IRS limits planning for lump-sum distributions.Often a client wants to use lumpsum treatment for only a portion of a plan balance. IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. Letter Ruling 9025092 seemed to offer a good opportunity for doing just that. The Service ruled that a distribution of a participant's remaining account balance, after a portion of the plan's assets was transferred to another plan, was a qualified total distribution and a lump-sum distribution Lump-Sum Distribution A one time payment for the entire amount due, rather than breaking payments into smaller installments. Some lump-sum distributions receive special tax treatment. if the participant was over age 59 1/2. Unfortunately, this ruling has now been revoked by Letter Ruling 9139031. Taxpayers who were relying on the earlier ruling may run into problerns. Facts Companies N and M merged. Both companies had maintained profit-sharing retirement plans with a cash or deferred arrangement (CODA (1) A distributed file system developed at Carnegie Mellon University in the late 1980s. Evolving from the Andrews File System, Coda is noted for its ability to withstand network failures. See AFS. (2) A software company based in the U.K. ). To simplify administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. , the CODA portion of N's profit-sharing plan Profit-Sharing Plan A plan that gives employees a share in the profits of the company. Each employee receives into an account, a percentage of those profits based on their earnings. Also known as "deferred profit-sharing plan" or "DPSP". was transferred to M's profit-sharing plan. The N profit-sharing plan was then terminated and the remaining assets were distributed to the plan's participants. N requested rulings on whether the distribution of plan assets would e a qualified total distribution or a lumpsum distribution for participants who were 59 1/2 at the date of distribution. Original ruling The IRS originally ruled that a total distribution of plan assets on termination, after a portion had been transferred to another plan, was a qualified total distribution and a lump-sum distribution for participants over 59 1/2. The Service relied on Sec. 402(a)(5)(e)(i)(1), which provides that "qualified total distribution" includes a total distribution of a participant's account balance made on account of a plan termination Plan termination for ERISA defined benefit pension plans, is either the voluntary act of a pension plan sponsor who no longer believes that the costs of providing the pension outweighs its benefits, or the involuntary termination by the PBGC when the federal pension agency believes , and Sec. 402(e)(4)(a), which provides that "lump-sum distribution" includes a total distribution of a participant's account balance after the participants attains age 59 1/2. New ruling The IRS did not congder Rev. Rul 72-242 in its original letter ruling. In Rev. Rul. 72-242, the Service concluded that a participant receiving a total distribution of plan assets immediately following a transfer of 50% of his account balance to another qualified plan was not receiving a total distribution of his account balance. A participant's accumulated ac·cu·mu·late v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates v.tr. To gather or pile up; amass. See Synonyms at gather. v.intr. To mount up; increase. account balance prior to separation from service was unchanged by the transfer of assets The conveyance of something of value from one person, place, or situation to another. The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. immediately before retirement. Therefore, participants receiving their entire posttransfer account balances in the plan would not be treated as having received a total distribution of plan assets. The IRS'S current position, as stated in Letter Ruling 9139031, is that a participant's accumulated account balance is determined immediately before the transfer of plan assets. Since the participants in the N plan would receive their account balances after the transfer of the CODA portion of plan assets, the distributions would be neither qualified total distributions for Sec. 402(a)(5)(e) purposes nor lumpsun distributions for Sec. 402 e 4 A u oses. |
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