PS-58's impact on rollovers

[Santo Gold]

If a plan has been reporting its ps-58 costs via 1099-R each year, and lets say those accumlated reported ps-58 have totaled $1,000. Now the participant has terminated employment and is doing an IRA rollover of her $100,000 account balance. 2 questions:

1) Should the rollover 1099-R simply show a gross distribution of $100,000 with a taxable amount of $0.00?

2) How does the already declared $1,000 in ps-58's get tracked/credited once the $100,000 leaves the plan? I assume that if nothing is done, the $100,000 goes to the IRA, and is then taxed as it is withdrawn from that IRA. Where/when does the already taxed $1,000 used to reduce the taxable portion of the participant's subsequent cash distribution(s)?

Thanks

[Belgarath]

This can get tricky. Was her life insurance (a) surrendered by the Trustee with the proceeds deposited to her plan account, or(b) assigend to her as a taxable distribution or © did she purchase it from the plan for the Fair Market Value?

I'm guessing (a). If so, then in your example, she would normally only roll over $99,000 to the IRA and the plan would pay her $1,000 as a non-taxable return of "basis." The Taxable term cost is not considered an "eligible rollover distribution" under 1.402©-2, Q&A-4.

[Santo Gold]

This can get tricky. Was her life insurance (a) surrendered by the Trustee with the proceeds deposited to her plan account, or(b) assigend to her as a taxable distribution or © did she purchase it from the plan for the Fair Market Value?

I'm guessing (a). If so, then in your example, she would normally only roll over $99,000 to the IRA and the plan would pay her $1,000 as a non-taxable return of "basis." The Taxable term cost is not considered an "eligible rollover distribution" under 1.402©-2, Q&A-4.

I believe © fair market value was paid to the plan for the insurance CV. So now, out of the entire account balance, $1,000 is "after-tax", and therefore not eligible for the rollover?

[Belgarath]

That's one interpretation.

If she purchased it for FMV, then I would say it will represent basis in the life insurance policy cash values. So if at some future date it is surrendered, then she ought to be able to recover the $1,000 then. So if she bought it for $100,000, then her basis should now be $101,000. However, I'm not at all sure there is any direct regulatory support for this interpretation.

An alternative interpretation would be that the basis is lost, but this seems an unreasonable result.

Fun stuff, eh?

[Bird]

I believe © fair market value was paid to the plan for the insurance CV. So now, out of the entire account balance, $1,000 is "after-tax", and therefore not eligible for the rollover?

She bought it? Then yes, $1,000 is just paid to her in a lump sum, not taxable, and the rest can be rolled over.

[Belgarath]

Bird's solution makes sense to me.

[Santo Gold]

Thanks to all with the replies. My last question: If she takes the $1,000 out of the plan in cash and rolls the other $99,000, what 1099-R code would be used for the $1,000 non-taxable distribution? She is over 59-1/2. Would you just use code "7" and, show $1,000 as the gross distribution but $0.00 as taxable?

Thanks

[Bird]

We just did one of these and yes, did what you suggested. We also put that amount in Box 5.