Life and Death Planning for Retirement Benefits

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106 Life and Death Planning for Retirement Benefits
separation from service, subparagraph (A) [of 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.”
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
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 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 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