After tax contributions prior to 1986

After-tax employee contributions in this DB plan stopped in 1969, well before the 1986 changes to IRC 72(d). The 1986 law eliminated the 3 year basis recovery rule for pensions starting after 1986 enactment.

I have heard, but cannot find, a rule that employee contributions prior to 1986 will still have the benefit of the 3 year rule, even if the pension starts after 1986. 

Does anyone have that reference? Do these pre-1986 after-tax contributions still have the benefit of the 3 year basis recovery rule if the pension starts AFTER 1986?

According to Notice 88-118:

"As a result of the repeal of the 3-year rule by section 1122(c)(1) of TRA '86, all annuity distributions from qualified plans to distributees with annuity starting dates after July 1, 1986, are taxed under section 72(b) of the Code. Section 72(b) provides that a portion of the annuity payments received in a taxable year may be excluded from gross income as a return of the distributee's investment according to an exclusion ratio determined at the annuity starting date. The numerator of this ratio is the employee's investment in the contract, and the denominator is the expected return."

Thanks, Slider. That's the way the statute reads as well.

I think the idea of "grandfathered" after-tax contributions comes from the "separate contract" rationale that is in 72(d)(8). It applies to pre-87 employee contribution contracts that are received "before" the annuity starting date. The IRS position in at least one PLR I saw is that as long as the election form to receive a lump sum is at the same time (or a second before the lection for the rest of the benefit) that all the employee contributions are received at once. 

There is a grandfather in the case of a plan that, as of May 5, 1986, permitted withdrawal of any employer contributions prior to separation from service, then the changes in the basis recovery rules prior to the annuity starting date brought by TRA 86 apply only to the extent the amount distributed exceeds the employee's basis as of December 31, 1986.