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Qualified Plans:
Distributions
Generally, the law requires plans to pay retirement benefits no later than the
time an employee reaches normal retirement age, and many plans provide earlier
payments under certain circumstances. For example, a plan may allow employees to
receive distributions after terminating employment. The plan's "Summary Plan
Description" (SPD) should provide the rules for obtaining the distribution as
well as the timing of distribution after termination of employment.
Qualified Joint and Survivor Annuity (QJSA)
In a
money purchase pension plan, the retirement benefit payment generally must
occur in series of equal, periodic payments over the lifetime of the employee,
and the payments must continue to the employee's spouse for the rest of his or
her life if he or she survives the employee. The periodic payment to the
surviving spouse must be at least 50 percent but not more than 100 percent of
the periodic payment received by the participant while he or she was alive. This
form of payment is called a qualified joint and survivor annuity (QJSA), and the
plan must provide an explanation of the QJSA in a timely manner.
If the plan provides other forms of benefit payment, the employee and his/her
spouse can elect to waive their rights to receive the QJSA and select one of the
other payment options available. The waiver must be made in writing within
certain time limits and be witnessed by a notary or plan representative.
Triggering Event
Generally, distributions cannot be made until one of the following occurs:
- The employee
reaches retirement age as defined under the plan.
- The employee
becomes disabled.
- The employee
dies, at which time the beneficiary is eligible for distributions.
- The employee
separates from service.
- The plan is
terminated and is not replaced by another defined contribution plan.
All of the above
are referred to as triggering events.
If the plan is a
profit-sharing or a
401(k) plan, the employee is allowed to take an in-service withdrawal if the
plan permits. An in-service withdrawal is a distribution that may
occur without the employee experiencing a triggering event. Some plans will
allow an in-service withdrawal only if the employee experiences financial
hardships as defined by the plan.
Tax on Early Distributions
If a distribution is made to an employee under the plan before he or she reaches
age 59½, the employee may have to pay a ten-percent additional tax on the
distribution. This tax applies to the amount received, which the employee must
include as income.
The ten-percent tax will not apply before age 59½, however, if the following
occurs:
- The
distribution is made to a beneficiary on or after the death of the employee.
- The
distribution is made because the employee acquires a qualifying disability.
- The
distribution is made as part of a series of substantially equal periodic
payments beginning after separation from service and made at least annually
for the life or life expectancy of the employee or the joint lives or life
expectancies of the employee and his or her designated beneficiary. (The
payments under this exception, except in the case of death or disability, must
continue for at least five years or until the employee reaches age 59 ½,
whichever is the longer period.)
- The
distribution is made to an employee after separation from service if the
separation occurred during or after the calendar year in which the employee
reached age 55.
- The
distribution is made to an alternate payee under a qualified domestic
relations order (QDRO).
- The
distribution is made to an employee for medical care up to the amount
allowable as a medical expense deduction (determined without regard to whether
the employee itemizes deductions).
- The
distribution is made timely to reduce excess contributions under a 401(k)
plan.
- The
distribution is made timely to reduce excess employee or employer
matching contributions (excess aggregate contributions).
- The
distribution is made timely to reduce excess
elective deferrals.
- The
distribution is made because of an IRS levy on the plan.
Withholding on Eligible Rollover Distributions
Distributions paid to an employee are subjected to a mandatory federal withholding of
20 percent if the distribution exceeds $200 for the year and is an eligible rollover
distribution. Distributions that are not eligible rollover distributions are not
subjected the mandatory 20-percent withholding.
Eligible rollover distributions are distributions of all or any part of an
employee's balance in a qualified retirement plan, except if the distribution is any of the following:
- A required
minimum distribution.
- Any of a
series of substantially equal payments made at least once a year over any of
the following periods:
- The
employee's life or life expectancy.
- The joint
lives or life expectancies of the employee and beneficiary.
- A period of
ten years or longer.
- A hardship
distribution.
- A corrective
distribution of excess contributions or deferrals under a 401(k) plan and any
income allocable to the excess, or a corrective distribution of annual
additions and any allocable gains.
- Loans treated
as distributions.
-
Dividends on
employer securities.
- The cost of
life insurance coverage.
An employee may
avoid the 20-percent withholding by having the distribution processed as a
direct rollover to an eligible retirement plan. In a direct rollover the assets
are made payable to the trustee or custodian of the receiving retirement plan.
Required
Distributions
For implementing the required minimum distributions (RMD), a qualified plan must
provide that either of the following occurs:
- Each
participant will receive his or her entire interest (benefits) in the plan by
the required beginning date or
- Each
participant will begin to receive regular periodic distributions by the
required beginning date. The distributions are annual amounts calculated so
that the participant's entire interest is distributed over his or her life
expectancy or over the joint life expectancy of the participant and the
designated beneficiary.
The plan
administrator must figure the RMD for each participant and distribute the
amount to each participant who is required to remove an RMD from his or her
qualified plan account.
If an employee participates in more than one qualified plan, the RMD for each
plan must be calculated separately. Unlike IRAs, the RMD for multiple plans
cannot be combined and taken from one plan.
Required
Beginning Date
Generally, each participant must begin receiving RMD by April 1st of the year
following the calendar year he or she reaches age 70 ½. This is referred to as
the required beginning date (RBD). If the plan allows and the employee is still
employed after he or she reaches age 70 ½, the RBD could be delayed until April
1st following the year the employee retires. The option to delay the RBD after
April 1st following the calendar year in which the employee reached the 70 ½
birthday is not available to employees who own at least five percent of the
business.
Subsequent RMD amounts must be distributed by December 31 of each year.
Excess
Accumulation Penalty
Employees who do not take their RMD by the prescribed deadline will owe the IRS
a 50-percent excess-accumulation penalty. The 50 percent is assessed on the
amount not distributed.
Example:
Jane's RBD is April 1,2003. Her RMD for 2002 is $40,000 and for 2003,
her RMD is $38,000.
Jane distributed her 2002 RMD of $40,000 on March 1,2003. By December
31, 2003 she distributed an additional $20,000.
For 2003, Jane was $18,000 short from meeting her RMD, so she owes the
IRS $9,000 ($38,000 - 20,000 = $18,000; $18,000 x 0.5= $9,000). |
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Jane must pay the
excess accumulation penalty when she files her federal tax return. If she feels that the failure was due to reasonable
circumstance, she may write to the IRS and request that the penalty be waived.
If the request is approved, the IRS will return the payment to Jane. Next-->>
Summary and Resources
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