Distribution of Real Estate

[415 Limit]

We administer a 401(k) Profit Sharing Plan that allows for participant-directed accounts. A participant has attained NRA and will begin taking in-service distributions (S)he has a piece of property in the earmarked accont that was just appraised at $400,000. The participant also has a substantial amount of cash and mutual funds in their earmarked account.

The participant has elected to withdraw the property. In this case would the gross distribution be $500,000 (20% federal taxes = $100,000 plus the property worth $400,000) -- and is it required that the $100,000 in federal taxes be paid from the earmarked account since the funds are available in the account and since this is an eligible rollover distribution; or does the participant have the option to pay the taxes from his or her personal account (thus making the gross distribution $400,000 with zero federal taxes withheld)? Citations or any input on this would be very helpful.

Thanks!

[Jim Chad]

FWIW I can't think of anywhere to look for an exception to the 20% withholding rule.

It seems that the taxable distribution is $500,000.

[J Simmons]

I agree with Jim in both respects.

[Guest Sieve]

I disagree. Choice is participant's. Withholding can be paid by participant if distribution is the real estate only (in this case, 20% X $400,000, or $80,000). Look at Treas. Reg. Sections 31.3405©-1, Q&A-9 and 35.3405-1T, Q&A F-2 & F-3. I assume the 1099-R then shows the $80,000 withholding.

[J Simmons]

I disagree. Choice is participant's. Withholding can be paid by participant if distribution is the real estate only (in this case, 20% X $400,000, or $80,000). Look at Treas. Reg. Sections 31.3405©-1, Q&A-9 and 35.3405-1T, Q&A F-2 & F-3. I assume the 1099-R then shows the $80,000 withholding.

Larry, is it the participant's choice under those regs you cite or the plan administrator's? " However, the payor or plan administrator may instead permit the payee to remit to the payor or plan administrator sufficient cash to satisfy the withholding obligation." Treas Reg § 35.3405-1T, F-2. A.

[Guest Sieve]

You're correct that legally it's not the participant's decision to pay this withholding from outside the plan. But, on a practical level, I doubt the administrator/payor will try to sell property without giving the participant the option either to take some cash in the distribution in order to pay the withholding or to pay from outside the plan (since the regs do not permit the administrator to force a cash distribution for payment of withholding). No doubt the administrator will inform the participant, and give that individual the choice of how to move forward.

In any event, the regs do not require that the distribution be increased by sufficient cash to cover the withholding.