Life and Death Planning for Retirement Benefits

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262 Life and Death Planning for Retirement Benefits
 Corrective distributions of excess deferral amounts (including income thereon) made to
comply with the elective deferral limits of Reg. nd the cash-or-deferred
plan rules. A-4(b), (c).
 Plan loans that are treated as deemed distributions under § 72(p). A-4(d). See A).
 Dividends paid on employer securities as described in A-4(e). See also Reg.
, A-11.
 The deemed income resulting from plan-owned life insurance. A-4(f). Se H).
 The deemed income resulting from a prohibited transaction. A-4(g).
 “Similar items designated by the Commissioner in revenue rulings, notices, and other
guidance published in the Internal Revenue Bulletin.” A-4(h).
The never-qualified category is needed to prevent game-playing. For example, if excess
contributions (and earnings thereon) could be distributed tax-free as long as the participant had
met the five-year and triggering event tests, then everyone over 59½ with five years of DRAC
participation would have an incentive to transfer all his wealth into his DRAC. That would be an
excess contribution, but any penalties could be avoided by distributing the excess contribution
(and earnings thereon) back to himself by a certain deadline (see D)); and if there were
no income tax on the distributed earnings the participant would have done an end run around the
Code’s contribution limits.
Though the above list of never-qualified distributions generally tracks the list of
distributions that are not “eligible rollover distributions,” the regulations clarify that some
distributions that are not eligible rollover distributions nevertheless CAN be qualified
distributions. Hardship distributions, required minimum distributions, and distributions that are
part of a series of substantially equal periodic payments fall into this category. Reg. ,
A-11.
D. QDROs and payments to beneficiaries. In the case of a distribution to an alternate payee
under a QDRO, or to a beneficiary, it is the death, age, or disability of the participant that
determines whether the distribution is qualified. See Reg. , A-4(d), regarding
QDRO payments from DRACs.
5.7.05 Nonqualified DRAC distributions
Though not automatically entitled to 100 percent tax-free treatment the way a qualified
distribution is, a nonqualified distribution may be partly or wholly tax-free. However, the treatment
of nonqualified distributions is one of the big differences between Roth IRAs and DRACs.
As is true with a Roth IRA, if the DRAC has appreciated since the original contribution(s),
then the DRAC contains two kinds of money: the participant’s contributions (which comprise the
participant’s basis in the account—the money he has already paid tax on—also called the “after-
tax money” or “investment in the contract”; see , plus the appreciation (which is pretax