Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

basis (investment in the contract). Reg. § 1.72(p)-1 , A-4, A-10, A-11, A-21; ¶ 2.2.03 (C). A deemed distribution under § 72(p) :  Is not an eligible rollover distribution ( ¶ 2.6.02 ); Reg. § 1.402(c)-2 , A-4(d).  Cannot be a tax-free “qualified distribution” if made from a DRAC ( ¶ 5.7.04 (C)); Reg. § 1.402A-1 , A-2(c), A-11; § 1.402(c)-2 , A-4(d).  Does not count towards fulfilling the minimum distribution requirement ( ¶ 1.2.02 (B)); Reg. § 1.401(a)(9)-5 , A-9(b)(4).  Is subject to the 10 percent early distributions penalty if the participant is under age 59½ and no exception applies; see ¶ 9.1.03 (D). B. Plan loan offset distributions. If the loan complies with § 72(p) , we get away from the nonrollable deemed distribution that occurs when § 72(p) is violated. We then encounter another type of loan-related distribution, the “plan loan offset distribution” that occurs when the employee’s termination of employment (or death) causes the loan to be accelerated. Typically, the plan requires the loan to be repaid immediately in that event, deducts the loan balance from the employee’s account, and distributes to the employee (or beneficiary) the plan benefits minus the loan amount. The plan’s repayment to itself is called a loan offset, and it is considered an actual distribution, includible in income ( ¶ 2.1.01 ) when the offset occurs (except to the extent it is rolled over). Reg. § 1.72(p)-1 , A- 13. As an “actual distribution,” the plan loan offset:  Does count towards the required minimum distribution RMD) (if any) for the year. Reg. § 1.401(a)(9)-5 , A-9(a); see ¶ 1.2.02 .  Is subject to the 10 percent early distributions penalty ( § 72(t) ), unless an exception applies (¶ 9.4) . For example, if the employee has retired at age 55 or later at the time the plan loan offset distribution to him occurs, there is no penalty; ¶ 9.4.04 .  Is an eligible rollover distribution ( ¶ 2.6.02 ), except to the extent it represents an RMD ( ¶ 2.6.03 ). The participant can “roll over” the non RMD portion of the offset distribution using substituted funds. Reg. § 1.402(c)-2 , A-9; PLR 2006-17037; IRS Instructions for Forms 1099-R and 5498 (2010), p. 3. See Tilley v. Comm’r , T.C. Summary 2008-86, in which the Tax Court ruled that, for purposes of computing the 60-day rollover deadline ( ¶ 2.6.06 ), the offset distribution was deemed to have occurred upon expiration of the loan’s 90-day cure period. See PLR 2009-30051, in which an employee was granted a hardship waiver ( ¶ 2.6.07 ) of the 60-day rollover deadline for a plan loan offset distribution.  Is treated as an “eligible rollover distribution” (or as part of such a distribution) for purposes of the mandatory 20 percent income tax withholding on eligible rollover distributions ( ¶ 2.3.02 (C)). However, the plan is not obligated to withhold more than the cash ( i.e., the non-offset) portion of the distribution. Reg. § 31.3405(c)-1 ,