Practical Distribution Analysis for Qualified Plans-part Ii

Publication year1987
16 Colo.Law. 1
Colorado Lawyer

1987, October, Pg. 1819. Practical Distribution Analysis for Qualified Plans-Part II


Vol. 16, No. 10, Pg. i

Practical Distribution Analysis for Qualified Plans---Part II

by Bruce A. Schilken

This article discusses the practical "how to" mechanics of helping a client decide what to do with a proposed qualified plan distribution. The ideas contained herein apply to Internal Revenue Code of 1986 ("Code") § 401 plans. These include defined benefit pension plans, profit sharing plans, money purchase pension plans, target benefit plans, 401K plans, stock bonus plans, tax-sheltered annuities, SEPs and IRAs.

Part I of this article, published in the August 1987 issue at page 1393, dealt with the decision to either take a lump sum distribution or roll over to a qualified plan. This Part II addresses the excess distribution and accumulation penalties.

Excise Tax on Excess Distributions

There is a new 15 percent tax on excess distributions from all types of retirement plans.(fn1) The total of all retirement distributions from all sources is considered. It makes no difference if the distribution is from different employers.

The excise tax is 15 percent of an individual's excess distributions during any calendar year. The individual who had the excess distribution is liable for the tax, not the plan. Reduce the excise tax by any 10 percent premature distribution penalty on the excess amount for distributions before age 59 1/2.(fn2) Note that only the 10 percent on the excess amount, not 10 percent of the total distribution, reduces the 15 percent tax. This tax applies to distributions received after December 31, 1986.

The base amount is the greater of $112,500, which will be indexed for cost of living adjustments ("COLA") under Code § 415(d), or $150,000, and can be received each year free of excise tax. Thus, the limit is $150,000 in 1987. If an individual was a participant with an account balance as of August 1, 1986, special grandfather rules apply if (1) the participant elects to have the rules apply and (2) the account balance was at least $562,500. The election must be made on the individual's 1987 or 1988 tax return because of possible adverse consequences, so the participant should wait as long as possible to make the election. If the grandfather rules are not elected for an individual with an 8/1/86 accrued balance, $150,000 is the base amount that can be received each year without an excise tax.(fn3)


There is no excise tax on distributions (1) after death (but there is an additional estate tax), (2) pursuant to a qualified domestic relations order ("QDRO"), (3) in a tax free rollover, or (4) based on employee contributions. Aggregate all retirement distributions received during a calendar year for purposes of determining the amount of excess distributions for the calendar year.

If an individual receives a lump sum distribution from a plan and elects five- or ten-year averaging under Code § 402(e)(4)(B), a special rule applies. The amount received excise tax-free is five times the applicable base amount, which is $562,500 (adjusted for COLA) if the general rule of $112,500 applies (a grandfather...

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