Distribution on Plan Termination including after-tax contributions

[Guest Mike A]

Small employer is terminating 2 year old 401(k) plan with only one active participant with any account balance. The 401(k) plan apparently (I haven't seen any background docs yet)includes money "fozen" from a previous money purchase plan MPP that the employer sponsored for about 12 years and terminated before adopting the 401(k)(again all benefits were for this one participant).

The paticipant plans to roll over his 401(k) contributions to a new traditional IRA.

Question: assuming his plan distribution includes after-tax contributions that he made to the former MPP, am I correct that he can't rollover those proceeds to an IRA, but could rollover the earnings on those contributions?

Anyone willing to share any thoughts on how the former MPP controbutins are treated or options?

Thanks

[MWeddell]

You are correct. After-tax contributions cannot be rolled over but investment gains on those contributions can.

The fact that the money may have come from an old money purchase pension plan affects the forms of benefit payment (i.e. annuities) available to the participant but not the rollover rules.

[Guest Mike A]

Thanks for your reply. If you'll indulge me one more question...

If 401(k) plan terminates and distributes balance attributable to MPP after-tax contributions directly to participant, and participant rolls over the earnings on those contributions to an IRA, am I correct that the returned contributions are "return of basis" and not subject to Section 72 penalties?

Thanks again.