( § 402(e)(4)(D)(v) , (vii) ); interplay with the § 691(c) deduction ( ¶ 4.6.04 ); an LSD paid to multiple recipients; and distribution of annuity contracts as part of an LSD. 2.4.02 First hurdle: Type of plan Only distributions from § 401(a) “qualified plans” (pension, profit-sharing, or stock bonus) can qualify as LSDs. Both corporate plans and self-employed (“Keogh”) plans can give rise to LSDs, but a distribution from an IRA, SEP-IRA, SIMPLE, or 403(b) plan can never qualify for LSD treatment. § 402(e)(4)(D)(i) . Once money or stock has been “rolled” into an IRA, any special LSD or NUA deal is permanently lost. PLR 2004-42032. 2.4.03 Second hurdle: “Reason” for distribution The distribution must be made following a triggering event. § 402(e)(4)(D)(i) , I–IV . The triggering events are slightly different depending on whether the participant is a “common law employee” or is self-employed (“employee within the meaning of section 401(c)(1)”). If the participant is a common-law employee, the distribution must be made either:  On account of the employee’s death; or  After the employee attains age 59½; or  On account of the employee’s “separation from service.” § 402(e)(4)(D)(i) , I–III . 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) Landmine: separation from service