Commingled Death Benefit

[Corduroy Frog]

Distribution from retirement plan is exempt from penalty if it came from a deceased spouse (death benefit).
This one ain't that simple.

Facts:
1)Husband works at Giantcorp and dies in 2007. Leaves $150,000 in his 401k.
2)Wife also works at Giantcorp at the time of his death and has a 401k of her own.
3)Giantcorp talks wife into rolling over his 401k into her own where it stays for a few years.
4)Wife finally quits Giantcorp, and cashes out $240,000 total distribution of her 401k in 2012.

For 2012, Giantcorp's custodian has sent a 1099-R to wife with a Distribution Code "1".

I contend that wife is entitled to be exempted of $15,000 of the big penalty. What say ye??

[tpnl]

Disagree

I asked around our office and everyone said "sorry." The rollover she did in 2007 when the husband died was her distribution at his death; so the code was "4G". Only the G showed up on the 1099-R (we assume). Unless I could find someother citation, that is how I would handle it (I would keep looking). Good luck.

[Burke]

I think she may be SOL due to the rollover into her account in 2007. She could have rolled her 401k over to an IRA when she left the company, and then taken as needed. How close was she to 59 1/2? What about the rule for "separating from company after age 55?"

[Roland Slugg]

The death benefit (Code 4) exemption from the 10% penalty would have applied if she had not merged her husband's 401(k) balance in with her own. But once she did that, it all became her own fund balance. No exception applies. I assume, of course, that she was younger than 59½ when she received the payout.

It seems inconceivable to me that anyone would take a distribution that large from an IRA or 401(k) plan without first seeking advice from a person qualified to offer it. Perhaps this woman did, then went ahead anyway. But if she didn't, she will now pay a heavy price in penalties and, probably, in income tax as well.

[Golden Rocket]

Subplot

It seems inconceivable to me that anyone would take a distribution that large from an IRA or 401(k) plan without first seeking advice from a person qualified to offer it.

Mr. Slugg touches on a very important subplot to this entire situation. Her husband's 401K (and hers as well) was tied up 75% in stock of GiantCorp. Client says the Human Resources Office was dictating what to do and not advising of their options at the time. Client is either misinformed, or the company office was breaking all manner of regulations.

[Burke]

OP said she "retired" but we still don't know her age. Rule 72(t)(2)(A)(v) says a distribution from a qualified retirement plan "if the participant separated from service in or after the year he or she reached age 55..." as an exception to the penalty. Would she qualify?
See TTB page 13-3.

[Burke]

Mr. Slugg touches on a very important subplot to this entire situation. Her husband's 401K (and hers as well) was tied up 75% in stock of GiantCorp. Client says the Human Resources Office was dictating what to do and not advising of their options at the time. Client is either misinformed, or the company office was breaking all manner of regulations.

I thought the IRS required companies to advise retirement participants of their options when they were leaving the company, and this rule was put into effect some years back. Am I dreaming this up?

[Snaggletooth]

Don't Know Why

Almost without exception, the conventional wisdom of respondants are telling me she cannot escape the penalty. Company will disavow any pressure on woman to rollover into her own plan, and if need be, would produce documents to the effect that she signed on the dotted line.

However, I have gone deeper than TTB into §72(t)(2)(A)(ii) and read the Code for myself - also the Regulation 1.72(t)(2)(A)(ii). What I found out was the code and regs do not really state in greater depth than TTB itself. A very simple two line statement which does not mention re-application of the penalty if she chooses to roll into her own plan.

If you guys (gals) are correct, then your knowledge must consist of information not in the code or regs. This could be the lexicon of a court decision, chief counsel statement, etc.

At risk is a considerable amount of penalty (the numbers I gave earlier were example only, and are much higher). If this hasn't been to court, and the client is game, we might just try filing under exception code 4. Client is only 38 years old in 2012, so we can end any discussion of age.

[Corduroy Frog]

One more time

will bump this to the top one more time...hoping someone knows a cite beyond the code/regs. Thanks for reading.

[Burke]

Well, this isn't much of a cite, but Pub 17, page 123 referring to other retirement plans (as opposed to IRA's) states "An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan." As such it is subject to the 10% penalty if no exception applies. I would think there have been some Tax Court decisions on this somewhere along the line.