Amounts paid to plan participants from a qualified plan are called distributions. Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Also, certain loans may be treated as distributions. See Loans Treated as Distributions in Publication 575.taxmap/pubs/p560-019.htm#en_us_publink10009013
A qualified plan must provide that each participant will either:
- Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or
- Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period).
These distribution rules apply individually to each qualified plan. You cannot satisfy the requirement for one plan by taking a distribution from another. The plan must provide that these rules override any inconsistent distribution options previously offered.taxmap/pubs/p560-019.htm#en_us_publink10009014
If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. This minimum is figured by dividing the account balance by the applicable life expectancy. For details on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575.taxmap/pubs/p560-019.htm#en_us_publink10009016
Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date.
A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years.
- Calendar year in which he or she reaches age 701/2.
- Calendar year in which he or she retires from employment with the employer maintaining the plan.
However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 701
even if the participant has not retired.
If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 701/2. For more information, see Tax on Excess Accumulation in Publication 575.taxmap/pubs/p560-019.htm#en_us_publink1000136526
Required minimum distributions for 2009 are waived for defined contribution plans under the Worker, Retiree, and Employer Recovery Act of 2008. Required minimum distributions for 2008 that are not due until April 1, 2009, must still be made.taxmap/pubs/p560-019.htm#en_us_publink10009017
The distribution required to be made by April 1 is treated as a distribution for the starting year. (The starting year is the year in which the participant meets (1) or (2) above, whichever applies.) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31).taxmap/pubs/p560-019.htm#en_us_publink10009018
See Publication 575 for the special rules covering distributions made after the death of a participant.taxmap/pubs/p560-019.htm#en_us_publink10009020
Generally, distributions cannot be made until one of the following occurs.
- The employee retires, dies, becomes disabled, or otherwise severs employment.
- The plan ends and no other defined contribution plan is established or continued.
- In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 591/2 or suffers financial hardship. For the rules on hardship distributions, including the limits on them, see Regulations section 1.401(k)-1(d).
- The employee becomes eligible for a qualified reservist distribution (defined below).
Certain distributions listed above may be subject to the tax on early distributions discussed later.
A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. All or part of a qualified reservist distribution can be recontributed to an IRA. The additional 10% tax on early distributions does not apply to a qualified reservist distribution.taxmap/pubs/p560-019.htm#en_us_publink10009022
Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Since most recipients have no cost basis, a distribution is generally fully taxable. An exception is a distribution that is properly rolled over as discussed under Rollover, below.
The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution.
A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Also, a distribution from a designated Roth account is tax-free if certain conditions are met. See Qualified distributions
under Qualified Roth Contribution Program
The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. However, it may be subject to withholding as discussed under Withholding requirement, later. Beginning in 2008, a rollover can be made to a Roth IRA from a qualified plan if certain income and filing requirements are met. See page 2 under What's New.taxmap/pubs/p560-019.htm#en_us_publink10009025
This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following.
- A required minimum distribution. See Required Distributions, earlier.
- Any of a series of substantially equal payments made at least once a year over any of the following periods.
- The employee's life or life expectancy.
- The joint lives or life expectancies of the employee and beneficiary.
- A period of 10 years or longer.
- A hardship distribution.
- The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. See Employee Contributions, earlier, and Rollover of nontaxable amounts, below.
- Loans treated as distributions.
- Dividends on employer securities.
- The cost of any life insurance coverage provided under a qualified retirement plan.
- Similar items designated by the IRS in published guidance. See, for example, the Instructions for Forms 1099-R and 5498.
You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to a traditional IRA. The transfer must be made either through a direct (trustee-to-trustee) rollover to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to an IRA.
A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee).
For more information about rollovers, see Rollovers in Pubs. 575 and 590.taxmap/pubs/p560-019.htm#en_us_publink10009030
If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of each distribution for federal income tax.taxmap/pubs/p560-019.htm#en_us_publink10009031
If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required.
If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Other withholding rules apply to distributions such as long-term periodic distributions and required distributions (periodic or nonperiodic). However, the participant can still choose not to have tax withheld from these distributions. If the participant does not make this choice, the following withholding rules apply.
- For periodic distributions, withholding is based on their treatment as wages.
- For nonperiodic distributions, 10% of the taxable part is withheld.
If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. For more information, see Withholding Tax and Estimated Tax in Publication 575.taxmap/pubs/p560-019.htm#en_us_publink1000135959
If a distribution is an eligible rollover distribution, as discussed earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions.
- That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer.
- That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan.
- That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution.
- Certain other rules that may be applicable.
The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution.taxmap/pubs/p560-019.htm#en_us_publink1000135961
The written notice must be provided individually to each distributee of an eligible rollover distribution. Posting of the notice is not sufficient. However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. See Regulations section 1.401(a)-21.taxmap/pubs/p560-019.htm#en_us_publink10009033
If a distribution is made to an employee under the plan before he or she reaches age 591/2, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.taxmap/pubs/p560-019.htm#en_us_publink10009034
The 10% tax will not apply if distributions before age 591
are made in any of the following circumstances.
- Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.
- Made due to the employee having a qualifying disability.
- Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 591/2, whichever is the longer period.)
- Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.
- Made to an alternate payee under a QDRO.
- Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).
- Timely made to reduce excess contributions under a 401(k) plan.
- Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
- Timely made to reduce excess elective deferrals.
- Made because of an IRS levy on the plan.
- Made as a qualified reservist distribution.
- Made as a permissible withdrawal from an EACA.
To report the tax on early distributions, file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. See the form instructions for additional information about this tax.taxmap/pubs/p560-019.htm#en_us_publink10009036
If you are or have been a 5% owner of the business maintaining the plan, amounts you receive at any age that are more than the benefits provided for you under the plan formula are subject to an additional tax. This tax also applies to amounts received by your successor. The tax is 10% of the excess benefit includible in income.taxmap/pubs/p560-019.htm#en_us_publink10009037
You are a 5% owner if you meet either of the following conditions at any time during the 5 plan years immediately before the plan year that ends within the tax year you receive the distribution.
- You own more than 5% of the capital or profits interest in the employer.
- You own or are considered to own more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer.
To determine whether or not you are a 5% owner, see section 318.taxmap/pubs/p560-019.htm#en_us_publink10009038
Include on Form 1040, line 59, any tax you owe for an excess benefit. On the dotted line next to the total, write "Sec. 72(m)(5)" and write in the amount.taxmap/pubs/p560-019.htm#en_us_publink10009039
The amount subject to the additional tax is not eligible for the optional methods of figuring income tax on a lump-sum distribution. The optional methods are discussed under Lump-Sum Distributions in Publication 575.taxmap/pubs/p560-019.htm#en_us_publink10009040
A 20% or 50% excise tax is generally imposed on the cash and fair market value of other property an employer receives directly or indirectly from a qualified plan. If you owe this tax, report it on Schedule I of Form 5330. See the form instructions for more information.taxmap/pubs/p560-019.htm#en_us_publink10009041
An employer or the plan will have to pay an excise tax if both the following occur.
- A defined benefit plan or money purchase pension plan is amended to provide for a significant reduction in the rate of future benefit accrual.
- The plan administrator fails to notify the affected individuals and the employee organizations representing them of the reduction in writing. Affected individuals are the participants and alternate payees whose rate of benefit accrual under the plan may reasonably be expected to be significantly reduced by the amendment.
A plan amendment that eliminates or reduces any early retirement benefit or retirement-type subsidy reduces the rate of future benefit accrual.
The notice must be written in a manner calculated to be understood by the average plan participant and must provide enough information to allow each individual to understand the effect of the plan amendment. It must be provided within a reasonable time before the amendment takes effect.
The tax is $100 per participant or alternate payee for each day the notice is late. It is imposed on the employer, or, in the case of a multi-employer plan, on the plan.
There are certain exceptions to, and limitations on, the tax. The tax does not apply in any of the following situations.
- The person liable for the tax was unaware of the failure and exercised reasonable diligence to meet the notice requirements.
- The person liable for the tax exercised reasonable diligence to meet the notice requirements and provided the notice within 30 days starting on the first date the person knew or should have known that the failure to provide notice existed.
If the person liable for the tax exercised reasonable diligence to meet the notice requirement, the tax cannot be more than $500,000 during the tax year. The tax can also be waived to the extent it would be excessive or unfair if the failure is due to reasonable cause and not to willful neglect.