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CCH® PENSION — 09/08/10

IRS provides guidance for calculating excludable portion of pension distributions where no exclusions were reported in prior years

A qualified pension plan participant whose pension distributions were reported and taxed for several years without excluding after-tax plan contributions must use the simplified method to determine the excludable amount for the current tax year, according to IRS Letter Ruling 201021042. The participant could amend prior years' income tax returns to reflect the correct exclusion amounts for those years' pension distributions for each year an amended return was allowable. Generally, an income tax return may be amended within three years of the date upon which the original return was due, or within two years from the date the income tax was paid, whichever is later.

Two methods that were suggested by the participant for correcting the prior years' returns were rejected because they did not comply with Code Sec. 72 and underlying regulations. The participant's first suggestion was, beginning with the earliest year for which he could file an amended return, to treat the entire distribution received as nontaxable (and, thus, excludable) until he had caught up with the appropriate recovery amount for the current year, as if he had treated the correct amount as excludable each year. The second suggestion was to treat the earliest year for which he could file an amended return as the annuity starting date and calculate the exclusion amount based on that assumption.

As to the first suggestion, the IRS explained that each year's exclusion amount is limited to 12 times the monthly excludable amount calculated under the simplified method. In answer to the second suggestion, the IRS stated that the rules for the simplified method require the calculation to be based on the ages of the participant and the joint annuitant at the annuity starting date, which is the first day of the first period for which a payment is received.

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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