401(k) Qualified Plans

Distributions
Generally, the law requires plans to pay retirement benefits no later than the time an employee reaches normal retirement age, and many plans provide earlier payments under certain circumstances. For example, a plan may allow employees to receive distributions after terminating employment regardless of the employee's age. The plan's summary plan description (SPD) should provide the rules for obtaining the distribution as well as the timing of distribution after termination of employment.

Qualified Joint and Survivor Annuity (QJSA)
In a money-purchase pension plan, the retirement benefit payment generally must occur in series of equal, periodic payments over the lifetime of the employee or the joint life of, and the payments must continue to the employee's spouse for the rest of his or her life if he or she survives the employee. The periodic payment to the surviving spouse must be at least 50% but not more than 100% of the periodic payment received by the participant while he or she was alive. This form of payment is called a qualified joint and survivor annuity (QJSA), and the plan must provide an explanation of the QJSA in a timely manner.

If the plan provides other forms of benefit payment, the employee and his or her spouse can elect to waive their rights to receive the QJSA and select one of the other payment options available. The waiver must be made in writing within certain time limits and be witnessed by a notary or plan representative.

Triggering Event
Generally, distributions cannot be made until one of the following occurs:

All of the above are referred to as triggering events.

If the plan is a profit-sharing or a 401(k) plan, the employee is allowed to take an in-service withdrawals if the plan permits. An in-service withdrawal is a distribution that may occur without the employee experiencing a triggering event. Some plans will allow an in-service withdrawal only if the employee experiences financial hardships as defined by the plan.

Tax on Early Distributions
If a distribution is made to an employee under the plan before he or she reaches age 59.5, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the taxable amount received by the employee.

However, the 10% tax will not apply before age 59.5 if the following occurs:

Withholding on Eligible Rollover Distributions
Distributions paid to an employee are subjected to a mandatory federal withholding of 20% if the distribution exceeds $200 for the year and is an eligible rollover distribution. Distributions that are not eligible rollover distributions are not subjected to the mandatory 20% withholding.

Eligible rollover distributions are distributions of all or any part of an employee's balance in a qualified retirement plan, except if the distribution is any of the following:

An employee may avoid the 20% withholding by having the distribution processed as a direct rollover to an eligible retirement plan. In a direct rollover the assets are made payable to the trustee or custodian of the receiving retirement plan for the benefit of the employee.

Required Distributions
Under the required minimum distributions (RMD) rules, a qualified plan must provide that either of the following occurs:

• Each participant will receive his or her entire interest (benefits) in the plan by the required beginning date (RBD).
• Each participant will begin to receive regular periodic distributions by the required beginning date. The distributions are annual amounts calculated so that the participant's entire interest is distributed over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary.

The plan administrator must figure the RMD for each participant and distribute the amount to each participant who is required to remove an RMD from his or her qualified plan account.

If an employee participates in more than one qualified plan, the RMD for each plan must be calculated separately. Unlike IRAs, the RMD for multiple plans cannot be combined and taken from one plan.

Required Beginning Date
Generally, each participant must begin receiving RMD by April 1 of the year following the calendar year he or she reaches age 70.5. If the plan allows and the employee is still employed after he or she reaches age 70.5, the RBD could be delayed until Apr 1 following the year the employee retires. The option to delay the RBD after Apr 1 following the calendar year in which the employee reached the 70.5 birthday is not available to employees who own at least 5% of the business.

Subsequent RMD amounts must be distributed by December 31 of each year.

Excess-Accumulation Penalty
Employees who do not take their RMD by the prescribed deadline will owe the IRS a 50% excess-accumulation penalty. The 50% is assessed on the amount not distributed.

Jane must pay the excess-accumulation penalty when she files her federal tax return, unless she feels that the failure was due to reasonable circumstance - in which case, she may write to the IRS and request that the penalty be waived.