Publication 560 - Retirement Plans For Small Business

Required Distributions

After the starting year, the participant must re-

2) Any of a series of substantially equal pay-

ceive the required distribution for each year by

ments made at least once a year over any

December 31 of that year. If no distribution is

of the following periods.

A qualified plan must provide that each partici-

made in the starting year, required distributions

pant will either:

a) The employee’s life or life expectancy.

for 2 years must be made in the next year (one

•

Receive his or her entire interest (benefits)

by April 1 and one by December 31).

b) The joint lives or life expectancies of

in the plan by the required beginning date

the employee and beneficiary.

Distributions after participant’s death.

(defined later), or

See Publication 575 for the special rules cover-

•

c) A period of 10 years or longer.

Begin receiving regular periodic distribu-

ing distributions made after the death of a par-

tions by the required beginning date in an-

ticipant.

3) A hardship distribution from a 401(k) plan.

nual amounts calculated to distribute the

(No hardship distribution made after De-

participant’s entire interest (benefits) over

Distributions From

cember 31, 2001, will qualify as an eligible

his or her life expectancy or over the joint

401(k) Plans

rollover distribution.)

life expectancy of the participant and the

designated beneficiary (or over a shorter

4) The portion of a distribution that repre-

Generally, distributions cannot be made until

period).

sents the return of an employee’s nonde-

one of the following occurs.

ductible contributions to the plan. See

•

These distribution rules apply individually to

The employee retires, dies, becomes dis-

Employee Contributions, earlier.

each qualified plan. You cannot satisfy the re-

abled, or otherwise separates from ser-

5) A corrective distribution of excess contri-

quirement for one plan by taking a distribution

vice.

butions or deferrals under a 401(k) plan

from another. These rules may be incorporated

•

The plan ends and no other defined contri-

and any income allocable to the excess, or

in the plan by reference. The plan must provide

bution plan is established or continued.

of excess annual additions and any alloca-

that these rules override any inconsistent distri-

ble gains. See Correcting excess annual

•

bution options previously offered.

In the case of a 401(k) plan that is part of

additions, earlier, under Limits on Contri-

a profit-sharing plan, the employee

Minimum distribution. If the account balance

butions and Benefits.

reaches age 59

or suffers financial hard-

of a qualified plan participant is to be distributed

ship. For the rules on hardship distribu-

6) Loans treated as distributions.

(other than as an annuity), the plan administra-

tions, including the limits on them, see

tor must figure the minimum amount required to

7) Dividends on employer securities.

section 1.401(k) – 1(d)(2) of the regula-

be distributed each distribution calendar year.

tions.

8) The cost of life insurance coverage.

This minimum is figured by dividing the account

balance by the applicable life expectancy. For

More information. For more information

details on figuring the minimum distribution, see

Certain distributions listed above may

about rollovers, see Rollovers in Publications

Tax on Excess Accumulation in Publication 575.

be subject to the tax on early distribu-

575 and 590.

tions discussed later.

CAUTION

Minimum distribution incidental benefit re-

quirement. Minimum distributions must also

Withholding requirement. If, during a year, a

Qualified domestic relations order (QDRO).

meet the minimum distribution incidental benefit

qualified plan pays to a participant one or more

These distribution restrictions do not apply if the

requirement. This requirement ensures the plan

eligible rollover distributions (defined earlier)

distribution is to an alternate payee under the

is used primarily to provide retirement benefits

that are reasonably expected to total $200 or

terms of a QDRO, which is defined in Publication

to the employee. After the employee’s death,

more, the payor must withhold 20% of each

575.

only “incidental” benefits are expected to remain

distribution for federal income tax.

for distribution to the employee’s beneficiary (or

Exceptions. If, instead of having the distri-

Tax Treatment

beneficiaries). For more information about other

bution paid to him or her, the participant chooses

distribution requirements, see Publication 575.

of Distributions

to have the plan pay it directly to an IRA or

another eligible retirement plan (a direct rol-

Required beginning date. Generally, each

Distributions from a qualified plan minus a pro-

lover), no withholding is required.

participant must receive his or her entire bene-

rated part of any cost basis are subject to in-

fits in the plan or begin to receive periodic distri-

If the distribution is not an eligible rollover

come tax in the year they are distributed. Since

butions of benefits from the plan by the required

distribution, defined earlier, the 20% withholding

most recipients have no cost basis, a distribution

beginning date.

requirement does not apply. Other withholding

is generally fully taxable. An exception is a distri-

A participant must begin to receive distribu-

rules apply to distributions such as long-term

bution that is properly rolled over as discussed

tions from his or her qualified retirement plan by

periodic distributions and required distributions

next under Rollover.

April 1 of the first year after the later of the

(periodic or nonperiodic). However, the partici-

The tax treatment of distributions depends

following years.

pant can still choose not to have tax withheld

on whether they are made periodically over sev-

from these distributions. If the participant does

eral years or life (periodic distributions) or are

1) Calendar year in which he or she reaches

not make this choice, the following withholding

nonperiodic distributions. See Taxation of Peri-

age 70

rules apply.

odic Payments and Taxation of Nonperiodic

2) Calendar year in which he or she retires.

•

Payments in Publication 575 for a detailed

For periodic distributions, withholding is

description of how distributions are taxed, in-

based on their treatment as wages.

However, your plan may require you to begin

cluding the 10-year tax option or capital gain

receiving distributions by April 1 of the year after

•

For nonperiodic distributions, 10% of the

treatment of a lump-sum distribution.

you reach age 70

even if you have not retired.

taxable part is withheld.

If the participant is a 5% owner of the em-

Rollover. The recipient of an eligible rollover

ployer maintaining the plan or if the distribution

distribution from a qualified plan can defer the

Estimated tax payments. If no income tax

is from a traditional or SIMPLE IRA, the partici-

tax on it by rolling it over into a traditional IRA or

is withheld or not enough tax is withheld, the

pant must begin receiving distributions by April 1

another eligible retirement plan. However, it may

recipient of a distribution may have to make

of the first year after the calendar year in which

be subject to withholding as discussed under

estimated tax payments. For more information,

the participant reached age 70

. For more infor-

Withholding requirement, later.

see Withholding Tax and Estimated Tax in Pub-

mation, see Tax on Excess Accumulation in

lication 575.

Eligible rollover distribution. This is a dis-

Publication 575.

tribution of all or any part of an employee’s

Tax on Early Distributions

Distributions after the starting year. The

balance in a qualified retirement plan that is not

distribution required to be made by April 1 is

any of the following.

treated as a distribution for the starting year.

If a distribution is made to an employee under

(The starting year is the year in which the partici-

1) A required minimum distribution. See Re-

the plan before he or she reaches age 59

, the

pant meets (1) or (2) above, whichever applies.)

quired Distributions, earlier.

employee may have to pay a 10% additional tax

Chapter 4 Qualified Plans

Page 17

Publication 560 - Retirement Plans For Small Business - 2001 Page 17

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