EMPLOYEE BENEFIT PROGRAM 1.Why might an employee who receives a lump sum distrib

Question

EMPLOYEE BENEFIT PROGRAM

1.Why might an employee who receives a lump sum distribution from a qualified retirement plan choose to roll over the distribution into an IRA? What are the negative tax consequences of doing so?

2. Understanding Treasury Revenue Ruling 60-31 is essential to the proper planning of compensation arrangements that will defer income over time. Identify three principles outlined in this ruling that must be considered to avoid constructive receipt problems in a compensation arrangement.

3. An unfunded deferred compensation agreement generally is secured only by the promise of the employer to satisfy its future obligation to the employee. Identify the major requirement for a deferred compensation agreement to qualify as unfunded for income tax purposes and state why this requirement is important.

Explanation / Answer

1. When you roll over a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred.

3. The unqualified deferred compensation agreement do not provide employers and employees with the tax benefits associated with qualified plans because NQDC plans do not satisfy all of the requirements of IRC § 401(a). And employers generally only deduct expenses when income is recognized by the employee or service provider. In contrast, under a qualified plan, employers are entitled to deduct expenses in the year contributions are made even though employees will not recognize income until the later years upon receipt of distribution

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