Employee Contributions in Defined Benefit Plan

[J. Bringhurst]

Does anyone know if there are special rollover rules for employee contributions that are distributed in a lump sum from a defined benefit plan (non-cash balance DB)?

I know that they are considered after-tax contributions for tax purposes (are not tax deductible when contributed)...I believe they are compared to the total value of the benefit (in whatever form paid) and that ratio is applied to each payment, or lump sum amount...and that portion is not taxable until the participant has, in effect, received a full return of all employee contributions.

Just not sure if this has any bearing on the rollover rules affecting these amounts.

[Calavera]

Full lump sum rollover - financial institution should confirm the ability to hold a non-taxable portion in a rollover account.

Partial lump sum rollover + cash to participant - cash to participant is coming from the non-taxable portion first.

Partial lump sum + partial annuity - the non-taxable portion will be split between an annuity and a lump sum.

[My 2 cents]

I thought that in a defined benefit plan, the cash to the participant is measured against the full value of the plan benefits, and the return of basis is allocated on a purely prorata basis (unless accounted for separately for pre-1986 and post-1986). So that it would not be the case that the first $X dollars of cash paid would be return of basis when only part of the benefit is being distributed. Is this not so?

[david rigby]

If it's a lump sum of the entire participant benefit, is there a need to prorate anything? The basis is the basis.

Or perhaps I misread the question?

[My 2 cents]

Just remember that it is different than it was until the mid-80s. Up until then everything taken out was a return of basis until the basis was gone. Since then, you have to prorate the basis. I think (not that I know) that you can now roll over the amount that is a return of basis, but it might make the IRA taxation more complicated.

[Calavera]

402©(2) was amended by the Job Creation and Worker Assistance Act of 2002 as:

"In the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to paragraph (1))."

So in the case of a full lump sum election with partial rollover, the taxable portion first goes to an IRA.

See also ERISA outline book that has a big section on "effect of basis recovery calculations on application of rollover rules"