Eligible Rollover Distribution or NonPeriodic Payment

[tax & coffee]

In a governmental 401a defined benefit plan, each monthly annuity is paid in the month after it accrues (i.e. in February the member is paid the annuity amount accrued in January).  When a member dies, say 15 days into a month, his or her designated beneficiary is entitled to a one-time, lump sum distribution of the deceased member's prorated annuity amount (i.e. those 15 days in the month of the member's death that they were alive and accrued an annuity amount).  Is this prorated annuity amount paid upon the member's death considered an eligible rollover distribution or a nonperiodic payment?  We are trying to determine whether we should apply the 20% federal withholding on ERDs or the 10% federal withholding on nonperiodic payments with an option for no withholding.

[david rigby]

I'll give this a shot, but not necessarily confident in my response:

I think whether this payment is "roll-able" may depend on exactly how it's defined in the plan document.  For example, if it is defined as a death benefit, it might be roll-able, but if it's defined as part of the annuity stream, I'll suggest it is not roll-able.

BTW, I really don't like the manner in which you use "accrued".  Definitely not in conformance with most usage in the context of a DB plan.  Maybe it's just me.

 

[tax & coffee]

Thanks David.  What would be a more appropriate term to use in lieu of "accrued" that is consistent with my fact pattern and in conformance with industry standards? 

This is how our plan language reads:

"Each annuity is stated as an annual amount, one twelfth of which, fixed at the nearest dollar, accrues monthly (except that an annuity accrues over any portion of a month after the commencing date of such annuity but before the 1st day of the next month and is payable for such month, to include the month of death of the annuitant, in an amount prorated in a manner to be determined by ......) and is payable on the 1st business day of the month after it accrues."

[david rigby]

Yeah, that is still an odd use of "accrues" (as far as I've seen).

[GMK]

While the plan language that t & c quotes seems clear and makes sense to me, I have come to realize (after the discussion in another thread a couple days ago) that I never understood the true meaning of the word "accrue" and the proper ways in which can be used.

To avoid mistakes, I have banned "accrue" from my vocabulary indefinitely.