Rollover of qualified plan benefits - importance of form.A recent Tax Court case, Rodini, 105 TC No. 3 (1995), illustrates the importance of form in successfully rolling over distributions from a qualified retirement plan.
The taxpayers were formerly married and resided in California, a community property state. Divorce proceedings began in 1985, and were finalized on Dec. 31, 1988. The husband was a shareholder, director and employee of a farming operation incorporated in California, and participated in the farm's profit-sharing and defined benefit pension plans. In 1986, on termination of the 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". , the husband elected to receive his vested benefits vested benefits
Pension benefits that belong to an employee independent of his or her future employment. An employee usually becomes vested after five years of employment with the same firm, although there are numerous exceptions requiring longer employment. in a lumpsum payment that included a community property component and a separate property component. The couple's Marital Settlement Agreement, executed in 1988, provided that the wife was to receive the community property portion of the profit-sharing payment. The husband transferred the entire distribution to his wife, who within 60 days used the money to establish two separate rollover individual retirement accounts (IRAs). The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. determined that such transfers of the funds were not qualified rollovers.
Under Sec. 402(a)(1), a distribution from a qualified employees' trust is taxable to the distributee in the year of distribution. Sec. 402(a)(5)(A) provides an exception for certain rollovers by an employee, and Sec. 402(a)(6)(F) provides another exception for rollovers of distributions pursuant to qualified domestic relations orders (QDROS). The court held that the Sec. 402(a)(5) exception applies only to rollovers to IRAs established for the exclusive benefit of the employee who received the 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. . Further, the lump-sum distribution did not meet the requirement of Sec. 402(a)(5)(F), that the distribution must be made pursuant to a QDRO See Qualified Domestic Relations Order. , because the settlement agreement was entered into several years after the distribution of the profit-sharing plan.
Because the transfers did not comply with the requirements for a tax-free rollover under Sec. 402(a)(5)(A) or (a)(6)(F), the lumpsum distributions were gross income to the husband subject to excise tax Excise Tax
1. An indirect tax charged on the sale of a particular good.
2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS.
1. under Sec. 72(t). In addition, the wife was liable for excise taxes for excess contributions to an IRA Ira, in the Bible
Ira (ī`rə), in the Bible.
1 Chief officer of David.
3 Two of David's guard.
IRA. under Sec. 4973(a). Although the rollover rules have changed somewhat from the provisions involved in the case, the underlying principles should continue under present law.