Jump to content

Distribution of Assets


Randy Watson

Recommended Posts

The IRS requires assets of a plan to be distributed as soon as administratively feasible after a terminating amendment is adopted. As I undertand things, the IRS will give an employer one year to distribute assets that are more difficult to liquidate (e.g., real estate, partnerships etc...). Is this an unspoken rule or is there actually legal authority out there?

Link to comment
Share on other sites

In Revenue Ruling 89-87, in the second paragraph of the analysis section:

"Whether a distribution is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but, generally, a distribution which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible."

Link to comment
Share on other sites

Distribution does not require sale of the asset- it merely requires that the interest be distributed to participants by the plan. For example, if the plan holds an illiquid asset such as RE which cannot be sold, the plan can distribute the RE to a taxable trust which will hold title to the asset and give each participant a certificate of interest in the RE which can be rolled over to an IRA with a custodian who will hold such an interest until the asset is sold and proceeds paid to the participant's IRA.

Link to comment
Share on other sites

mjb - as someone who doesn't know beans about a "taxable trust" I find this solution interesting, but also confusing. I'm presuming that a taxable trust is non-qualified - so what happens to any interest/earnings? And if it is non-qualified, and hence a distribution from the plan, how is it then eligible for rollover by the participant unless it is liquidated in time to allow a rollover within 60 days? And what if the participant doesn't want a share in a RE trust - suppose this is a DB plan that allows lump sum distributions, and all the participants want a lump sum, etc.. I'm not seeing how all the parts work together here.

Is there some citation (RR, Notice, PLR) that discusses and approves this method? If plan subject to PBGC, will the PBGC approve this?

Thanks in advance for educating me a bit on this subject!

Link to comment
Share on other sites

yes it is a taxable trust but the particpant has 60 days from reciept of the certificate of interest to roll over the interest to an IRA. Any income would be tax deferred if it was paid to the IRA custodian. Participants who do not roll over their interest in the taxable trust will be taxed on the fmv on the date of distribution. The taxable trust is used when the plan wants to dispose of an illiquid asset such as RE that is going through bkcy or is encumbered by liens and claims that have not been resolved as of the time the plan terminates.

Dont know about DB plans because participants would be subject to PBGC rules. IRS has issued Plrs on transfers to taxable trust qualfying as interest that can be rolled over to IRA.

Link to comment
Share on other sites

If these distributions are eligible for rollover, then they're subject to withholding. The taxable trust is not an IRA, so withholding would be required before any amounts could be sent to the taxable trust.

Ed Snyder

Link to comment
Share on other sites

If the property is illiquid how can it be sold or disposed of to collect the 20% tax? The sole point of transferring it to a taxable trust is because it can not be disposed of and the proceeds distributed to participants.

Link to comment
Share on other sites

One would hope that the assets of the Plan included both liquid and illiquid assets. Reg 35.3405-1, Q&A F-3, says if you distribute both cash and non-cash assets, you don't have to sell the non-cash assets if there is sufficient cash to provide for the withholding.

IRS has issued Plrs on transfers to taxable trust qualfying as interest that can be rolled over to IRA.

And since the IRS has said it's rollover eligible, the best option is to do it as a direct rollover, so mandatory withholding is bypassed.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

In Revenue Ruling 89-87, in the second paragraph of the analysis section:

"Whether a distribution is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but, generally, a distribution which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible."

Any idea what kind of facts and circumstances would be enough to overcome the presumption?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...