RMD and post-tax contributions

[RCK]

We have a participant in our 401(k) plan who is over age 70 1/2 who will be receiving a RMD. What makes him unique for our plan is that he still has some post-tax contributions in his account.

So I've waded through code and proposed regs enough to be comfortable saying that those post tax contributions are included in determining the "entire interest" of the employee, and subject to RMD. But my question is whether, if he takes a distribution of those post-tax contributions, that distribution counts against the RMD.

I have gotten opinions on both sides of this already.

RCK

[RTK]

The final 2002 regs address this at 1.401(a)(9)-5, Q&A 9 -- after-tax employee contributions are taken into account in determining whether rmd satisfied. Note that final 2002 regs may be adopted for 2002. I cannot remember if proposed 1987 regulations or (proposed 2001 regulations) specifically covered the issue, but I do recall that after-tax employee contributions were treated the same (i.e., count towards rmd).

[mbozek]

If the participant elects to receive a LSD of the account balance, the participant can use the after tax contributons to meet the rmd for 2002 and rollover the taxable portion of the of the account balance to an IRA.

[MGB]

RCK:

This has nothing to do with the RMD:

The participant cannot just take a distribution of the post-tax contributions unless they are from pre-86 and separately accounted for. If they are not under this special exception, then any distribution is pro rata between the post-tax contributions and the remaining taxable balance. This has been the law since '86.

In the case of a distribution that contains both post-tax and taxable amounts, the total amount (including the post-tax return) counts against the RMD that was calculated based on the total account balance.

[RTK]

My thoughts are that the eligibility for a distribution (or withdrawal) of after-tax contributions and the taxation of the distribution should be addressed as two separate issues.

All of the dc plans that I work with that have after-tax contributions separately account for the after-tax contributions, and virtually all of them permit the participant to make an in-service withdrawal of the entire balance of the after-tax account, even if not eligible for any other withdrawals or distributions. This includes pre-1987 and post-1986 contributions. This is a matter of plan design.

What changed in 1987 was the TRA-86 amendments to the rules for the allocation of a participant's investment in the contract (attributable to the after-tax contributions). TRA-86 made signficant changes on how to determine the portion of a distribution (or withdrawal) that is a tax-free recover of the investment in the contract, particularly for pre-annuity starting date distributions. This is an income tax matter. It does not prohibit a withdrawal or distribution of after-tax contributions.

[RCK]

Thanks for responses.

The money in question is indeed pre-87 money and has been separately accounted for. We only allow lump sum distributions from the plan, and allow distributions at termination of employment, or after age 59 1/2, or post tax contributions at any time, or inbound rollovers at any time.

So as I see it, participant IS eligible to request a distribution, he IS eligible to take the post tax dollars separately, he CAN take his post-tax dollars out first, the post tax dollars DO count against the RMD and he CAN rollover the excess over the RMD. In this case, the RMD is greater than the post tax amount so he will be getting a sliver of tax liability in the process.

RCK

[mbozek]

MGB: Under existing tax law a participant can 1. elect to take a Lump sum distribution and rollover only the taxable portion to an IRA and take mrd from pre tax funds, 2. allocate the after tax contributions as part of mrd payments for the account balance made over the participant's life expectancy under IRC 72(d) or 3. the participant can apply all the after tax amounts toward rmd payments for the year in which 70 1/2 is attained (or if there is enough AT funds and the AT withdrawal is made between 1/1-4/1 of the year following attainment of age 70 1/2) for the first two years of rmds.

[RCK]

For anyone following this thread, the other regulation that is a little older, but still on point is 1.402©-2, Q & A 8. Reg 1.401(a)(9)-5 is effective 1/1/2003.

RCK