This notice explains the federal income tax implications of your retirement benefits from the San Mateo Electrical Construction Industry Retirement Plan (“Plan”).  It is provided to you by the Plan’s Board of Trustees, which is the “Plan Administrator”. Federal law requires this notice to help you decide how to receive your Plan benefits.

This information is adapted from IRS instructions but should not be considered personal tax advice. Instead, you should consult with a personal tax advisor for tax advice for your situation. 

The rules are complex and contain many conditions and exceptions not included in this notice. You can find more  information on the tax treatment of payments in IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements. These publications are available on the IRS website at https://www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676). If you have additional questions after reading this notice, contact the Plan Office.

Summary

Cash Distribution: The payment is made directly to you.

  • The Plan Administrator is required to subtract 20% for income tax withholding. This amount is sent to the IRS and credited toward your Federal Income Taxes.
  • Your payment will be taxed in the current year unless you roll it over within 60 days of receiving the payment.

Direct Rollover: The payment is made directly to a traditional IRA that you establish or to a qualified employer plan that will accept it and hold it for your benefit.

  • The distribution is not taxed in the current year, and income tax is not withheld.
  • When you take the money out of the traditional IRA or the qualified employer plan, the money is taxed.

Required Minimum Distribution (RMD): The minimum payment you must receive from your account each year after your reach age 72.

  • Your distribution will be included in your taxable income. You may elect to have no income tax withheld or you may use IRS Form W4-P to determine your tax withholding.
  • If the distribution does not meet the required minimum each year, you may have to pay a 50% excise tax on the amount not distributed as required.

Income Tax Withholding

Mandatory Withholding

If any portion of your payment can be rolled over and you do not elect to make a Direct Rollover, the Plan is required by law to withhold 20% of the taxable amount. This amount is sent to the IRS as federal income tax withholding.

For example, if you can roll over a taxable payment of $10,000, only $8,000 will be paid to you because the Plan must withhold $2,000 as income tax. When you prepare your income tax return for the year, you must report the entire $10,000 as a taxable payment from the Plan unless you make a rollover within 60 days. You must also enter the $2,000 as tax withheld, and it is credited toward any income tax you owe for the year. There will be no income tax withholding if your payments for the year are less than $200.

Voluntary Withholding

If any portion of your payment is taxable but cannot be rolled over, the mandatory withholding rules described above do not apply. If you do nothing, IRS tables determine your income tax withholding. Instead, you may determine your withholding and submit the federal and state forms. The data from these forms can be entered in your Pension Forms. If you enter the data electronically, keep the forms for your records.

    1. Tax Withholding, Federal (W-4P)
    2. Tax Withholding, CA State
    3. Tax Withholding, CA State (Spanish)

State or Local Income Tax

State and local income tax is withheld only for those states where such withholding is mandatory. If you reside in a state that has a state income tax, and the state does not have a mandatory withholding rule, you will be responsible for any state income taxes due on the taxable portion of your distribution. You should also be aware that some states have not yet changed their laws to consider the expanded rollover rules that became effective January 1, 2002. In some instances, a rollover now permitted under federal law may be subject to taxation under state law. However, once the rollover is taxed under state law, the state would not tax this amount again when later you receive it as a distribution.

Cash Distribution

Cash distribution for money that cannot be rolled over: If your payment cannot be rolled over, ordinary income tax will apply. You should fill out IRS form W4-P and enter the information in the pension forms.

Cash distribution for money than can be rolled over: If your payment can be rolled over and the payment is made to you in cash, it is subject to 20% federal income tax withholding on the taxable portion (state tax withholding may also apply).

  • You will receive only 80% of the payment because the Plan Administrator is required to subtract 20% for income tax withholding. This amount is sent to the IRS and credited toward your Federal Income Taxes.
  • Your payment will be taxed in the current year unless you roll it over. Under limited circumstances, you may be able to use special tax rules that could reduce the tax you owe.
  • If you receive the payment before the Plan’s early retirement age of 55, you may have to pay an additional 10% tax. See the section below on Early Distribution Penalty.
  • You can roll over all or part of the payment to a traditional IRA or to a qualified employer plan within 60 days of receiving the payment. The amount rolled over will not be taxed until you take it out of the traditional IRA or the qualified employer plan.
  • Suppose you want to roll over 100% of the payment within 60 days to a traditional IRA or a qualified employer plan. In that case, you must find other money to replace the 20% withheld for taxes since it is already credited to you at the IRS. Instead, if you roll over only the 80% that you received, you will be taxed on the 20% that was withheld and not rolled over. To avoid this problem, use the Direct Rollover when possible.

Example for 60-day Rollover: The taxable portion of your payment that can be rolled over is $10,000, and you choose to have it paid to you in a Cash Distribution. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you decide to roll over the entire $10,000 to a traditional IRA or a qualified employer plan. To do this, you roll over the $8,000 you received from the Plan, and you find $2,000 from other sources (your savings, a loan, etc.). Now, the entire $10,000 is not taxed until you take it out of the new plan. When you file your income tax return, you may get a refund of part or all of the $2,000 withheld. On the other hand, if you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return, you may still get a refund of part of the $2,000 withheld, but any refund would be smaller that if you had rolled over the entire $10,000. Tip: The Direct Rollover, in this case, would have been an easier choice.

Direct Rollover

A Direct Rollover is a direct payment of your Plan benefits to a traditional IRA or a qualified employer plan that will accept it. Only funds that are eligible for rollover can be rolled over. You are not taxed on your distribution when you roll it over. Instead, you will be taxed when you withdraw from the new IRA or plan.

Future distributions from the new plan may be subject to different tax treatment than this Plan’s distributions. For example, if you were born before January 1, 1936, you may be entitled to ten-year averaging or capital gain treatment. However, if you have your benefit rolled over to a section 403(b) tax-sheltered annuity, a governmental 457 plan, or a traditional IRA in a Direct Rollover, your benefit will no longer be eligible for that special treatment. See the section below on Special Tax Treatment.

Early Distribution Penalty (under age 59-1/2)

When you receive a distribution from a pension plan, such as this Plan, you will pay federal and state taxes on the distribution. In addition, a 10% federal tax penalty applies to early distributions (as defined in section 72(t) of the IRS code, generally when you have not reached age 59 1/2). You may also be liable for state tax penalties on early distributions. For example, California assesses a 2.5% penalty. See IRS Form 5329 for more information on the additional 10% tax.

Exceptions:

    1. Eligible Rollover. You roll over the distribution in a Direct Rollover or within 60 days of a Cash Distribution.
    2. Early Retirement at age 55. You qualify for early retirement under the Plan on or after age 55.
    3. Certain Disabilities. You cannot engage in substantial gainful activity because of a medically-determined physical or mental impairment, which is expected to result in death or to be of prolonged and indefinite duration. (Not all disabilities meet this standard.)
    4. Periodic Payments that are Substantially Equal Payments. You receive recurring payments in a series of substantially equal installments (at least annually). Payments are made for your life or life expectancy, or for the joint life or joint life expectancy of you and a designated beneficiary.
    5. Medical Deduction. You receive a distribution not exceeding the amount allowable as a medical deduction under Internal Revenue Code Section 213.
    6. Death Benefits. Your beneficiary or your estate receives a distribution on account of your death.
    7. Certain Domestic Relations Orders. A distribution to an alternate payee under a qualified domestic relations order.
    8. Tax Payment: Certain payments directly to the government to satisfy a federal tax levy.

Repayment of Plan Loans

If you apply for your pension benefits and have an outstanding loan from the Plan, the loan balance may reduce the payment. The amount of your loan offset is treated as compensation at the time of the distribution. Therefore, it is taxed unless you roll over an amount equal to the amount of your loan offset to a traditional IRA or qualified employer plan within 60 days of the date of the offset. If the amount of your loan offset is the only amount you receive or are treated as having received, nothing will be withheld. If you receive other cash payments from the Plan, the 20% withholding will be based on the entire amount paid to you, including the loan offset. The amount withheld will be limited to the cash paid to you. The amount of a defaulted plan loan that is considered taxable cannot be rolled over.

Special Tax Treatment (Born before January 1, 1936)

If you receive a payment from the Plan that can be rolled over and you do not roll it over to a traditional IRA or a qualified employer plan, the payment will be taxed in the year you receive it. However, if the payment qualifies as a lump-sum distribution, it may be eligible for special tax treatment. A lump-sum distribution is a payment within one year of your entire balance under the Plan. It is payable to you after you have reached age 59-1/2 or because you have separated from service with your employer. For a payment to be treated as a lump-sum distribution, you must have participated in the Plan for at least five years before the year you receive the distribution.

Ten-Year Averaging: If you received a lump-sum distribution and were born before January 1, 1936, you can make a one-time election to figure your tax by using a “10-year averaging” method which also uses 1986 tax rates. Ten-year averaging often reduces the tax you owe.

Capital Gain Treatment: If you received a lump-sum distribution, were born before January 1, 1936, and participated in the Plan before 1974, you may elect to have the part of your payment attributable to your pre-1974 participation taxed as a long-term capital gain. Capital gains are taxed at a lower rate than ordinary income, thus saving you money.

Limitations:

    1. You can elect this special tax treatment only once in your lifetime, and the election applies to all lump-sum distributions that you receive in that same year.
    2. You may not elect this special tax treatment if you rolled amounts into this Plan from a 403(b) tax-sheltered annuity, a governmental 457 plan, or an IRA not originally attributable to a qualified employer plan.
    3. If you previously rolled over a distribution from this Plan (or similar employer plans), you cannot use this special averaging treatment for later payments from the Plan.
    4. If you roll over your payment to a traditional IRA, governmental 457 plan, or 403(b) tax-sheltered annuity, you will not be able to use special tax treatment for subsequent distributions fromt he new plan.
    5. If you roll over only a portion of your payment to a traditional IRA, governmental 457 plan, or 403(b) tax-sheltered annuity, this special tax treatment is not available for the rest of the payment.

See IRS Form 4972 for additional information on lump-sum distributions and how to elect the special tax treatment.

Beneficiaries

If you are a surviving spouse, an alternate payee, or another beneficiary, you may be able to use the special tax treatment for lump-sum distributions. You may treat the payment as a lump-sum distribution if the employee met the appropriate age requirements, whether or not the employee had five years of participation in the Plan. We recommend that you consult with a tax advisor regarding your options.

Surviving Spouse and Alternate Payees:

  • Rules that apply to employee payments also apply to payments to surviving spouses and alternate payees.
  • Payments are not subject to an additional 10% tax, even if the surviving spouse or alternate payee is younger than age 59-1/2.

Other Beneficiaries:

  • A Cash Distribution cannot be rolled over. Mandatory 20% withholding rules for Cash Distributions do not apply to payments. Ordinary income tax applies.
  • Payments are not subject to an additional 10% tax, even if the beneficiary is younger than age 59-1/2.