Saturday, February 27, 2010

US Non-Qualified pension Claims

Earlier I wrote about the idea that we should claim the loss of our non-qualified pensions as losses on future year tax filings. I also started thinking about the possibility of rolling over any payment we receive on our claims into an IRA or other tax deferred vehicle.

The reason we had to take part of our defined benefits pension as non-qualified is the IRS code rule under section 415 (a), (17). The limit was $170,000 when I retired in 2001 and has since increased to $245,000. That means that if I had retired this yea, I probably could have rolled over all my commuted pension into an IRA. So I have composed a letter which I am sending to the Tax Advocate Service in Atlanta. You can send letters on this topic to the tax Advocate Service in your own states if you wish. The following site will lead you to the address and phone number in your state:,,id=150972,00.html

Here's a copy of the letter I sent along with form 911 which I filled out and sent as well, since the IRS will need a completed form 911 to initiate your case.

Dear Sir or Madam:

I have a couple of tax questions but am unsure as to where to direct them. I would appreciate either a definitive response, or a name and address, or email to which I can direct my questions. The following is the situation I am facing.

I retired in 2002 from Nortel Networks with a defined pension. I took the majority of my pension as a lump sum and rolled it over into my 401K, and subsequently to an IRA. The remainder of my pension was considered non-qualified by the IRS due to the compensation limits applicable in 2002 for rolling over commuted pension values.

Because of Nortel’s internal rules, the non-qualified pension was paid over a 15 year period in monthly amounts. This pension was termed a 15 year certain restoration plan.

In January 2009 Nortel Networks filed for bankruptcy protection under chapter 11. At that time they stopped paying the non qualified pension, and I was informed that I should place a claim on the Nortel Estate for the remainder of the pension. I placed a claim against Nortel based on calculations by an actuarial company which used data from Nortel, and the same factors that Nortel used in determining the amount owed to me.

Under chapter 11 protection, Nortel has sold off most of the assets of the company, and it is probable that they will liquidate later this year or early next year. When that happens, I will be treated as an unsecured creditor. My claim will be considered in court along with all other unsecured creditors. Depending on the value of Nortel’s remaining assets, all unsecured creditors will be paid a percentage of their claims. This payment will be in the form of a lump sum.

The first question I have is whether I can take that lump sum payout and roll it over to a tax deferred vehicle? Since 2002, when I retired, the IRS has increased the compensation limits on qualified roll-overs to IRAs from a base of $170,000 to $245,000. (IRS code 401(a), (17)). Had this new limit been in effect in 2002, I would have been able to roll over almost my entire commuted pension. Hence I think there is a case for arguing that the future payments against my claim could be considered part of a qualified pension payment and could be rolled over tax exempt.

A second question I have is related to the percentage of my remaining commuted value that I will lose. Can I consider that a loss under the tax code, and claim it against the taxes I might owe during the year or previous years?

Since I retired my income has been much lower than when I was working. My original plan was to use the restoration payment to carry me through until I reached 75, at which time I planned to replace that income from my IRA. Now however, I have had to start making withdrawals from my IRA earlier than anticipated. Coupled with the decline in the market, this has had an impact on the principal in my IRA, and will reduce the amount I can withdraw each year. Losing part of the claim as well as any the taxes I may have to pay, will have a large impact on my standard of living.

I would appreciate any guidance you could provide to me on this matter and the questions I have raised in this letter.

1 comment:

  1. Curious - did you ever receive a response? Have a situation where a portion of my pension payment is "non-qualified", want to understand the tax implications - can I roll this over to an IRA?