DEFINITION of 'Lump-Sum Distribution'

A lump sum distribution is a one-time payment for an entire amount due, rather than payments broken into smaller installments. In certain cases, lump-sum distributions receive special tax treatment.

BREAKING DOWN 'Lump-Sum Distribution'

Two examples of lump sum distributions are a commission check and a pension plan distribution, following a pensioner’s death.

In general, distributions from qualified plans are treated as lump sums if the following requirements are met if the total plan balance is distributed over the same tax year and if the distribution is made as a result of the employee:

  • Attaining age 59.5
  • Being deceased (applicable to beneficiaries)
  • Separating from service (not applicable to self-employed individuals but applies to their common-law employees)
  • Being disabled (applicable only to self-employed individuals)

The distribution occurs after five years of participation (this requirement is waived for beneficiaries).

Lump Sum Distribution and Qualified Retirement Plans

If a pension plan owner passes away, a lump sum distribution will often transfer to a beneficiary or beneficiaries. These can be relatives, close acquaintances, or even institutions such as charities. Beneficiaries can be revocable or irrevocable, have discretionary powers (or not).

Qualified plans generally fall into two categories: defined benefit and defined contribution. Defined benefit plans give employees a guaranteed payout; this places the risk on the employer to save and invest properly to meet plan liabilities. For employees in a defined contribution plan, the amount they receive in retirement depends on how well they save and invest on their own behalf during their working years. A 401(k) is the most popular example of a defined contribution plan.

Other examples of qualified plans include:

  • Profit-sharing plans
  • 403(b) plans
  • 457 plans
  • Money purchase plans
  • Target benefit plans
  • Employee stock ownership (ESOP) plans
  • Keogh (HR-10)
  • Simplified Employee Pension (SEP)
  • Savings Incentive Match Plan for Employees (SIMPLE)

The Internal Revenue Service (IRS) provides a comprehensive guide to common qualified plan requirements. This guide breaks down each plan and who they best suit, draws comparisons among them, and notes risks or concerns for potential or current investors.

Commission Check and Qualified Retirement Plans

Commission checks are another impetus for lump sum payments. Commission checks apply to roles mainly in sales and marketing either as sole earnings or in addition to a base salary. Employers often use sales commissions to incentivize workers to produce more value. Several major types of commission checks include a base salary and commission, straight commission, draw against commission, and residual commission.

  1. Qualified Retirement Plan

    A qualified retirement plan meets the requirements of Internal ...
  2. IRS Publication 575

    IRS Publication 575 is an IRS document that provides information ...
  3. Nonperiodic Distribution

    Nonperiodic distribution is a one-time, lump-sum payment of an ...
  4. Unit Benefit Plan

    A unit benefit plan is an employer-sponsored pension plan with ...
  5. Direct Rollover

    A direct rollover is a distribution of eligible assets from one ...
  6. Lump-Sum Payment

    A lump-sum payment is a large sum that is paid in one single ...
Related Articles
  1. Retirement

    Lifetime Income or Lump Sum Payment: Which Is Best?

    If your pension is being eliminated, should you take the lump sum or lifetime income option?
  2. Retirement

    The 401(k) and Other Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  3. Retirement

    Pension Payout Options: What You Need To Know

    Here's what needs to be considered if you have the option of either taking a lump sum payout or a monthly benefit from your pension.
  4. Financial Advisor

    SEP vs. Keogh Plans: Which is Right for You?

    SEP and Keogh plans each have their pros and cons. Here's how to choose which one is right for you.
  5. Retirement

    Retirement Savings Tools I: Employer Savings Plans

    There are a variety of employer savings plans that can offer multiple routes to saving for retirement.
  6. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  7. Retirement

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
  1. Is a 401(k) a qualified retirement plan?

    Examine the different types of qualified retirement plans and discover if a 401(k) meets the definition of a qualified retirement ... Read Answer >>
Trading Center