Life and Death Planning for Retirement Benefits

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Chapter 2: Income Tax Issues 99
A-11. The plan does not have to offer the direct rollover option (see C))
for this type of distribution as it does for other eligible rollover distributions. Reg.
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. 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. 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.” See 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.” For how to compute the net income
attributable to a returned IRA contribution, see
C. No deduction taken. The participant must not take an income tax deduction for the
contribution.
D. Income tax and 10 percent penalty treatment. As explained a and the
general rule for tax treatment of IRA distributions (under and 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