RetroPayment from a Cash Balance Plan

Home Fairmark Forum Retirement Savings and Benefits RetroPayment from a Cash Balance Plan

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  • #14236
    jd54
    Participant

    Hello. My mother has been in a Pension Plan that converted into a Cash Balance Plan some years ago. We have just been informed that because of IRC 415, not positive if it is (b), she must take a retro payment for the past 37 years out of the plan and start taking her monthly annuity or lump sum benefit. The single annuity with Retro is substantially more that the Lump Sum payment that also has a retro component. I asked if I could possibly move the Single annuity a Retro payment to a workplace 403B plan that they have, because she is still considered an active employee on Workers Comp. I was told no, because there is still a monthly annuity payment that goes with the significant retro payment. Would the Lump Sum with retro be treated as rollover ineligible? I would like to keep this money tax sheltered. The lump sum, with retro, is still less than the single annuity with retro payment and with taxes taken out from the single annuity and about $900 a month continuous Single annuity for life.

    The other angle that has me more concerned is if she must pay the IRS for one total Retro payment or 37 individual years of taxes, penalties and interest that would have to be figured.

    • This topic was modified 8 months, 1 week ago by jd54.
    #14269
    Alan S.
    Participant

    This is very unusual, and she should insist on a total explanation in writing. I am not familiar with this exact set of circumstances, but if excessive amounts were contributed to the plan over the years, and such amounts must therefore be distributed out of the plan, the amount distributed will not be eligible for rollover. If the amounts are significant, it’s possible that a benefits attorney should be consulted.

    A lump sum payment would have to be reported in the year distributed, and while this would avoid any amended tax returns, it could certainly result in a much higher marginal tax rate for the year distributed. If she made after tax contributions to the pension plan, any amount distributed needs to be properly allocated between taxable and non taxable amounts.

    #14271
    jd54
    Participant

    Alan, thank you for your response. I agree on how unusual this situation is. I have been in contact with a CPA and Lawyer and neither had heard of anything such as this. This Cash Balance Plan is a defined benefit plan, so none of her personal money has been contributed to this plan. From what has been sent to us it seems that the Plan administrator noticed recently that she should have been removed from the plan in 1984, but they didn’t catch it at the time, probably because she has been on Workers Comp. She is now 91 and still considered an employee of this company. Their course of action is to pay her 206 months of annuity payments as a Retro Payment and allow her to take those accumulated funds along with a monthly annuity for life. I worry about the marginal tax rate as well, estimating it at 27.4%. I am also wondering if she could do a 10 year tax averaging using Form 4972. Until I see her 1099R I won’t know how they filled in each line, so I don’t know if she is eligible for that. Could you explain what a benefits attorney would be useful in this matter right now. It seems as though they are usually hired by the company in matters such as this.

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