nontaxable portion of distribution

[Guest KennyH]

I just took over a governmental DC plan that only has after-tax EE contributions and an ER match on those contributions. The plan allows inservice withdrawals of the EE contributions, but not the ER portion. What account balance should be considered when calculating the taxable/nontaxable portions of the distribution if someone is just withdrawing money from the EE portion of the account balance? In other words, should the nontaxable portion be Contribution Basis / EE Account Balance X Distribution or Contribution Basis / (EE Account Balance + ER Account Balance) X Distribution? Does it matter as long as you are consistent in the calculations?

I would appreciate pointing me in the direction of official guidance/code/regualtions along with any answers you provide.

TIA

[masteff]

It's the first (after tax basis / after tax balance * amount of after tax distribution).

Pub 575, pg 16, top of column 2: "Defined contribution plan. Under a defined contribution plan, your contributions (and income allocable to them) may be treated as a separate contract for figuring the taxable part of any distribution." http://www.irs.gov/pub/irs-pdf/p575.pdf

Someone else might have reg citation for you.

[Guest KennyH]

My personal preference would be to use the first method also. However, past practice has been to use the second. It appears that either is allowed (based on the description of the first method as an option rather than a requirement). My inclination is to continue past administrative practice unless given a compelling reason not to. Can someone provide that compelling reason?