CPC CPC Plan Distributions & Taxation 2 — Questions and Answers
Question 1: Under IRC Section 401(a)(9), what is the default distribution rule for a non-spouse beneficiary under the 10-year rule?
- Distributions must be taken in equal annual installments over 10 years
- The entire account must be distributed by December 31 of the 10th year after the participant's death (Correct answer)
- Annual RMDs based on beneficiary's life expectancy must begin in year one
- Distributions can be deferred until the beneficiary reaches age 72
Correct answer: The entire account must be distributed by December 31 of the 10th year after the participant's death
Under SECURE Act's 10-year rule, non-spouse designated beneficiaries must deplete the account by December 31 of the tenth year following the participant's death.
Question 2: A participant receives a plan loan that fails to meet IRC Section 72(p) requirements. What is the tax consequence?
- The loan is reclassified as an employer contribution
- The loan amount is treated as a taxable deemed distribution (Correct answer)
- The loan is forgiven without tax consequence
- Interest payments become deductible as investment interest
Correct answer: The loan amount is treated as a taxable deemed distribution
A loan that violates Section 72(p) requirements (amount, term, or repayment schedule) is treated as a deemed distribution, making the loan balance immediately taxable to the participant.
Question 3: The General Rule for taxation of annuity payments applies when?
- The participant made no after-tax contributions to the plan
- The participant's after-tax investment in the contract cannot be recovered using the Simplified Method (Correct answer)
- All annuity payments began before 1987
- The annuity is provided through an IRA
Correct answer: The participant's after-tax investment in the contract cannot be recovered using the Simplified Method
The General Rule applies to annuity payees who cannot use the Simplified Method, typically because their annuity starting date predates 1987 or the pension is from a non-qualified plan.
Question 4: Which exception allows a plan to distribute a benefit without participant consent when the present value is below a specified threshold?
- $1,000 involuntary cash-out limit triggering mandatory IRA rollover
- $5,000 involuntary cash-out with mandatory IRA rollover for amounts over $1,000 (Correct answer)
- $10,000 small-benefit rule
- $7,000 de minimis rule
Correct answer: $5,000 involuntary cash-out with mandatory IRA rollover for amounts over $1,000
Plans may cash out vested benefits of $5,000 or less without consent; amounts above $1,000 but at or below $5,000 must be rolled to an IRA if the participant doesn't elect otherwise.
Question 5: A participant's qualified plan account includes a life insurance policy. What portion of the premiums is currently taxable to the participant?
- None—all life insurance in a qualified plan is tax-free
- The pure insurance cost (P.S. 58 cost or Table 2001 rates) is taxable annually (Correct answer)
- Premiums are taxable only when the death benefit is paid
- 100% of premiums are taxable in the year paid
Correct answer: The pure insurance cost (P.S. 58 cost or Table 2001 rates) is taxable annually
The cost of current life insurance protection (measured by IRS Table 2001 rates or insurer's lower published rates) is includible in the participant's gross income each year.
Question 6: Under the 10-year forward averaging rule for lump-sum distributions, who is eligible?
- Any participant who receives a lump-sum distribution
- Participants born before January 1, 1936, who elect the special tax treatment (Correct answer)
- Participants with at least 20 years of plan participation
- Only participants who have reached age 59½ at the time of distribution
Correct answer: Participants born before January 1, 1936, who elect the special tax treatment
The 10-year forward averaging method under IRC Section 402(d) is only available to participants born before January 1, 1936.
CPC CPC Plan Distributions & Taxation 2
Under IRC Section 401(a)(9), what is the default distribution rule for a non-spouse beneficiary under the 10-year rule?