IRS limits planning for lump-sum distributions.

AuthorWalker, Deborah

Often a client wants to use lumpsum treatment for only a portion of a plan balance. IRS 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 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 Unfortunately, this ruling has now been revoked by Letter Ruling 9139031.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). To simplify administrative costs, the CODA portion of N's profit-sharing plan 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, and...

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