After Tax Contributions

[Guest tbt]

The employer removed the after-tax provision during the restatement with the intent of removing (cash out) all emplyee after tax monies including earnings.

My question is what if the 2 participants will not consent to the cash out. Both are married so i need spouse cosent. Any guidance would be appreciated.

[MWeddell]

The plan prior to the restatement very likely did not permit the employer to mandate distributions of after-tax contributions whenever it discontinued the after-tax contribution portion of the plan. Instead, the prior plan document gave participants forms of payment that are protected by Code Section 411(d)(6). The employer cannot remove distribution rights previously given to the participants without jeopardizing the qualified status of the plan.

[mbozek]

There is one expensive alternative : spin off the after tax contributions and earnings to a separate clone plan which can be terminated. The assets can be distributed in a lump sum without the participants consent. Why is spousal consent required because the participants are married?

[MGB]

If a plan pays out the after-tax contributions, it really doesn't do so from a tax standpoint (assuming it is post-86 money). The distribution must be pro rata taxable and nontaxable money.

How does a spinoff work under this rule? It seems the IRS would consider this a subversion of the taxation rule and say that the spinoff was also pro rata.

Also, although this was posted under the 401(k) discussion group, perhaps this is not a 401(k) plan and that is why the J&S rules apply.

[mbozek]

MGB: Since IRS rev rule 72-275 permits withdrawal of voluntary employee contributions at any time from a ps plan, a plan sponsor should be able to spin off the after tax contributions into a separate plan. Also it dont think the annuity rule of IRC 72(e) applies for lump sums not recieved as as annuity. See IRC 72(d)(1)(D). Again this option is complicated and expensive and it would be cheaper if the employer offerred the participants a cash payment for withdrawing their AT funds

The real question is why bother tring to devise ways to kick out the AT money if the participant does not want to take a distribution. Just freeze the AT money in the plan.