Retirement distribution

[Dawn20]

• • I need some advice on the IRS's treatment of this situation.
• Taxpayer worked for a company from 1968 until 1978 in Columbus, Ohio, Brussels, Belgium, and Walnut Creek, California.
• • He reached the age of 70 ½ in 2013 so his first withdrawal from their pension plan would have been 2014.
• After leaving the company in 1978, he has not had any contact from them over the years. The original company he worked for has changed hands multiple times, but his funds were passed down each time.
• On 1/9/24 he received a letter informing him he had benefits.

• • Multiple telephone conversations, emails and postal mail attempts to understand amounts, set up distributions, or just figure out what was going on were unsuccessful. He has documented proof of these attempts to resolve this issue with ABB to no avail.

• January 21,2025, ABB again sent him a letter trying to figure out how to distribute the funds due to him from past plans, etc. This time the communication was from another office or department and moving forward it was determined that he indeed had a pension plan that had been accruing interest and needed to be distributed. After many back-and-forth phone calls and emails, it was determined:

• This was a Cash Balance Plan UNKNOWN IF QUALIFIED PLAN PER IRS DEFINITION

• Back benefits will be calculated as of April 1, 2014, instead of the current date.  which would be past, retroactive payments and an interest payment verbally estimated in a phone conversation with Hope, the ABB representative, in the amount of $14,500 - Payment including interest. (NO IDEA WHAT THE SPLIT IS)

• He also was asked to Certify that he has chosen the Single Life Annuity to begin on April 1, 2014
• And that this option pays $110.90 per month starting April 1, 2014 –
•   133 MONTHS AT $110.90 = $14,749.70 PAID TO HIM

QUESTIONS:

Is the distribution chosen the best option for him or is something else better? TOO LATE TO CHANGE NOW

Will the back payment + interest - estimated at $14,500, require back taxes or amended tax returns for all these years?                                                                                                                          …….Or will this not be an issue since he did not receive any of these funds in prior years?

Will IRS impose penalties on him for non-withdrawals of funds during these 10 years – 2014-2024  11 YRS TO 2025

If any penalties were imposed, would the company be liable for these penalties since they failed to contact him?

Since he lived in California until 2017, would that part of that back retirement/interest payment be subject to California Income Tax?

(Probably not since he didn’t take any distribution

(OR IS THIS A CASE OF ALLOWED OR ALLOWABLE)

[Jennifer_A]

Thank you for the detailed history and detailed questions.

Firstly, "is the distribution chosen, the best option?"  Since they had him certify to a Single Life Annuity, did he have another option?  The annuity may need to be reviewed by a financial adviser.  If this was a Cash Balance Plan there are options to roll the lump sum into an annuity, an IRA, or other qualified retirement plan.

"Will the IRS impose penalties for non-withdrawals?" It depends on what kind of plan it was.  For example, Roth IRAs do not have a RMDs.  

A Cash Balance Plan is a defined benefit plan and considered tax-deferred.  Distributions are reported as ordinary income in the year distributed (not earned).  So if he left California in 2017, there would be no state liability if he received the distribution in 2024.  Furthermore, there would be no amendment for prior years on the earnings.  However, Cash Balance Plans do require RMDs and so an amendment of the previous federal returns to calculate the penalties would be appropriate.

If the IRS imposes penalties on the late RMD, the IRS will impose them on the tax payer.

[Dawn20]

Jennifer, thank you for your answers. The funds were paid to him in 2025, and although we are not talking a lot of money, he is retired and hoping there will be no additional penalties on this money.

I do not believe it is a Roth IRA, as it was paid through the company and probably before Roth IRAs were set up. 

Either way, since I do our taxes (I was a tax preparer in another lifetime), I am inclined to just claim the funds as income for 2025 as a distribution and see if the IRS comes back with any penalties. Should I do that or should I follow up with you in January and see what else might be done on the taxes?  We should get a 1099 at the end of the years with a bit more information on it than we have now.