Withholding

[Guest Sieve]

I prsume this is an easy one for you TPA types . . .

Say a DC participant has a $100,000 account balance, $30,000 of which represents an outstanding loan. Participant terminates employment, and requests a rollover of the remaining $70,000. $6,000 mandatory withholidng (20% X $30,000) is taken from the $70,000, so that only $64,000 can be rolled over--correct?

[Kevin C]

No, The entire $70,000 is rolled over, since everything but the loan is being rolled over.

§31.3405©-1

Q-11: Are there special rules for applying the 20-percent withholding requirement to employer securities and a plan loan offset amount distributed in an eligible rollover distribution?

A-11: Yes. The maximum amount to be withheld on any designated distribution (including any eligible rollover distribution) under section 3405© must not exceed the sum of the cash and the fair market value of property (excluding employer securities) received in the distribution. The amount of the sum is determined without regard to whether any portion of the cash or property is a designated distribution or an eligible rollover distribution. For purposes of this rule, any plan loan offset amount, as defined in §1.402©-2, Q&A-9 of this chapter, is treated in the same manner as employer securities. Thus, although employer securities and plan loan offset amounts must be included in the amount that is multiplied by 20-percent, the total amount required to be withheld for an eligible rollover distribution is limited to the sum of the cash and the fair market value of property received by the distributee, excluding any amount of the distribution that is a plan loan offset amount or that is distributed in the form of employer securities. For example, if the only portion of an eligible rollover distribution that is not paid in a direct rollover consists of employer securities or a plan loan offset amount, withholding is not required. In addition, if a distribution consists solely of employer securities and cash (not in excess of $200) in lieu of fractional shares, no amount is required to be withheld as income tax from the distribution under section 3405 (including section 3405© and this section). For purposes of section 3405 and this section, employer securities means securities of the employer corporation within the meaning of section 402(e)(4)(E)(ii).

[ETA Consulting LLC]

There are several exceptions to the withholding requirements when there are "cashless" distributions. Loan offsets are one of those exceptions. However, if the participant were to attempt to pay $6,000 in taxes as a withholding, then the withholding would then be based on $36,000; so the $6,000 in withholding would no longer be enough. It creates a circular calculation.

Good Luck!

[Guest Sieve]

Thanks for the corrction, Kevin. I knew the answer was there somewhere, but I was too lazy to look . . .