I would like to cash out these policies now if I can somehow average the lump-sum distribution over a period of five or 10 years. Is this possible?

TB: I am assuming from the fact that the policies are owned by your ex-employer that this was a nonqualified program that covered only key executives. The tax rules for distributions from nonqualified plans are not nearly as flexible as those applying to qualified plans.

The consulting firm I was with prior to starting the 401(k) Association designed, installed and administered nonqualified plans. It is my understanding based upon my prior experience that the distribution arrangements for these plans must be established before the money is put into the plan. These arrangements would include when the benefits will be paid and in what manner.

With a nonqualified plan, you cannot decide how you will take the money after you leave the employer. The timing and manner of distribution must be established in advance and may not be changed.

For example, the plan might specify that your payment will begin in the calendar year after you cease to be an employee and payment will be made in annual installments over a period of 10 years. These provisions would govern upon termination.

You state that you can get the money any time by asking. In my opinion, if you are able to take this money at any time then a taxable event has already occurred under the doctrine of constructive receipt. Under this doctrine, the money is taxable at the time it is first available. Distributions from nonqualified plans are taxable when the money becomes available.

If your program was nonqualified, you won't be able to use the special 10-year income averaging that sometimes applies to lump-sum distributions from qualified plans (the five-year averaging was phased out a couple years ago).

Question: I quit my job and am withdrawing money from my 401(k) plan. I'm aware of the taxes due. I asked that the proceeds be sent directly to me, but the representative at my plan provider tells me the check will be sent to my former employer. Do they have the right to ignore my request? If so, why?

TB: The reason the money goes to your former employer is because your former employer, not the service provider, is responsible for seeing that you receive the benefits you are entitled to.

There are a variety of ways employers and service providers establish benefit payment procedures. Some service providers will withhold taxes and make benefit payments directly to participants. However, other providers do not offer these services. It's typical in these situations for the employer rather than the plan provider to withhold the applicable taxes and to issue the benefit payments. There isn't anything wrong with this arrangement and it sounds like this is what your employer does. In this case, the plan provider is required to follow whatever is the proper administrative structure for the plan rather than your request.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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