Rules stating that, for any portion of the payment made to the employee from an eligible rollover distribution, the plan administrator is required by federal law to withhold 20% of the distribution. The amount withheld is sent to the IRS as income tax withholding to be credited against the employee's tax obligations. If the employee is paid an eligible rollover distribution, the distribution can still be rolled over (in total or in part) into an eligible employer plan or an IRA, provided the rollover is accomplished within 60 days of the time the employee receives the payment. That portion of the distribution that is rolled over will not be subject to taxes until the employee withdraws it from the eligible employer plan or from the IRA. If the employer should receive a distribution before reaching age 59'A and does not roll it over, it will be taxed as ordinary income in the year received, plus an extra tax of 10% of the taxable portion of the distribution must be paid. This extra 10% penalty does not apply to the distribution under the following circumstances: the employee separates from service with the employer during or after the year the employee attains age 55; distribution is paid to the employee in equal payment over the life expectancy of the employee and/or that of the employee's beneficiary; and distribution is paid due to the retirement on disability of the employee.
If the employee receives a lump sum distribution (payment within one year of the employee's total funds on deposit under the EMPLOYEE BENEFIT INSURANCE PLAN because the employee has attained age 59'A, or has separated from the employer's service; or if self-employed, has reached age 59'A or has become disabled) after having participated in the plan for at least five years, the distribution is subject to special tax treatment as follows: Five-Year Averaging; Ten-Year Averaging if the employee was born before January 1, 1936; and long-term capital gain treatment at a rate of 20 percent if the employee was born before January 1, 1936. If the employee desires to roll over 100% of the eligible rollover distribution to an employee benefit insurance plan or IRA, including the 20% withheld for income tax purposes, other funds must be contributed within the 60-day period to replace the 20% withheld (if only 80% of the distribution received is rolled over, the employee must pay ordinary income taxes on the 20% withheld).