Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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A-11. The plan does not have to offer the direct rollover option (see ¶ 2.6.01 (C)) for this type of distribution as it does for other eligible rollover distributions. Reg. § 1.401(a)(31)-1 , A-16. C. Who gets the “offset” when participant dies? If the decedent had borrowed money from his employer’s QRP, the plan will typically “pay itself back” out of the employee’s account before distributing the (net amount) to the beneficiary of the account, thereby creating a “plan offset distribution” (see “B” above) and its resulting phantom income. The question is, to whom is the offset amount deemed distributed in this case? One possibility is that this is considered a distribution to the participant’s estate , because it is discharging a debt of the decedent. Another view is that this is a distribution to the beneficiary(ies) of the account. Reg. § 1.402(c)-2 , A-9(a), seems to support the “beneficiary” view, since it says that the plan offset distribution “can be rolled over by the employee (or spousal distributee ).” Emphasis added. There is no other guidance. 2.1.08 Excess IRA contributions; corrective distributions The Code allows IRA contributions to be returned to the contributor for a certain period of time. If three requirements are met (see A–C), the returned contribution gets special treatment for income tax purposes (see “D”) and for purposes of the penalty on excess IRA contributions (see “E”). In this book, a returned IRA contribution that meets these requirements is called a “ corrective distribution ,” regardless of whether it was returned in order to correct a problem (such as an excess IRA contribution) or just because the participant changed his mind. The same rules apply to return of Roth IRA contributions. Reg. § 1.408A-6 , A-1(d). If an excess plan contribution is returned late, so it does not qualify as a corrective distribution, see F–H. A. Deadline for a corrective IRA distribution. To qualify for the special income tax treatment (see “D”), the corrective distribution must be “received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year.” § 408(d)(4)(A) . See ¶ 5.6.02 for what this deadline term means. B. Income attributable to returned IRA contribution. The amount that must be distributed by the deadline is the contribution itself, “accompanied by the amount of net income attributable to such contribution.” § 408(d)(4)(C) . For how to compute the net income attributable to a returned IRA contribution, see ¶ 5.6.02 . C. No deduction taken. The participant must not take an income tax deduction for the contribution. § 408(d)(4)(B) . D. Income tax and 10 percent penalty treatment. As explained at ¶ 2.2.02 and ¶ 2.2.08 , the general rule for tax treatment of IRA distributions (under § 408(d)(1) and § 72 ) is that any such distribution is included in gross income to the extent it exceeds the distributee’s basis; and a proportionate allocation and aggregation rule (the “cream-in-the-coffee rule”) applies for purposes of determining how much of such distribution is basis. Returned IRA contributions are an exception to these general rules: If the above three requirements A–C