Module 6: Plan Distributions

Question 1

Types of Basic Qualified Plan Distributions

Answer 1

• lump sum distribution
• an annuity or other form of periodic payment
• a rollover or direct transfer

Question 2

Three conditions for lump-sum distributions to qualify for favorable tax treatment

Answer 2

• the distribution must represent the entire amount of the employee’s benefit in the plan
• an election must be made by the participant (or their estate) within one year of the receipt of the distribution
• The distributions must be due to one of the following:
  1. Death
  2. 59.5
  3. Separation of service
  4. Disability

Question 3

In-Service withdrawal Features

Answer 3

• usually not allowed by a pension plan before 62.

- Profit Sharing may offer earlier, like 59.5.

Question 4

How much of an annuity distribution received from a qualified plan is taxable

Answer 4

it’s taxable as ordinary income to the extent that it exceeds the allocated portion of the employees basis, if any.

Question 5

Survivorship Rules for Pension Plans

Answer 5

• all defined benefit plans must provide two forms of survivorship annuities for spouses: qualified pre-retirement survivor annuity and qualified joint and survivor annuity

Question 6

What is a “direct Transfer”

Answer 6

occurs when the trustee or other custodian who holds the assets making up the participant’s accrued benefits transfers some or all of those assets directly to the trustee or custodian of another retirement plan or IRA

Question 7

Who is the 20% mandatory withholding for?

Answer 7

Qualified plans, including the SIMPLE 401k. It is not for IRA, SEP IRA, or SIMPLE IRA distributions.

Question 8

What cannot be rolled over?

Answer 8

• RMD’s, withdrawals from electing out of automatic contribution arrangements, the return of an excess contributions, and hardship withdrawals

Question 9

What is the Required Beginning Date for an RMD?

Answer 9

April 1 of the year following the year in which the retired plan participant becomes age 72. This is called the “trigger” year

Question 10

Alternative ‘trigger year’ for those who are still working at 72

Answer 10

This is April 1 after the year in which they actually retire. This is for qualified plans only though, no IRA’s.

**however this is not allowed if the participant is a greater than 5% owner, either directly or through family attribution, of the business sponsoring the retirement plan.

Question 11

Rules for Qualified Plan and Sect. 403b Plan Loans

Answer 11

The loans must be repaid within 5 years with interest. The only exception to this rule is when a plan loan is made to allow the participant to acquire a dwelling to be used as principal residence. Repayments must be made in level installments at least quarterly.

Question 12

How much can a plan offer for a loan?

Answer 12

limited to half the vested account balance of the plan participant, not to exceed a dollar cap of $50,000. With loans less than $10,000 the total vested balance is allowed

Question 13

Loan Reduction Rules

Answer 13

The maximum loan balance must also be reduced further by the highest outstanding loan balance the participant had in the one-year period preceding the loan

Question 14

How are loan payments taxed?

Answer 14

Technically they’re taxed twice, the money is taxed when it goes in and then taxed when it comes out. Because the loan interest is considered consumer interest by the IRS, it is nondeductible.

Question 15

Deemed Distributions

Answer 15

Remaining loan balances that aren’t paid after a certain period that cannot be rolled into another retirement plan, governmental 457 plan or an IRA. That means the unpaid loan balance after the allowed period is subject to both income tax and the 10% early distribution penalty rules.

Question 16

the manner in which qualified plan or IRA benefits are distributed depends on:

Answer 16

• is there a designated beneficiary or EDB of the plan or account?
• Have RMDs already begun at the time of the participant-owner’s death?

Question 17

Difference between a beneficiary, designated beneficiary, and EDB

Answer 17

Beneficiary can become the new owner of retirement assets, designated beneficiary is the person whose age and status are used to calculate the RMD and EDBs are people who are eligible to be designated beneficiaries.

Question 18

Who can qualify as an EDB?

Answer 18

surviving spouse

• people not more than 10 years older than the deceased
• a disabled person
• a chronically ill person
• a minor child of the decedent

Question 19

Why does it matter if someone is an EDB?

Answer 19

They can use the persons life expectancy as the factor for RMD’s, rather than the 10 year rule.

Question 20

Date for determining a designated beneficiary:

Answer 20

September 30 of the year following the year of the participant-owner’s death.

Question 21

Who is a nonspouse EDB

Answer 21

someone not more than 10 years younger than the decedent, someone who was chronically ill or disabled on the DOD, or a minor child of the decedent.

Question 22

Death Occuring Before the RBD date for an EDB

Answer 22

The distributions period is the remaining life expectancy of the nonspouse EDB. The age is calculated by using the age of the nonspouse EDB in the year following the year of the decedent’s death, reduced by one for each subsequent year.
- also the 5 year rule or lump sum payment if they want

Question 23

Death Occurring on or After the RBD for an EDB

Answer 23

The distribution must be distributed at least as rapidly as the longer of the remaining life expectancy of the designated beneficiary or the deceased owner’s life expectancy that would have been applicable for RMD purposes.

Question 24

The Situation for a Designated Beneficiary

Answer 24

If the people do not qualify as a EDB, then they are a designated beneficiary, and they must follow the 10 year rule, where the inherited retirement account must be totally gone by Dec 31 in the year containing the 10th anniversary of the decedent’s death

Question 25

Qualifying Trust as a Beneficiary

Answer 25

If a qualifying Trust is named as beneficiary, the beneficiaries of the trust could be treated as their correct categorization

Question 26

What is considered a qualifying trust?

Answer 26

• the trust is valid under state law;
• the trust is irrevocable or will become so on the participants death
• the beneficiaries are identifiable from the trust instrument
• appropriate documentations has been provided to the plan administrator

Question 27

Qualifying Charity as Beneficiary

Answer 27

Fiver year payout is generally required, but it will most likely be emptied much quicker than that.

Question 28

Estate as Beneficiary

Answer 28

An estate is not treated as a designated beneficiary. Benefits payable to the estate have to be distributed under the five-year rule if the death occurs before the RBD

Question 29

All defined contribution plans and defined benefits plans that have minimum funding standards must offer:

Answer 29

• qualified joint and survivor annuity

- qualified preretirement survivor annuities

Question 30

Qualified Joint and Survivor Annuity

Answer 30

An annuity for life of the participant, with a survivor annuity for the life of her spouse that is not less than 50% or greater than 100% of the amount of the annuity payable during the life of the participant

Question 31

Qualified Preretirement Survivor Annuity

Answer 31

Annuity payments for the life of the surviving spouse of the participant must begin no later than the month in which the participant would have reached the earliest retirement age under the plan, and is the actuarial equivalent of not less than half of the participants vested account balance as of the assumed retirement date.

Question 32

QDRO

Answer 32

Settlement under state law relating to child support, alimony, or marital property rights that assigns all or part of a participant’s plan benefits to an alternate payee. Distributions may still be subject to income tax but not the 10% penalty tax

Question 33

In terms of ownership assignment, how does a QDRO or Domestic Relations Order work?

Answer 33

They are able to assign the ownership of part or all of a participant’s balance in the retirement assets.

Question 34

Roth IRA Post-Death Distirbutions

Answer 34

The minimum distribution rules that apply to TIRA’s as if the owner died before RBD age. 5 year clock still counts and the 10% EWP goes away because of death.