Income taxation of this death benefit is as follows: (1) the pure insurance element (death benefit less cash values) is received free of taxes; (2) the total of "economic benefit" costs paid by participant are also received free of taxes; and (3) any remaining death benefit is taxed as a qualified plan distribution
(generally as ordinary income).
24) However, in order to preserve capital gains and special averaging treatment for a qualified plan distribution
, the money from the qualified plan cannot be commingled with money from other sources.
Thus, to preserve capital gains and income averaging treatment for a qualified plan distribution
that is rolled over, the rollover would have to be made to a conduit IRA as under current law, and then rolled back into a qualified plan.
Taking a qualified plan distribution
in cash may allow immediate spending needs to be addressed, but such an action does come at a cost.
The remaining distribution, reduced by the participant's basis in the contract, is taxed as a qualified plan distribution
Because the ESOP is a qualified plan, this money is eligible for rollover to an IRA or will be taxed as a qualified plan distribution
If there is no preexisting income right, a qualified plan distribution
will usually be taxed to the plan participant.
Of course, if the qualified plan distribution
occurs after marriage, the spouse would have to waive his or her rights under ERISA for a rollover to occur.
404(k) do not apply; SESOP flowthrough distributions to participants will probably be treated as would any other pre-retirement qualified plan distribution