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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The U.S. Court of Appeals in Chicago (CA-7) has affirmed a Tax Court decision that held that an individual retirement account (IRA) owner was liable for the 10% additional tax on a premature withdrawal from his IRA after he rolled his benefits from a pension plan to the IRA because he withdrew the funds from the IRA prior to attaining age 59 ½.
IRA owner rolled pension benefits into IRA
After an individual left his position as partner in a law firm at age 56, he chose to roll over his law firm pension into an IRA instead of taking a distribution from the pension plan. The rollover was a nontaxable event. The IRA owner later took a distribution from the IRA before he attained age 59½. He paid income tax on the distribution, but not the 10% early withdrawal tax.
Early withdrawal tax on IRA withdrawal
Under Code Secs. 72(t)(1) and (2)(A)(i), a distribution from a qualified retirement plan (which includes IRAs) is subject to a 10% early withdrawal tax that must be paid in addition to federal income tax if a plan participant receives the distribution from the plan before reaching age 59½. Under the exception in Code Sec. 72(t)(2)(A)(v), if the distribution is "made to an employee" who has separated from the employer’s service after attaining age 55, the distribution will be exempt from the 10% tax. However, Code Sec. 72(t)(3)(A) provides that the exception in Code Sec. 72(t)(2)(A)(v) does not apply to distributions from IRAs.
The Tax Court upheld the IRS determination that the IRA owner owed the 10% early withdrawal tax. The IRA owner appealed the decision. The appellate court found that the IRA owner’s distribution was not "made to an employee" and that Code Sec. 72(t)(3)(A) provides that Code Sec. 72(t)(2)(A)(v) does not apply to distributions from IRAs. Since the IRA owner withdrew funds from the IRA prior to attaining age 59½, the withdrawal was subject to the 10% additional tax pursuant to Code Sec. 72(t)(1).
The IRA owner argued that it did not make sense that he could take a distribution from his law firm’s plan without owing the 10% additional tax, but would have to pay the extra 10% tax if he took a distribution from an IRA after having rolled his law firm’s plan benefits to the IRA. The appellate court responded that the Code says that the difference here matters and that many of the provisions in the Code are compromises and are arbitrary. The court noted that the tax deferrals provided for amounts in pension plans and IRAs are expensive to the Treasury and so the Code makes using some tax-deferral opportunities costly. Congress established the boundaries, and the court was not authorized to redraw them.
Source: Kim v. Commissioner of Internal Revenue (CA-7).
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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