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Constructive Receipt Revisited: Inservice Distributions w/ Penalty Ap


Guest EMC

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How about a NQDC plan that allows the participant not only to change the form of his/her distribution "downstream" (ala the Martin case), but also to take an inservice (non-emergency) distribution upon demand?

The provision that would prevent constructive receipt would be a built-in penalty for all inservice distributions equal to X% of the distribution's value. This would place a significant restriction on the distribution and would it not create the fofeiture of a valuable right?

That said, any guidance out there as to how much the penalty % would have to be to escape constructive receipt? 5%? 10%? More?

Thanks.

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Guest wmacdonald

] I'm seeing 10% from our survey data (Fortune 1000), and in many cases some period of time that the executive can not re-enter the plan. See www.crgworld.com for a copy of the survey.

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Mr. MacDonald:

Thanks. I've seen the Clark/Bardes Fortune 1000 Executive Benefits Survey (for the year 2000). It is an excellent resource for this type of question and I appreciate CB having it available on its website.

Have you (or anyone else) seen any guidance from the Service (PLR, etc.) regarding the acceptability of this type of a provision? I've seen reference in BNA's Tax Management Portfolio re: a 5% figure (no letter was requested, though), but haven't seen much else that would reflect the Service's acceptance or opposition to the "haircut" as a method of allowing inservice withdrawals on demand while still avoiding constructive receipt.

Thanks.

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Guest EAKarno

There is no definitive guidance on what constitutes a sufficient "haircut." Based upon case law (Supreme Court case of LoBue v. Commissioner) and an example given in the Code Section 451 Regs. you can make a case that 25% is a safe harbor amount. Nevertheless, most practitioners assume that a 10% haircut is sufficient based upon the 10% excise tax penalty for early withdrawal under a qualified plan. To my knowledge a 10% haircut has never been challenged nor blessed by the Service.

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Guest Harry O

There were also a number of old revenue rulings on this issue from back in the days when qualfiied plans were subject to constructive receipt -- there the IRS held that a 6% penalty was sufficient.

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Harry O is right, but representatives of the IRS have publicly disavowed those rulings.

Also, I seem to recall that they dealt with tax-qualified retirement plans, before the constructive receipt doctrine was repealed as it applies to tax-qualified retirement plans. Thus, they may not have strong precedential value as applied to nonqualified deferred compensation plans.

Kirk Maldonado

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