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February 17, 2009

Lump Sum Distribution

Your Guide



  • Distribution or payment, within a single tax year, of a plan participant’s entire balance from all of the employer’s qualified pension plan, profit-sharing plan, or stock bonus plans. All the participants account balances under the employer’s qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.  The distribution must occur as a result of one of the following:
    1. on account of the employee’s death,
    2. after the employee attains age 59 ½  ,
    3. on account of the employee’s separation from service, or
    4. after the employee has become disabled (within the meaning of IRC § 72 (m)(7)),
  • All trusts which are part of a plan shall be treated as a single trust
  • All pension plans maintained by the employer shall be treated as a single plan,
  • All profit-sharing plans maintained by the employer shall be treated as a single plan, and
  • All stock bonus plans maintained by the employer shall be treated as a single plan,

Referring Cite

IRC § 402(d)(4) , IRS Form 4972

Additional Helpful Information

  • Lump-sum distributions are eligible for special tax treatment, including income-averaging, which s a tax treatment where lump-sum distributions from qualified plans are treated as if they were distributed averagely over a five-year or ten-year period, beginning with the year the distribution occurs. However, the distributions are in fact distributed in one year and applicable taxes are paid on the amount for the year the distribution occurs.
  • The five-year income averaging was repealed under the Small Business Job Protection Act of 1996 ( SBA ’96) effective for distributions that occur after 12/31/1999
  • If an employee receives a lump-sum distribution in one year and receives an additional distribution in a later year, this ( additional) distribution will not disqualify the lump-sum distribution if it is attributed to additional contributions made to the account for the employee’s last or a subsequent year of service. For instance:

Assume the employee terminates from service last year and took a lump-sum distribution (last year). Next year, he receives a contribution to his account. A distribution of that contribution amount will not affect the lump-sum distribution he took last year and the lump-sum treatment he applied to that amount still stands.Cite:Prop. Treas. Reg. § 1.402(e)-2(d)(1)(ii)(B)

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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