One of the most confusing aspects of employee benefit plans is the federal tax treatment of distributions to the participants of these plans and to the beneficiaries of deceased participants. The issues frequently involve not only income taxation, but estate and gift taxation as well. While the average practitioner may never be called upon to draft a pension or profit-sharing plan, he may be asked by his client about the consequences of the various alternative methods
of receiving a benefit from such a plan. Many employee benefit plans, particularly profit-sharing plans, offer a participant upon his retirement from the plan or upon his separation from employment a choice of a lump sum distribution, installment payments or some form of annuity. A participant's choice will affect his tax liability, and the wrong advice to the client may be costly. The attorney who does not specialize in the area of employee benefit plans may also discover that in drafting a will or establishing an estate plan some knowledge of the tax treatment of distributions from these plans is necessary. As more employees participate in employee benefit plans, and as more employees are faced with a choice as to the method of distribution at retirement, the attorney can expect more requests for advice in this matter.
Louis A. Mezzullo,
The Taxation of Distributions from Qualified Employee Benefit Plans,
U. Rich. L. Rev.
Available at: http://scholarship.richmond.edu/lawreview/vol11/iss2/2