Typically, when a participant receives annuity payments from a defined benefit pension plan where he or she has a basis in the benefit (what Code Section 72 calls an “investment in the contract”), a portion of the payment is treated as a recovery of that basis. Therefore, it is not taxable to the participant. That portion is determined under the rules of Code Section 72. The most common way in which an employee has basis in his or her benefit is by making after-tax contributions. Currently, this is more common in governmental defined benefit plans than other plans.
However, it was not clear how these basis recovery rules worked in the context of phased retirement distributions. The IRS recently issued Notice 2016-39 to address theRead More