How to allocate distribution between taxable and nontaxable

[jkharvey]

Help!! I'm sorry, but I am not in my office and do not have access to any of my research materials. I have a participant in a 401(k) PS Plan who wants a distribution of only $3500.00. Her account balance is much greater than this. She is NRA. Her account, however, consists of after tax contributions with related earnings as well as 401(k) contributions and related earnings. HOw do I allocate the $3500 distribution among taxable and nontaxable amounts?

[Guest Harry O]

Need more information. Did plan allow in-service withdrawals in May 1986? If so, does plan maintain separate "contracts" between pre-87 and post-86 contributions? Does the plan allow the employee to designate from which "contract" the withdrawal will be made?

[jkharvey]

We did not administer the plan pre-1987, but the information we received from the prior TPA did provide separate accounting for pre1987 and post 1986 monies. Unfortunately, I don't have access to the plan and won't until next week. Are you saying that the plan itself should specify from where the distribution will come as opposed to some statutory requirement?

[Guest Harry O]

Yes, the IRS said that the plan may either give the employee the right to designate the source or the plan can mandate the source.

[jkharvey]

Thanks for your help. The plan document allows the employee to choose. Next question, however. Aren't there rules that determine how much of the distribution from the employee's after tax account must be allocated to earnings? Where do I find these? Also, I'm dealing w/ pre-1987 and Post 1986 monies. I know I have seen something about a difference in treatment between these.

[Guest Harry O]

See Notice 87-13 for an exhaustive discussion of the basis recovery rules.