Lump Sum Distribution and Employee CoOntributions

[emmetttrudy]

A governmental Plan requires employee contributions. When the participant terminates he/she receives the larger of the Plan Benefit and the Employee Contributions (accumulated with 2% interest). In general, the longer service participants always get paid out the Plan Benefit, since that lump sum is much larger.

My questions is about the taxes on the cash distributions. Let's say the accumulated employee contributions are $30,000. The lump sum of the Plan benefit turns out to be $100,000. And the employee had made $20,000 in employee contributions during his tenure.

The payout amount is the $100,000. If the participant takes a cash distribution is the full $100,000 subject the 20% mandatory withholding? Or is it only $80,000? Taking into account his $20,000 in after-tax contributions.

[QDROphile]

See sections 72 and 414(h) of the Internal Revenue Code.

[emmetttrudy]

See sections 72 and 414(h) of the Internal Revenue Code.

OK so based on my understanding of that, since these are indeed "employee contributions" that are being made after-tax, the amount of employee after-tax contributions the participant has made to the Plan would not be subject to the 20% withholding rule. However, the remainder of the lump sum would be, assuming a cash distribution.

[mbozek]

See sections 72 and 414(h) of the Internal Revenue Code.

OK so based on my understanding of that, since these are indeed "employee contributions" that are being made after-tax, the amount of employee after-tax contributions the participant has made to the Plan would not be subject to the 20% withholding rule. However, the remainder of the lump sum would be, assuming a cash distribution.

I never heard of any public employee plan requring employees to make after tax contributions to a retirement plan when pre tax contributions are available.

Employee contributions made under IRC 414(h)(2) are considered to be employer contributions and are pre tax amounts the same as employer contributions. Therefore the entire distribution is subject to income tax. You need to determine how the distributions will be taxed on the 1099.

[K2retire]

I never heard of any public employee plan requring employees to make after tax contributions to a retirement plan when pre tax contributions are available.

CSRS comes to mind.

[mbozek]

I never heard of any public employee plan requring employees to make after tax contributions to a retirement plan when pre tax contributions are available.

CSRS comes to mind.

CSRS doesnt count b/c its a federal plan and unlike state and municipal employee unions, federal employee unions cannot bargain for pre tax benefits. Also federal employees are not covered under 414(h)(2).

[eeyore]

There are a few state and local governmental plans that still treat member contributions as after tax. I've seen this in some public school districts. More importantly, even in plans that treat member contributions as pre-tax under IRC 414(h)(2), all contributions made prior to ~1983 are after tax. Therefore, the original poster has to get a breakdown between pre-tax and post-tax contributions from the plan administrator. (The ~1983 date is whenever the plan adopted treatment under 414(h)(2).)