Payments received from qualified defined benefit plans, from non-qualified contracts

Payments received from qualified defined benefit plans

The IRS today released advance versions of guidance—Notice 2016-39 and Rev. Proc. 2016-36—concerning the tax treatment of payments received from qualified defined benefit plans during phased retirement and payments received from non-qualified contracts.

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Notice 2016-39

Notice 2016-39 [PDF 41 KB] provides guidance as to whether payments received by an employee from a qualified retirement plan during “phased retirement” are amounts received as an annuity under section 72. The IRS issued Notice 2016-39 in response to inquiries as to whether payments received by an employee from a qualified defined benefit plan during phased retirement are amounts received as an annuity under section 72. 

“Phased retirement” is an arrangement under which a participant in a qualified defined benefit plan commences the distribution of a portion of his or her retirement benefits from the plan while continuing to work on a part-time basis. 

The IRS notice provides guidance regarding the appropriate present value factors to be used for purposes of determining the basis recovery fraction of each payment received during phased retirement, and provides guidance regarding the time for determining the basis recovery fraction for these phased retirement payments. The notice specifically states that it does not apply to amounts received from non-qualified contracts. That guidance is provided in Rev. Proc. 2016-36.

Notice 2016-39 applies to tax years beginning on or after January 1, 2016. Taxpayers may, however, elect to apply the notice to tax years beginning before that date. 

Rev. Proc. 2016-36

Rev. Proc. 2016-36 [PDF 17 KB] provides that Notice 2016-39—concerning the recovery of investment in the contract from payments received from a retirement plan by an employee during phased retirement—does not apply to amounts that are received from a non-qualified contract.  

The revenue procedure concludes that in applying the section 72 regulations to a non-qualified contract, the possibility of further contributions to the contract or a subsequent election under the contract to receive the benefit payable under the contract in a different manner generally will not affect the determination of whether distributions are amounts received as an annuity.

The guidance in Rev. Proc. 2016-36 applies to tax years beginning on or after January 1, 2016. Taxpayers, however, may apply this revenue procedure to tax years beginning before that date. 

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