Surviving spouse “Qualified” Lump Sum Distribution
In order for a distribution to qualify as a lump-sum distribution (LSD) the entire plan balance must be withdrawn in one taxable year after a triggering event.
Pursuant to 72(t) A triggering event is either: separation from service, retirement, death, disability or reaching age 59 1/2.
If a participant in a Qualified Plan takes a partial plan distribution after a triggering event under 72(t) a subsequent complete distribution of the entire plan balance in one taxable year would not be considered a “Qualified” LSD eligible for certain favorable tax treatment including NUA in employer stock. Additionally, a participant’s RMD would be considered a partial distribution making any future distributions ineligible as a LSD.
Based on the above, if a participant dies after receiving their first RMD is the spouse beneficiary eligible to make a “Qualified” LSD? or, is the fact that the decedent took their first RMD the spouse can not of the take advantage of “Qualified” LSD?
Permalink Submitted by Alan Spross on Thu, 2008-12-11 20:18
Laura,
This should not be a problem, since the employee’s death constitutes a new triggering event. A new triggering event erases any prior “intervening distributions” such as the decedent’s RMD or any other distribution the decedent may have taken.
THis should be obvious to the IRS when they see the Death Code #4 in box 7 of the 1099R for the LSD. The surviving spouse therefore has the option for a qualified LSD and NUA treatment.
Having said that, there is a potential problem if the surviving spouse takes an RMD because the decedent had not taken their full RMD for the year of death. I suggest that the decedent NOT take such an RMD unless they are completely sure that the LSD can be completed in the same year. For example, if the survivor took the decedent’s RMD at this time of year and there is no time to complete the LSD prior to year end, the survivor might have made their own intervening distribution and blown the chances for NUA.