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Plan Distributions from A to Z. Ilene H. Ferenczy, Esq. The Law Offices of Ilene H. Ferenczy (404) 320-1100  (404) 320-1105 (fax) [email protected] Agenda. When are payments to participants permitted? Amount of benefit payments from a plan Withdrawals

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Plan Distributions from A to Z

Ilene H. Ferenczy, Esq.

The Law Offices of Ilene H. Ferenczy

(404) 320-1100  (404) 320-1105 (fax)

[email protected]


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Agenda

  • When are payments to participants permitted?

  • Amount of benefit payments from a plan

  • Withdrawals

    • In-service withdrawals from a profit sharing plan

    • Hardship withdrawals

    • Withdrawal pursuant to a QDRO


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Agenda (cont’d.)

  • Distributions

    • Required distribution forms

      • Defined

      • Notice requirements

    • Alternate distribution forms

    • Distributions on employment termination

    • When no participant consent is needed


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Agenda (continued)

  • Taxation

  • Rollovers

  • Withholding

  • Required minimum distributions



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When Are Payments Permitted?

  • Pension Plans

    • Distributions are permitted only upon:

      • a severance from service,

      • attainment of retirement age or, if earlier, age 62,

      • death,

      • disability

    • No in-service withdrawals (except in regard to above)


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When Are Payments Permitted?

  • Profit Sharing Plans: payments to participants may occur upon:

    • Termination of employment

    • Death

    • Disability


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When Are Payments Permitted?

  • Profit Sharing Plans: payments to participants may occur:

    • After a fixed number of years

      • 2 year/5 year rules

    • Attainment of stated age (e.g., age 59½)

    • Occurrence of a stated event (e.g., layoff, illness, hardship)


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When Are Payments Permitted?

  • Special rule for 401(k) deferrals: may distribute only upon:

    • Retirement Age 59½

    • Severance from Hardship

      Service Termination of

    • Disability plan if certain

    • Deathconditions are met


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When Are Payments Permitted?

  • Designated Roth Contribution Accounts are subject to same rules as 401(k) deferrals:

    • Retirement Age 59½

    • Severance from Hardship

      Service Termination of

    • Disability plan if certain

    • Deathconditions are met


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When Are Payments Permitted?

  • Special situations:

    • A plan may (but is not required to) permit withdrawal anytime of:

      • After-tax employee contributions (other than designated Roth contributions)

        • If after-tax contributions are mandatory, withdrawal can cause forfeiture of employer contributions

      • Employee rollover contributions


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When Are Payments Permitted?

  • Special situations:

    • Corrective payments

      • E.g., refunds of salary deferrals or payment of matching contributions due to exceeding limits or failure of nondiscrimination testing


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Special 401(k) Plan Distribution Issues

  • There are two situations in which payments of salary deferrals may be problematic:

    • When the plan is terminated; and

    • When a subsidiary participates in a plan sponsored by the parent and the stock of the subsidiary is sold


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Special Limitation on Distributions From Terminated 401(k) Plans

  • The rule: A terminated 401(k) plan may pay out 401(k) deferrals and qualified nonelective contributions only if there is no “alternative defined contribution plan”


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Special Limitation on Distributions From Terminated 401(k) Plans

  • Alternative defined contribution plan:

    • Any DC Plan other than ESOP, SEP, SIMPLE, 403(b), 457 plan

    • Sponsored by same employer

    • In existence between date of termination and 12 months after distribution of all assets from the terminated plan


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Alternative Defined Contribution Plan - Example Plans

  • Chris’s Chiropractic Offices has two locations: one in Los Angeles and one in Atlanta

  • CCO sponsors two plans: a 401(k) plan for the L.A. office and a regular profit sharing plan for the Atlanta office


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Alternative Defined Contribution Plan - Example Plans

  • CCO decides to terminate the 401(k) plan and move all participants into the profit sharing plan

  • The profit sharing plan is an alternative defined contribution plan:

    • Sponsored by the same employer

    • Not a SEP, SIMPLE, ESOP, 403(b), or 457(b) plan


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Alternative Defined Contribution Plan - Example Plans

  • CCO cannot pay out the salary deferrals from the terminated 401(k) plan

    • The 401(k) plan must be frozen; or

    • The deferrals must be transferred to the profit sharing plan (and subjected to the 401(k)-style payout rules)

    • Note: the 401(k) plan may pay out profit sharing or matching contributions, so long as they are not QNECs or QMACs


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Common M&A Problem When a Subsidiary Is Purchased Plans

  • Example:

    • CCO sponsors its profit sharing plan for all employees

    • CCO acquires the stock of another chiropractic practice, Minnie’s Chiropractic Office (MCO), which sponsors a 401(k) plan for its employees

    • CCO would like to terminate the MCO plan and have the MCO employees participate in its profit sharing plan


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Common M&A Problem When a Subsidiary Is Purchased Plans

  • Example:

    • Because MCO is now part of the CCO controlled group, its plan is sponsored by the same “employer”

    • As a result, the profit sharing plan sponsored by CCO is an alternate defined contribution plan


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Common M&A Problem When a Subsidiary Is Purchased Plans

  • Example:

    • Result: the 401(k) plan may not make distributions of the salary deferrals or QNECs or QMACs of the MCO employees (except those who terminate employment)

    • Plan must freeze or accounts must be transferred


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Some Ways to Get Out of the 401(k) Payout Problem … Plans

  • Alternative defined contribution plan:

    • Sponsored by same employer

      • Determined on date of termination of the 401(k) plan

        • Date of termination is the date the action is taken to terminate the plan (usually Board resolution or plan amendment)


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Some Ways to Get Out of the 401(k) Payout Problem … Plans

  • Alternative defined contribution plan:

    • If a plan is terminated in anticipation of and before an acquisition of the sponsor by another company, no alternative defined contribution plan exists at the time of termination

      • E.g., if MCO had terminated its plan before CCO acquired the company, there would have been no alternative DC plan on the date of termination


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Some Ways to Get Out of the 401(k) Payout Problem … Plans

  • Alternative defined contribution plan:

    • Result: the termination may be processed and the deferrals and QNECs and QMACs may be paid to the participants, even if the actual payout occurs after the acquisition

    • Note: remember that payments from a terminated plan must occur within a reasonable time after the termination, or the plan is deemed to be frozen, not terminated


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Another Way to Get Out of the 401(k) Payout Problem … Plans

  • Exception to limitation on distributions from terminated plans:

    • 2% Rule:

      • Distribution is permitted if less than 2% of participants from old plan participate in the “alternative DC plan” during 24-month period beginning 12 months before plan termination

      • Permits distributions to people who will not participate in the alternative DC plan


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2% Rule Example Plans

  • Going back to our original facts: CCO sponsors two plans, a 401(k) plan for L.A. and a profit sharing plan for Atlanta

  • CCO is really peeved at the L.A. office, because they are making no profit. As a result, they want to terminate the L.A. plan. The L.A. employees will not participate in the Atlanta plan.


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2% Rule Example Plans

  • Note: the Atlanta plan will need to meet Section 410(b) coverage rules to exclude the L.A. people

    • Assume for purposes of this example that it can do so

  • It is not expected than anyone from L.A. will transfer to Atlanta


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2% Rule Example Plans

  • Because:

    • No one (i.e., less than 2% of the participants) from L.A. participated in the Atlanta plan during the 12 months before the termination

    • No one (i.e., less than 2% of the participants) will transfer from L.A. to Atlanta in the 12 months after the termination,

  • The Atlanta Plan is not an alternative defined contribution plan


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2% Rule Plans

  • On a practical basis, this rule usually does not help much

    • In an acquisition, it is more common for buyers to want the newly acquired employees to participate in their plans – part of integrating the new group


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Latest Date for Plan-Initiated Distribution Plans

  • Plans are required to permit distributions not later than the 60th day after the end of the plan year in which the latest of the following occurs:

    • Attainment of normal retirement age

    • The 10th anniversary of the participant’s plan entry date; or

    • The participant’s termination of employment


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Normal Retirement Age Plans

  • Latest permitted normal retirement age is the later of:

    • Age 65

    • Fifth anniversary of plan entry date


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Early Retirement Age Plans

  • Not required to be in plan

  • Usually requires combination of attainment of a given age (e.g., 55) and completion of years of service (e.g., 10)

  • Usually provides for lower benefit than that available at normal retirement but sometimes greater than would be payable upon another termination of employment


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Late (Delayed) Retirement Age Plans

  • A participant may continue working past the normal retirement age, and begin taking distributions when actual retirement occurs

  • However, see rules for required minimum distributions later in presentation for limitations of ability of a participant (particularly a more-than-5% shareholder) to delay receipt of benefits



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Amount of Benefits Payable from a Defined Contribution Plan Plans

  • Generally, the participant’s benefit is equal to the account balance times vested interest

  • All or a part of the benefit may be payable, depending on the event causing a distribution


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Amount of Benefits Payable from a Defined Benefit Plan Plans

  • Generally, the benefit is defined as an annuity payable monthly beginning at retirement, and usually for life

  • Vesting applies


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Amount of Benefits Payable from a Defined Benefit Plan Plans

  • Plan may permit benefit payment at other time or in different form

    • Value is the same as the benefit earned to date (“actuarial equivalent”)

  • The actual amount of the payment may be for only part of the benefit, depending on the reason for the payment


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Amount of Disability Benefit Plans

  • DC plan: usually 100% vest the account balance

  • DB plan: may be:

    • Accrued benefit (often 100% vested) payable at disability date

    • Benefit in addition to retirement benefit, to be paid during disability period until normal retirement, and then retirement benefit kicks in

    • Other


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Amount of Death Benefits Plans

  • DC plan: usually 100% vest the account balance

  • DB plan: see QPSA discussion below



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Profit Sharing Plans May Permit Withdrawals Plans

  • Stated age

    • E.g., age 59½

  • Stated event

    • E.g., hardship, sale of the plan sponsor


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Profit Sharing Plans May Permit Withdrawals Plans

  • After a fixed number of years:

    • Contributions have been in the plan for two years; or

    • The individual has been a participant for at least 60 months



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Hardship Withdrawals Plans

  • Must be permitted in the plan

  • Profit sharing plans permitted to have significant flexibility in defining what constitutes a “hardship”

  • 401(k) deferrals, however, cannot be distributed on hardship unless the hardship qualifies under special rules

  • All hardship rules must be applied in nondiscriminatory fashion


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401(k) Hardship Withdrawals Plans

  • Must be applied uniformly

  • Subject to two-part test:

    • Must be a withdrawal to meet an immediate and heavy financial need (i.e., “events test”)

    • Withdrawal must be necessary to satisfy that need (i.e., “needs test”)


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401(k) Hardship Withdrawals Plans

  • Event Test

    • General Standard: facts and circumstances requiring plan administrator investigation

    • Safe Harbor Standards: must be one of the following:

      • Payment of certain unreimbursed medical expenses for participant, spouse, dependents

      • Purchase of a primary residence for participant

      • Payment of post-secondary education expenses for the next year for participant, spouse, dependents


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401(k) Hardship Withdrawals Plans

  • Event Test

    • Safe Harbor Standards (cont’d.):

      • Payments necessary to prevent eviction from or foreclosure on participant’s primary residence

      • Payments to repair casualty losses on home due to disaster

      • Funeral expenses


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401(k) Hardship Withdrawals Plans

  • Needs Test

    • General Standard:

      • Facts and circumstances requiring plan administrator investigation

      • Amount cannot exceed hardship plus gross-up for taxes


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401(k) Hardship Withdrawals Plans

  • Needs Test – General Standard

    • Plan administrator may accept participant certification that need cannot be met through:

      • Reimbursement by insurance or other compensation

      • Liquidation of employee’s assets

      • Cessation of 401(k) or after-tax contributions to the plan

      • Distributions or loans from plan

      • Loan from commercial lender under commercially reasonable terms

    • Note: this cannot be accepted as a proxy for facts and circumstances determination if the plan administrator has actual knowledge to the contrary


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401(k) Hardship Withdrawals Plans

  • Needs Test

    • Safe Harbor Standards

      • Distribution meets amount requirements described above

      • Employee has obtained all other available plan distributions and available loans

      • Deferrals and after-tax contributions to this and any other employer plans are suspended for six months after hardship distribution is received


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Amount of 401(k) Hardship Plans

  • May withdraw only:

    • Salary deferrals

    • Earnings earned through the end of plan year ending immediately before 7/1/89

  • May not withdraw:

    • Other earnings

    • QNECs, QMACs, safe harbor contributions


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Example Plans

  • The plan administrator has the following information about Margaret, who wants a hardship withdrawal:

    • Account balance as of 12/31/88: $3,250

    • Salary deferrals 1/1/89–12/31/07: $9,200

    • 401(k) account as of 12/31/07: $9,072

    • Hardship taken in 1995 $4,000

      Question: what hardship withdrawal may be taken by Margaret at this time?


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Example Solution Plans

  • Available for Hardship:

    • Deferrals and earnings as of end

      of plan year before 7/1/89 $ 3,250

    • Deferrals after 12/31/88 $ 9,200

      Total $12,450

    • Less: hardship withdrawal taken

      previously ( 4,000)

      Remaining amount available

      for hardship $ 8,450



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What Is a QDRO? (QDRO)

  • Generally, a court order

  • Must relate to alimony, child support, or other property settlement rights (including community property rights)

  • Usually related to divorce, but not required

  • Meets Code requirements


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Purpose of QDRO (QDRO)

  • Assigns rights in participant’s benefit under an employer plan to an “alternate payee”

  • Alternate payee may include:

    • Participant’s spouse

    • Participant’s former spouse

    • Participant’s child

    • Participant’s dependent


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QDRO Must Contain (QDRO)

  • Identity of:

    • Participant

    • Alternate payee

    • Plan

  • Benefits being provided to alternate payee

  • When the benefits are to be paid

  • If benefits are periodic, for how long the benefits will be paid to the alternate payee


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QDRO Cannot (QDRO)

  • Provide a benefit to the alternate payee in excess of what is due to the participant

  • Elect a payment form not available under the plan

  • Elect benefit timing not available under the plan


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Special QDRO Payment Timing (QDRO)

  • QDRO may permit alternate payee to withdraw benefit while the participant is employed by the plan sponsor and ineligible to receive the benefit if the plan so permits


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QDRO Procedures (QDRO)

  • A plan must have procedures explaining how it will review a proposed QDRO and report to the participant and alternate payee about whether the proposed QDRO is found to meet the requirements

  • Procedures must be provided to the participant and the alternate payee when a proposed QDRO is received by the plan



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Required Forms of Distribution During the Participant’s Lifetime

  • Pension Plans:

    • Married participants must receive benefits in the form of a “qualified joint and survivor annuity” unless:

      • they elect otherwise; and

      • have written, witnessed, spousal consent

    • Single participants must receive benefits in the form of a life annuity unless they elect otherwise


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Required Forms of Distribution if Participant Dies While Working

  • Pension Plans:

    • If a married participant dies after benefits were payable but before benefits begin, surviving spouse receives “qualified preretirement survivor annuity”

    • If single participant, no required death benefit


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Qualified Joint and Survivor Annuity Working

  • Defined: annuity payable over the life of the participant and the spouse under which surviving spouse’s benefit is equal to between 50% and 100% of benefit paid while the participant was alive

    • E.g., monthly benefit of $1,000 is payable while both are alive. Once participant dies, surviving spouse receives monthly benefit of $500


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Required QJSA Distribution Form Working

  • Does not apply if the participant’s benefit value is $5,000 or less

    • Plan may require that the benefit be distributed:

      • In a lump sum to the participant

      • In a single sum rollover to an IRA for the participant’s benefit


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Qualified Preretirement Survivor Annuity Working

  • Defined: the death benefit payable to a surviving spouse of a participant who could have terminated employment and taken a benefit from the plan but continued to work and died while in service


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Qualified Preretirement Survivor Annuity Working

  • Value:

    • In a defined benefit plan, equal to benefit amount that the surviving spouse would have received had the participant retired on the day before his death, took the qualified joint and survivor annuity, and then died the next day

    • Because an unmarried participant’s benefit is paid as a life annuity, there is no death benefit, so the QPSA is $0


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Qualified Preretirement Survivor Annuity Working

  • Value:

    • In a defined contribution plan, equal to an annuity purchased for the survivor with a value of not less than 50% of the participant’s account balance at death


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Qualified Preretirement Survivor Annuity Working

  • Note: the plan may provide for a larger death benefit, and any additional benefit can go to a beneficiary other than the surviving spouse

  • Plans not subject to QPSA rules can also provide a death benefit, either in annuity form or other form


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Required Forms of Distribution Working

  • Profit Sharing Plans (including 401(k))

    • Must provide QJSA and QPSA unless:

      • the plan does not offer annuity options or the participant does not select an annuity form

      • Beneficiary of any death benefit is the participant’s spouse unless alternative beneficiary is elected with witnessed spousal consent


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Required Forms of Distribution Working

  • Profit Sharing Plans (including 401(k))

    • If the profit sharing plan is the recipient of transferred benefits from a pension plan, must protect QJSA/QPSA rights for those accounts


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Distribution Notice Working

  • Notice rules

    • Participants must be notified of QJSA rights within 30-180 day period before distributions commence (i.e., the “annuity starting date”)

    • Participant may waive 30-day period, but must be able to revoke the election for seven days


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QJSA Notice Rules Working

  • Notice must be in nontechnical language and include:

    • Right to receive QJSA

    • Right to select other benefit

    • Spousal consent rights

    • Terms and conditions of QJSA

    • Right to waive QJSA and effect

    • Information on other options (material features and relative values)


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Waivers of QJSA or QPSA Working

  • Waivers of the QJSA or QPSA must have written consent of spouse

    • Witnessed by plan representative or notary public

    • Many practitioners recommend that plan representatives not witness consents for liability reasons


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Waivers of QJSA or QPSA Working

  • Types of Waiver/Consent

    • General waiver: allows participant to elect any form of benefit (for QJSA) or any beneficiary (for QPSA) and to change in the future without additional consent

      • Must state that the spouse has the right to consent to a specific waiver instead of a general waiver


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Waivers of QJSA or QPSA Working

  • Types of Waiver/Consent

    • Specific waiver: consents only to a specific nonspouse beneficiary (and later changes need new spousal consent)


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Waivers of QJSA or QPSA Working

  • No spousal consent needed for waiver to be effective if:

    • Spouse has legally abandoned the participant

    • Legal separation

  • Consent must be after marriage – prenuptial agreements are not valid


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Waivers of QJSA or QPSA Working

  • If QPSA waived before age 35, it is automatically reinstated at age 35 and must be re-waived thereafter


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Waivers of Nonspouse Beneficiary in Non-QJSA PS Plan Working

  • Need spousal consent for nonspouse beneficiary

  • Consent rules are similar to QJSA/QPSA rules

  • Do not need spousal consent for distribution to participant (i.e., nothing comparable to QJSA waiver needed)


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When No Participant Consent Is Required for Distribution Working

  • Participant’s benefit is valued at $1,000 or less (cash-out provision)

  • Participant’s benefit is valued at more than $1,000 but not more than $5,000 if the plan automatically rolls over such amount to an IRA for the participant

  • Terminating defined contribution plans if no other defined contribution plan is maintained

  • ESOP dividends


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If Participant Waives QJSA, What Other Options Are There? Working

  • A plan subject to the QJSA rules must also offer an Alternate Joint and Survivor Annuity

    • If QJSA is 50%, need to provide 75% Alternate JSA

    • If QJSA is more than 50%, need to provide 50% Alternate JSA

    • Effective as of 1/1/08


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If Participant Waives QJSA, What Other Options Are There? Working

  • A plan may provide one or more alternative distribution schemes for the participant to select among

  • Examples:

    • Lump sum

    • Alternate annuities over the participant’s lifetime or joint lifetimes with beneficiary, with or without minimum guarantees


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If Participant Waives QJSA, What Other Options Are There? Working

  • Examples:

    • Series of payments

      • over a stated period of time

      • over the participant’s life expectancy

      • over the joint life expectancies of the participant and a designated beneficiary

    • Combinations of the above


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If the Plan Is Not Subject to QJSA Working

  • Alternate forms of benefit may be provided for the participant to choose among

    • No annuities (would subject the plan to QJSA rules)

    • Periodic payments for life expectancy (or joint life expectancies of participant and beneficiary) are permissible


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When No Participant Consent Is Required for Distribution Working

  • Note: in determining whether the account exceeds the threshold amounts discussed on prior slides, can disregard rollover accounts if plan so permits


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Distributions on Termination Before Retirement Working

  • Generally, plan cannot force distributions prior to normal retirement age

    • Earlier distribution needs participant consent

  • Play maypermit participants to take distributions upon termination of employment


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Participant Consent to Early Distribution Working

  • Plan cannot impose a “significant detriment” on participant’s right to refuse early distribution

    • Valid business reasons

    • Cannot:

      • Offer less valuable investment options

      • Limit in-service distributions

      • Force participants to wait until age 65 if immediate distribution not elected


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Participant Consent to Early Distribution Working

  • Plan may charge participants who have terminated for expenses that the plan pays in relation to current employees

    • Must be reasonable allocation of proper expenses

    • Must meet ERISA rules

    • Must be nondiscriminatory


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Distributions on Termination Before Retirement Working

  • Plan may provide for automatic rollover to an IRA if vested interest is $5,000 or less if participant does not elect a distribution

    • Plan may not cash out amounts in excess of $1,000 if no automatic rollover is permitted


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Distributions on Termination Before Retirement Working

  • If participant’s benefit is more than $1,000 and is distributable upon the participant’s election:

    • The participant must receive notice between 30 and 180 days before payments begin

    • Participant can waive 30-day period if:

      • Told that he or she has 30 days to consider

      • Plan permits


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Distributions on Termination Before Retirement Working

  • If participant’s benefit is more than $1,000 and is distributable upon the participant’s election:

    • Notice must provide information about optional forms of benefit distribution, the relative value of such options, and the right to keep money in the plan until normal retirement age or beyond



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General Taxation Rule Working

  • Payments from qualified retirement plans are taxed as ordinary income in the year received

    • No “constructive receipt” before actual payment


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Exceptions to General Rule Working

  • After-tax contributions:

    • Return of after-tax contributions is considered “basis” and is not taxed on receipt

    • Payment of earnings on after-tax contributions is taxable as ordinary income

    • Payments are generally required to contain a pro-rata share of earnings


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Exceptions to General Rule Working

  • Designated Roth Contributions:

    • Return of contributions is considered “basis” and is not taxed on receipt

    • Certain distributions are “qualified”: earnings are not taxed on receipt

    • Nonqualified distributions: earnings are taxable as ordinary income


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Exceptions to General Rule Working

  • Designated Roth Contributions:

    • Qualified distribution: both:

      • On or after:

        • Attainment of age 59½

        • Disability; or

        • Death; and

      • After the end of the year containing the 5th anniversary of the first designated Roth contribution to the plan


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Deferral of Taxation Working

  • Participant may defer taxation on retirement benefits by:

    • Delaying distribution from the plan (taxed only on receipt)

    • Roll over to another tax-sheltered vehicle:

      • Another “eligible retirement plan”

      • IRA

      • If rollover occurs, no tax until amount is distributed from the IRA


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Premature Distribution Tax Working

  • General rule: if participant is under age 59½ when taxable amount is received, subject to an additional 10% tax


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Premature Distribution Tax Working

  • Exceptions:

    • Death, disability

    • Part of a series of substantially equal payments made for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary


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Premature Distribution Tax Working

  • Exceptions:

    • Made to an employee after separation from service after attainment of age 55

    • Alternate payees under QDROs

    • To qualified reservists called to active duty

    • To qualified public safety employees from government plan


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Rollovers Working


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What Is a Rollover? Working

  • A payment that is deposited to another qualified retirement plan or IRA

    • Can be direct (trustee-to-trustee) or indirect (trustee-to-participant-to-trustee)

  • Effect: amount is not taxed to the participant until it is distributed from the rollover account


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Rollover vs. Plan-to-Plan Transfer Working

  • Rollover:

    • Employee initiated (except for automatic rollover for missing or nonresponsive participant)

    • Constitutes a payment by the plan and is an alternative to the employee taking the funds and paying taxes


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Rollover vs. Plan-to-Plan Transfer Working

  • Plan-to-plan transfer:

    • Initiated by the plan sponsor or administrator

    • Usually part of spin-off/merger of plan with another plan

    • Participant may not elect to take a payment


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Eligible Rollover Distribution Working

  • Any payment to employee or surviving spouse may be rolled over unless excepted by law or regulation

  • There is also a procedure where a nonspouse beneficiary may request a plan-to-plan transfer of the death benefit from the plan to an inherited IRA

    • Often called a “nonspouse rollover” although this is a misnomer


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Eligible Rollover Distribution Working

  • Exceptions:

    • Series of periodic payments made for life or 10 or more years

    • Minimum required distributions

    • Refunds of 401(k) amounts

    • Hardships


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Eligible Rollover Distribution Working

  • Exceptions:

    • Dividends on employer stock

    • Deemed loan distributions (not offsets)

    • P.S. 58 costs

    • Permissible withdrawals from an eligible automatic contribution arrangement


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Eligible Rollover Distribution Working

  • What constitutes a “series of periodic payments”

    • Disregard contingencies (e.g., death, Social Security supplements)

    • Determined at commencement

    • If amount changes, redetermine based on future years only

    • Do not redetermine on death


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What Plans Can Receive Rollovers? Working

  • “Eligible Retirement Plans” that may receive rollovers:

    • IRA – traditional or Roth

    • 403(b) plans

    • Tax-qualified plans

    • Eligible 457(b) plans (governmental deferral plans)


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Types of Rollovers Working

  • Direct:

    • Participant elects rollover

    • Trustee of distributing plan transfers funds to trustee of recipient plan

  • Indirect:

    • Distribution paid to participant (less withholding)

    • Participant deposits distribution (and amount equal to withheld amount, if desired) to an IRA or other eligible retirement plan within 60 days


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Direct Rollover Working

  • Manner of effecting a direct rollover:

    • Wire

    • Check mailed to recipient plan

    • Check payable to plan given to employee

  • Plan must permit split elections

    • Can limit minimum rollover to $500

  • Plan may refuse to make direct rollover of less than $200


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Rollovers Working

  • Plans receiving rollovers:

    • Not required to accept rollovers

      • Can limit to rollovers for certain kinds of plans or funds

      • Must amend plan to accept rollover of after-tax money, and must separately track contributions and related earnings


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Rollovers Working

  • Distributing plan

    • Can have any reasonable procedures

    • Can require documentation from receiving plan

      • OK to get statement that receiving plan will accept rollover, or

      • OK to require statement that receiving plan is an eligible rollover plan


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Rollovers Working

  • Distributing plan

    • Cannot have procedures to reduce or eliminate ability of participants to make rollovers

      • Impermissible

        • Require opinion of counsel

        • Require agreement to return if mistakes

        • Indemnification


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Rollovers Working

  • Distributing plan

    • Cannot have procedures to reduce or eliminate ability of participants to make rollovers

      • Can require deadline, after which cannot revoke rollover election (but not less than 30 days)

      • May, but are not required, to allow rollover of loans


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Rollovers Working

  • Plans receiving rollovers:

    • Receiving plan’s qualification will not be affected if it reasonably concludes the distributing plan was qualified

      • Receiving plan does not have to consider “protected benefits”

    • May accept rollovers from employees who have not yet completed eligibility requirements


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Notice of Rollover Rights from Distributing Plan Working

  • Must be in writing

  • Contents:

    • Explanation of rollover rules and tax rules (and default rules)

  • Must provide notice between 30 and 180 days prior to distribution

    • Participant can waive 30-day notice period to get distribution earlier, but may take full 30 days to consider


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Automatic Rollovers – Plan Initiated Working

  • Plan may provide for automatic rollover to IRA of amounts greater than $1,000 and not more than $5,000 unless participant elects a distribution


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Automatic Rollovers – Plan Initiated Working

  • Permits Plan Administrator to “cash out” vested amounts between $1,000 and $5,000 upon participant termination

    • Amounts of $1,000 or less can be cashed out in lump sum to participant

    • Amounts of $5,000 or less are not subject to QJSA/QPSA rules or spousal consent rules


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Automatic Rollovers – Plan Initiated Working

  • Plan Administrator must select an IRA custodian

    • must be a regulated financial institution

  • Plan Administrator must choose an investment for the IRA

    • must be designed to preserve principal and provide a reasonable rate of interest taking into account fees and expenses associated with the IRA


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Automatic Rollovers – Plan Initiated Working

  • Plan Administrator must enter into written agreement with IRA custodian that provides:

    • custodian is a regulated financial institution

    • custodian will invest IRA assets to preserve principal and provide reasonable rate of return

    • fees and expenses will be reasonable


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Automatic Rollovers – Plan Initiated Working

  • Plan Administrator must describe the plan’s automatic rollover provisions in the SPD


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Automatic Rollovers – Plan Initiated Working

  • Missing participant: Department of Labor requires a plan to take at least the following steps to find a missing participant:

    • Mail the distribution forms to the participant via certified mail

    • Check related plan records for address information


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Automatic Rollovers – Plan Initiated Working

  • Missing participant: Department of Labor required steps (cont’d.):

    • Check with participant’s beneficiary for participant’s location

    • Make use of IRS or Social Security letter- forwarding services


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Withholding Working


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Withholding Working

  • Mandatory for eligible rollover distribution unless directly rolled over

    • If split election, withholding only applies to amount distributed

    • Plan loan offset/employer securities

      • Withhold to extent of other property and cash

      • Net unrealized appreciation in employer stock not subject to withholding


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Withholding Working

  • No withholding on payments if less than $200

  • Amount of mandatory withholding: 20% of amount distributed that is taxable


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Voluntary Withholding Working

  • Applies to all payments that are not eligible for rollover (e.g., hardships)

  • Withholding applies unless waived by participant

  • Amount:

    • If single sum distribution: 10%

    • If periodic distribution: subject to withholding tables


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Required Minimum WorkingDistributions


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Required Minimum Distributions Working

  • Applies to participants who are over age 70½ or who die with benefits in the plan


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Required Minimum Distributions Working

  • Lifetime Distributions

    • Required Beginning Date:

      • April 1st following calendar year in which Participant has both terminated employment and attained age 70½

      • A 5% owner of the plan sponsor cannot delay these distributions past age 70½

      • Grandfather rules apply for certain elections made in 1987 and 1988


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Required Minimum Distributions Working

  • If the required minimum distribution is not made, the affected participant is subject to an excise tax equal to 50% of the amount that should have been distributed


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Required Minimum Distributions Working

  • Amount of Lifetime Distribution:

    • Account as of Valuation Date in prior year, as adjusted, divided by rate from Uniform Lifetime Table in Treas. Reg. §1.401(a)(9) – 9, Q&A-2

      • Exception: spouse is sole beneficiary and is more than 10 years younger than the participant – use Table in Q&A-3


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Required Minimum Distributions Working

  • Distributions after death

    • Depends on whether there is a Named Beneficiary

    • Named Beneficiaries include:

      • Individual

      • Individual beneficiaries of a trust that meets certain requirements

      • By participant or by plan terms


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Required Minimum Distributions Working

  • Distributions after death

    • If no named beneficiary: full distribution required by end of 5th year following year of death


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Required Minimum Distributions Working

  • Distributions after death

    • If named nonspouse beneficiary:

      • 5-year rule; or

      • Distributions start by end of year following year of death and are spread over beneficiary’s life


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Required Minimum Distributions Working

  • Distributions after death

    • If named spouse beneficiary:

      • 5-year rule; or

      • Distributions start by end of year following year of death and are spread over beneficiary’s life; or

      • Distributions delayed until participant would have attained age 70-1/2, and then spread over beneficiary’s life


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Required Minimum Distributions Working

  • Amount of minimum distributions:

    • If 5-year rule applies: anything, so long as the account is emptied by the end of the 5th year


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Required Minimum Distributions Working

  • Amount of minimum distributions:

    • If using periodic distributions: adjusted account balance divided by rate on tables in Treas. Reg. 1.401(a)(9)-9

      • After first year, if participant or spouse, use rate at actual age

      • After first year, if other beneficiary, use rate for prior year minus 1


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Questions? Working


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Contact Information WorkingIlene H. Ferenczy

Law Offices of

Ilene H. Ferenczy, LLC

2200 Century Parkway, Suite 560

Atlanta, Georgia 30345

(404) 320-1100 x 102 (V)

(866) 515-5140 (toll free)

(404) 320-1105 (F)

[email protected]


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