10 Year Averaging to an active participant?

[Guest Bob Lees]

We have a participant in our plan who has achieved normal retirment age. She has elected to take her account balance out. She has requested 10 year averaging. She meets the age requirement for 10 year averaging, but since she is still employed she will continue to receive annual profit sharing contributions. To qualify for 10 year averaging must the distribution be her total account balance. In her case it will not be her total account balance because we continue to allocate contributions to her account. Our question is whether she qualifies for 10 year averaging or not?

[Guest]

In order to elect 10-year averaging you need to receive a qualifying lump sum distribution. A qualifying lump sum distribution is a total distribution of the employee's account within one calendar year on account of separation from service or attainment of age 59.5.

In your case, the employee is not separating from service. However, she has attained age 59.5. If this is the first distribution she has received since attaining age 59.5, and it is a complete distribution of her account at this time, it qualifies as a lump sum eligible for averaging (assuming she meets the magic age 50 by 1/1/86 criteria). It doesn't matter that she will be entitled to future contributions as she continues to work.

[Guest SHP]

Harry O

Would you please tell me where the "first distribution" referance in your statement "If this is the first distribution she has received since attaining age 59.5, and it is a complete distribution of her account at this time, it qualifies as a lump sum eligible for averaging (assuming she meets the magic age 50 by 1/1/86 criteria)." can be found?

In looking at PPDs ERISA OULTINES I read the following:

A plan makes a lump sum distribution if it pays to the recipient within one taxable year the "balance to the credit" of the employee. The plan must make the distribution:

a. on account of the employee's death.

b. after the employee attains age 59 1/2.

c. on account of the employee's separation from service

d. after the employee becomes disabled

Are you stating that, for example, a Participant who had been receiving distributions (MRDs) and subsequently elects to take their balance to the credit within one taxable year would not be eligible for 10 yr income averaging?

I would appreciate your thoughts.

[Guest]

A lump sum distribution is a distribution of the balance to the credit of the employee on account of a triggering event (attainment of age 59.5 or separation from service for most folks). The balance to the credit of the employee is determined at the time of each triggering event. The first distribution following that triggering event must be a complete distribution within one calendar year. See PLRs 8544077, 8541090.

An employee receiving MRDs will not be eligible for lump sum treatment unless he is still working and the first distribution after his eventual termination of employment (his "triggering event") is a complete distribution of his account. On the other hand, an employee who previously terminated and is now receiving MRDs will never be eligible for lump sum treatment since he has already received partial payments after passing his two triggering events -- age 59.5 and termination of employment. (Of course, his beneficiaries may qualify for lump sum treatment upon his death.)

[Guest SHP]

When does a self-employed individual separate from service?

May the self-employed individual's beneficiary then elect 10 year income averaging/cap gain treatment upon the participant's death as it is listed as a triggering event?

[Guest]

Separation from service is not one of the triggering events for self-employed individuals.

[david rigby]

Interesting.

Harry, you mention PLRs. Any other cites, since PLRS cannot be considered applicable to other situations?

[Guest]

Well, you can always slog through the statute and the proposed regulations issued many years ago (but never finalized). I cited the PLRs because they succinctly (and correctly, in my view) summarize the applicable authorities in this area.

My experience in this area is that most plan sponsors, third-party administrators and IRS agents do not know these technical rules. But this turns out to benefit employees since most single sum distributions are reflexively reported on 1099Rs as qualified lump sums even when they aren't. But this works out to the benefit of the employee because he relies on the coding on the 1099R . . . and most IRS auditors can't begin to figure out these rules either.