Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

281

 Corrective distributions of excess deferral amounts (including income thereon) made to comply with the elective deferral limits of Reg. § 1.402(g)-1(e)(3) and the cash-or-deferred plan rules. A-4(b), (c).

 Plan loans that are treated as deemed distributions under § 72(p). A-4(d). See ¶ 2.1.07 (A).

 Dividends paid on employer securities as described in § 404(k) . A-4(e). See also Reg. § 1.402A-1 , A-11.

 The deemed income resulting from plan-owned life insurance. A-4(f). See ¶ 2.1.04 (H).

 The deemed income resulting from a prohibited transaction. A-4(g).

 “Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin.” A-4(h). The never-qualified category is needed to prevent game-playing. For example, if excess contributions (and earnings thereon) could be distributed tax-free as long as the participant had met the five-year and triggering event tests, then everyone over 59½ with five years of DRAC participation would have an incentive to transfer all his wealth into his DRAC. That would be an excess contribution, but any penalties could be avoided by distributing the excess contribution (and earnings thereon) back to himself by a certain deadline (see ¶ 2.1.08 (D)); and if there were no income tax on the distributed earnings the participant would have done an end run around the Code’s contribution limits. Though the above list of never-qualified distributions generally tracks the list of distributions that are not “eligible rollover distributions,” the regulations clarify that some distributions that are not eligible rollover distributions nevertheless CAN be qualified distributions. Hardship distributions, required minimum distributions, and distributions that are part of a series of substantially equal periodic payments fall into this category. Reg. § 1.402A-1 , A-11. D. QDROs and payments to beneficiaries. In the case of a distribution to an alternate payee under a QDRO, or to a beneficiary, it is the death, age, or disability of the participant that determines whether the distribution is qualified. See Reg. § 1.402A-1 , A-4(d), regarding QDRO payments from DRACs. Though not automatically entitled to 100 percent tax-free treatment the way a qualified distribution is, a nonqualified distribution may be partly or wholly tax-free. However, the treatment of nonqualified distributions is one of the big differences between Roth IRAs and DRACs. As is true with a Roth IRA, if the DRAC has appreciated since the original contribution(s), then the DRAC contains two kinds of money: the participant’s contributions (which comprise the participant’s basis in the account—the money he has already paid tax on—also called the “after- tax money” or “investment in the contract”; see ¶ 2.2.01 ), plus the appreciation (which is pretax Nonqualified DRAC distributions