Withholding of monthly payments from defined contribution plan.

[ljr]

A participant in a defined contribution plan has elected to receive $700 a month. She is eligible for a total distribution. She just prefers to do it this way rather than rolling to an IRA.

It's a series of substantially equal payments but not calculated on her life expectancy.

So which withholding rules apply? Is it the rules for periodic payments which are like withholding on wages, the 10% on non-periodic payments or 20%?

Is the specific type of situation discussed in the IRS Code? Reference?

Thanks!!

[Appleby]

See page 25 of IRS pub 575 at http://www.irs.gov/pub/irs-pdf/p575.pdf. It appears that if the substantially equal distributions does not meet these requirements, then it is rollover eligible and subject to 20-percent withholding

[FundeK]

If the payments are spread over a period greater than ten years, they are considered ineligible for rollover and therefore can be taxed at a percent less than the mandatory 20% withholding. I don't have a specific cite offhand, but it is on our tax notice that is mailed with every distribution.

[Guest Harry O]

See Reg. 1.402©-2, Q&A 5(d)(2). You need to determine, based on reasonable actuarial assumptions, whether the $700 payment will deplete the account in more or less than 10 years. If less than 10 years, it is an eligible rollover distribution subject to 20% withholding if not directly rolled over.

[ljr]

Thank you!!!!!!!!

[TBob]

You all thought this one was finished....not!

So, you take a look at the 700.00 monthly payments and by your reasonable actuarial assumption it will take more than 10 years to deplete the account balance. Therefore, it is not eligible for rollover the 20% mandatory does not apply. I agree with this.

What happens a few years down the road when, based on the participants investment elections, the account has lost a significant portion to the market. Now your reasonable actuarial assumption falls short of 10 years. Do the payments then become eligible for rollover? If so, do you have any liability for not withholding the mandatory 20% on the earlier distributions? Is the determination of the eligible rollover status only made when the distributions begin or do you look at this each year? Maybe I'm thinking too much but wanted to play the devil's advocate.

This happened with one of our retirement plans that had employer stock as an investment option (not Enron but similar) where the stock tanked. The payments that were scheduled for more than 10 years ended in less than 2. I am curious how others would have handled the withholding.

[ljr]

Tbob - My plan is to do the calculations based on when the $700 a month payments begin. I can't think of anything that says this is okay, but the regs do deal with something similar relating to loans being limited to 50% of the participant's account balance AT THE TIME THE LOAN IS GRANTED.

There is no such thing as thinking too much! It's just that one has to come to a recommendation and it seems the more you know the harder it is . . . . .