New retirement plan distribution rules.

• Author: Delbecq, Bruce R.

The Unemployment Compensation Amendments Act of 1992 (the "Act"), which was signed into law on July 3, 1992, made substantial changes to the qualified retirement plan distribution rules by liberalizing certain restrictions on the rollover of distributions and by requiring either mandatory withholding or direct plan-to-plan transfer of distributed funds. In October 1992, the IRS issued temporary regulations and Notice 92-48, which provide guidance on the distribution provisions of the Act. (Note: The new rules call plan-to-plan transfers "direct rollovers.") The new rules generally apply to qualified plan distributions made after Dec. 31, 1992.

Distribution traps removed

In general, a distribution from a qualified retirement plan that is rolled into an individual retirement account (IRA) or into another qualified plan account within 60 days is not subject to tax. Previously, however, there were traps for the unwary; certain distributions were ineligible for rollover treatment, and thus were subject to income taxes at the time of the distribution, as well as a 10% excise tax if the distribution constituted an early withdrawal. For instance, a distribution of less than one-half of a participant's profit-sharing account balance was ineligible to be rolled over into an IRA.

The Act removes these distribution traps, but still prevents the rollover of distributions that consist of a series of substantially equal payments over the life of a participant (or the life of a participant and beneficiary); also, payments made over a specified period of 10 years or more may not be rolled over. In addition, required minimum distributions paid to participants who have attained age 70 1/2 are not eligible. The committee reports to the Act clarify that single sum payments - for example, a lump-sum payment of a portion of a participant's accrued benefit at retirement - will be allowed rollover treatment even though the balance of the benefit will be paid in equal monthly payments.

Beware: required direct rollover transfer or mandatory 20% withholding

Under prior law, distributions were typically made to the participant, who in turn would either elect to roll over the funds or retain the funds and pay the taxes due. The Act adds a new plan qualification requirement specifying that qualified plans must allow direct rollover of distributions otherwise eligible for rollover treatment. Direct rollovers may be made to an IRA, certain annuities, and to qualified...