Difference between "lump sum" and "single sum"?

[BG5150]

What's the difference between a "lump sum" distribution and a "single sum" distribution?

[MoJo]

What's the difference between a "lump sum" distribution and a "single sum" distribution?

Good question! Many (if not most) might say "nothing." I define "lump sum" to mean a non-periodic amount of all or a portion of the account. A single sum is a "single lump sum" - and that is the language I use in plan documents to avoid inadvertently authorizing partial lump sum distributions.

[BG5150]

A closer read shows: "Such Participant's benefit shall be payable, in cash or in-kind, in one lump sum payment." (emphasis mine)

So, I guess it's all-or-nothing.

But are the terms codified anywhere?

[Tom Poje]

Had to look it up, just to see if I remembered correctly from an old ASPPA test

from the IRS website:

A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.

so I always took that to mean that Gil T. S. Charged could take 50% of his balance in January 2012 and the remainder in December 2012 and it would still be considered a lump sum distribution.

[BG5150]

What would happen if Mr. Charged took 50% in January and that was it?

[Tom Poje]

Then the Mayan calendar would run out and the world would end...no wait

I almost forgot, Today is Popeye's perfect woman day - a '36' - because Olive Oyl is 12-12-12

.......................................

Many many many moons ago, lump sums qualified for 5 year averaging (pre 1999)

As I recall, 10 year averaging still applies but only if you were born before 1936.

so you would be 'dumb' to take 50% in Dec 2012 and 50% in Jan 2013 because it blows the lump sum out of the water.

[GMK]

and a happy 12/12/12 to you, too.

Also, to use NUA tax treatment, you need to take a lump sum distribution.

[masteff]

A closer read shows: "Such Participant's benefit shall be payable, in cash or in-kind, in one lump sum payment." (emphasis mine)

So, I guess it's all-or-nothing.

But are the terms codified anywhere?

I'd agree that reads as all-or-nothing and if the participant only took 1/2 then I'd worry you may have a failure.

As far as I can tell, the terms are not codified. Section 72 uses lump sum w/out cross-reference to any definition elsewhere.

[MoJo]

A closer read shows: "Such Participant's benefit shall be payable, in cash or in-kind, in one lump sum payment." (emphasis mine)

So, I guess it's all-or-nothing.

But are the terms codified anywhere?

I would suggest that this validates my prior opinion. If a "lump sum" means an entire account balance, then why would one need the modifier "one." It certainly implies that there may be more than "one" lump sum payment available, otherwise the word "one" is superfluous.

With that, may I have a hamburger today for which I will gladly pay you next Tuesday? (and if you understand that, you are of a certain age and spent way too much time in front of a television on Saturday mornings).

[Tom Poje]

but again, for those individuals born 1936 or earlier, the definition of lump sum, according to the IRS (it's in publication 575) the entire balance distributed in a single taxable year (I guess as opposed to one single sum)

in fact, if the company had 2 profit sharing plans the requirement is still the "entire balance", thus you have to take the distribution from both plans, and I doubt you would only get 'one' distribution check.

[MoJo]

but again, for those individuals born 1936 or earlier, the definition of lump sum, according to the IRS (it's in publication 575) the entire balance distributed in a single taxable year (I guess as opposed to one single sum)

in fact, if the company had 2 profit sharing plans the requirement is still the "entire balance", thus you have to take the distribution from both plans, and I doubt you would only get 'one' distribution check.

And it is precisely for these reasons that I always specifiy a "single lump sum distribution." Try as hard as I might to stifle it, occassionally the lawyer in me surfaces to be extra cautious.

Bottom line, absent context (and relying on context is always a bad idea), "lump sum" means nothing more than one payment, but doesn't necessarily mean the entire account balance - regardless of what the IRS says (and in my mind, the plan doc trumps the IRS in this case, and since it is a "document interpretation issue" and not necessarily (although it may impact) a qualification issue, their opinion is irrelevant except that a "single lump sum" has some tax or qualification consequence). There are some tax issues (and possibly qualification issues - although I haven't looked it up) that require an entire account balance to be depleted within a single "year" (plan or tax), and the IRS may use the short hand nomenclature of "lump sum" - but arguably, 12 monthly payments that deplete an account would be UNDER THEIR DEFINITION a "lump sum" but not under anyone elses.....

[Appleby]

...But are the terms codified anywhere?

IRC § 402(d)(4)

... If a "lump sum" means an entire account balance, then why would one need the modifier "one." It certainly implies that there may be more than "one" lump sum payment available, otherwise the word "one" is superfluous.

There can be more than one lump-sum distribution for a participant, as long as the requirements are met in each case. For instance, a lump-sum distribution can be made when a participant reaches age 59 ½. Contributions can be added to the account after that, allowing a lump-sum distribution to be taken upon separation from service

I have always understood the term ‘single sum’ to refer to payments designed to be ‘annuity payments’ being paid in one amount (instead of annuitized)- plan language permitting.

On the other hand, a lump-sum distribution refers to distribution of the entire balance of a participant’s account, where the entire balance is distributed in the same calendar year.

[Appleby]

...Bottom line, absent context (and relying on context is always a bad idea), "lump sum" means nothing more than one payment, but doesn't necessarily mean the entire account balance - regardless of what the IRS says (and in my mind, the plan doc trumps the IRS in this case, and since it is a "document interpretation issue" and not necessarily (although it may impact) a qualification issue, their opinion is irrelevant except that a "single lump sum" has some tax or qualification consequence). There are some tax issues (and possibly qualification issues - although I haven't looked it up) that require an entire account balance to be depleted within a single "year" (plan or tax), and the IRS may use the short hand nomenclature of "lump sum" - but arguably, 12 monthly payments that deplete an account would be UNDER THEIR DEFINITION a "lump sum" but not under anyone elses.....

That could be true from a Plan Document perspective. I don’t know. But, from a technical perspective, the term has a specific meaning for tax purposes, as you indicated. This is important for participants with net unrealized appreciation (NUA) on employer stocks, who want the NUA to be taxed at the capital gains rate instead of ordinary income tax rate. In such cases, the term lump-sum is important to the participant (or beneficiary), the tax preparer and the IRS. It should be important to the plan administrator as well- because all interested parties should speak the ‘same language’.IRC § 402(d)(4)

[MoJo]

That could be true from a Plan Document perspective. I don’t know. But, from a technical perspective, the term has a specific meaning for tax purposes, as you indicated. This is important for participants with net unrealized appreciation (NUA) on employer stocks, who want the NUA to be taxed at the capital gains rate instead of ordinary income tax rate. In such cases, the term lump-sum is important to the participant (or beneficiary), the tax preparer and the IRS. It should be important to the plan administrator as well- because all interested parties should speak the ‘same language’.IRC § 402(d)(4)

My position is that the plan document language should be precise - and consistent with what you call the "technical perspective". Using language that clearly spells out what "lump sum" means (be it a "single" lump sum, or a distribution of the entire account balance within one year) - it had better be clear. the worst situation would be one where the plan document wasn't clear, and a participant violated the "technical" perspective after having been told via participant communications of the tax treatment of a "lump sum" (even though it didn't specify a single, or all within a year). That's a lawsuit waiting to happen....