https://www.law.cornell.edu/uscode/text/26/409The ESOP distribution timing rules for terminations due to Death, Disability, and Retirement and Other Separations of Service are in addition to the distribution rules that apply to all qualified plan distribution rules. Yesterday we talked about the ESOP Latest Commencement Date. The provisions are another instance where the general qualified plan distribution rules in the Internal Revenue Code can supersede the ESOP distribution rules for Death, Disability, and Retirement, Other Separations of Service, and the ESOP Loan Exception, and ultimately impact the distribution commencement date. The Code also provides distribution timing provisions for deceased employees that supersede the ESOP Loan Exception.
§ 401. Qualified pension, profit-sharing, and stock bonus plans
(a) Requirements for qualification
A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section—
(9) Required distributions.—
(A) In general.— A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee—
(i) will be distributed to such employee not later than the required beginning date, or
(ii) will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).
(B) Required distribution where employee dies before entire interest is distributed.—
(i) Where distributions have begun under subparagraph (A)(ii).—A trust shall not constitute a qualified trust under this section unless the plan provides that if—
(I) the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), and
(II) the employee dies before his entire interest has been distributed to him, the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph (A)(ii) as of the date of his death.
(ii) 5-year rule for other cases.— A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee.
(iii) Exception to 5-year rule for certain amounts payable over life of beneficiary.— If—
(I) any portion of the employee's interest is payable to (or for the benefit of) a designated beneficiary,
(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and
(III) such distributions begin not later than 1 year after the date of the employee's death or such later date as the Secretary may by regulations prescribe, for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.
(iv) Special rule for surviving spouse of employee.— If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee—
(I) the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained age 701/2, and
(II) if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse were the employee.
(C) Required beginning date.— For purposes of this paragraph—
(i) In general.— The term "required beginning date" means April 1 of the calendar year following the later of—
(I) the calendar year in which the employee attains age 701/2, or
(II) the calendar year in which the employee retires.
(ii) Exception.— Subclause (II) of clause (i) shall not apply—
(I) except as provided in section 409 (d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 701/2, or
(II) for purposes of section 408 (a)(6) or (b)(3).
(iii) Actuarial adjustment.— In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 701/2, the employee's accrued benefit shall be actuarially increased to take into account the period after age 701/2 in which the employee was not receiving any benefits under the plan.
(iv) Exception for governmental and church plans.— Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of this clause, the term "church plan" means a plan maintained by a church for church employees, and the term "church" means any church (as defined in section 3121 (w)(3)(A)) or qualified church-controlled organization (as defined in section 3121 (w)(3)(B)).
(D) Life expectancy.— For purposes of this paragraph, the life expectancy of an employee and the employee's spouse (other than in the case of a life annuity) may be redetermined but not more frequently than annually.
(E) Designated beneficiary.— For purposes of this paragraph, the term "designated beneficiary" means any individual designated as a beneficiary by the employee.
(F) Treatment of payments to children.— Under regulations prescribed by the Secretary, for purposes of this paragraph, any amount paid to a child shall be treated as if it had been paid to the surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations).
(G) Treatment of incidental death benefit distributions.— For purposes of this title, any distribution required under the incidental death benefit requirements of this subsection shall be treated as a distribution required under this paragraph.
