Transcript Document

DB Minimum Distribution
Requirements
Presented by:
Pamela Means
Means & Associates, LLC
ERISA Compliance Associates, LLC
Topics
• Brief History - Recent Guidance
• Outline of IRC §401(a)(9)
• Final 2004 DB Reg. 1.401(a)(9)-0
through 1.401(a)(9)-9
– Excluding 1.401(a)(9)-5 = DC Plans
• Real Problems
Brief History – §401(a)(9)
• 2002 – Final and Temporary Regs
– RMD for CY beginning on or after 1/1/03
• Notice 2003-2 and Rev. Proc. 2003-10
– Some transition relief
– Extends time for DBs to adopt §401(a)(9)
amendments to end of EGTRRA Remedial
Amendment Period
• 2004 – Final Regs
– RMD for CY beginning on or after 1/1/03
Brief History – Cont.
• For 2003, 2004, and 2005 CYs
– Deemed to satisfy 2004 Final Regs, if satisfy
• 2002 Final and Temp Regs;
• 2001 Proposed Regs; or
• 1987 Proposed Regs (incl’d acct balance method)
Outline of §401(a)(9)
• (A) – Required for a Qualified Trust
– Full distribution by RBD; or
– Periodic distributions by RBD over Life/Joint
Lives or over Life/Joint Life Expectancy
• (B) – EE Dies before Full Distribution
– Has started distributions
• Remaining distributions “as least as rapidly”
– Has not started distributions
• 5-year rule…all within 5 years after death
• Exceptions for life expectancy or spousal distribs
Outline of §401(a)(9)
• (C) – Required beginning Date (RBD)
– April 1 following later of:
• CY EE attains 70 ½
• CY EE retires
– Exception for 5% owners (§416 definition =
more than 5% owners)
– Actuarial Adjustments, if retirement is after
age 70 ½
– Church and Governmental EES
Outline of §401(a)(9)
• (D) – Life Expectancy may be recalc’d, but
not more frequently than annually
• (E) – Designated Beneficiary means
individual designated as beneficiary by EE
• (F) – Treatment of Payments to Children –
As if paid to surviving spouse if would be
payable when children reach majority
• (G) - Treatment of Incidental Death
Benefits – Treated as RMD
1.401(a)(9)-1
• What plans are subject to RMD rules?
• Stock bonus, pension, profit sharing, 403(a) annuity
contracts, 403(b), IRA’s (including certain Roth
IRA’s), and certain 457 plans
• What benefits are subject to RMD rules?
• Account Balances and Benefits in existence on or after
1/1/85
• Beneficiary distributions apply
• Even if EE died before 1/1/02 – Effective date of regs
• Document RMD wording by amendment
• Due by end of EGTRRA RAP
1.401(a)(9)-2
• Life/Joint Life Expectancy rule detailed
• RBD definition detailed
• Includes right for plan to require RMD at 70 ½
• Before RBD, §401(a)(9)-compliant
distributions not required
• If EE dies after RMDs start, remainder
paid “at least as rapidly”
• If EE dies before RBD (even if an RMD
rec’d), see 1.401(a)(9)-3
1.401(a)(9)-3
• EE dies before RBD
– If no designated beneficiary, 5-year rule
• Entire amount by end of 5th calendar year after death
• Amounts rec’d in years 1-4 may be rolled to IRA
• Plan may designate the 5-year rule for all death benefits
– Designated beneficiary
• Life expectancy method
– Commencing by end of CY following CY of EE’s death
– Period certain not more than period on the Uniform Table
– Spouse is sole beneficiary, start later of
– End of CY following CY of EE’s death or
– End of CY when EE would have attained age 70 ½
1.401(a)(9)-4
• Determination of designated beneficiary
• By terms of plan or EE election, if plan permits
• If J&S benefit was elected, plan does not satisfy
§401(a)(9) unless the survivor benefit is payable to a
designated beneficiary
• Must be an individual, including a trust, but not charity,
foundation, or estate. Detailed Trust beneficiary info
must be provided to Plan Administrator
• Determined on 9/30 of CY following CY of EE’s
death, but beneficiary status can be disclaimed
• If surviving spouse dies after determination, but before
distributions begin, surviving spouse is treated as an EE
• If beneficiary dies before determination date, RMD
calc does not change
1.401(a)(9)-6 Q&A 1
• How must DB distributions be paid?
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Life or joint lives of EE and beneficiary
If period certain or certain & life, see -6 Q&A 2-3
Payment intervals may not exceed 1 year
Payment period may be changed, see -6 Q&A 13
1st payment must be made by RBD and equal
amount required for 1 payment interval
– 2nd payment must be made by the end of next
payment interval even if that payment interval
ends in the next calendar year
– Form and payment interval must be stated in plan
1.401(a)(9)-6 Q&A 1 (How DB distributions paid)
– Distributions must be non-increasing – see -6
Q&A 14 for exceptions
– Accruals at end of 1st distrib CY included in RMD
calc for payment intervals beginning after RBD
– Portion of lump sum distribution that is RMD and
not eligible for rollover
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Can treat lump sum as if DC balance and calc RMD
Or can use DB annuity rules
If after RBD distrib, can take lump sum as late as 12/31
In RBD year, amount not available for rollover would
include 1st RMD paid by 4/1 and 2nd paid by 12/31
– Ancillary death benefits not increasing annuity
1.401(a)(9)-6 Q&A 2
• How must life (or J&S) annuity be paid
to satisfy minimum distribution
incidental benefit (MDIB) requirement?
– Life annuity OK
– J&S always OK if spouse in beneficiary
– J&S % may need to be reduced per -6 Q&A 2
chart, if beneficiary is non-spouse and is >10
years younger than EE
• Chart is based on EE age minus beneficiary age and
further reduced by number of years EE is younger than
70
1.401(a)(9)-6 Q&A 3
• How long may period certain be?
– If commencing during EE’s lifetime
• Not longer than Uniform Lifetime Table
• If sole beneficiary is spouse, not longer than joint and
last survivor expectancy, if longer than EE’s distrib
period
– If commencing after EE’s death
• Not longer than beneficiary’s applicable distribution
period (life expectancy) in CY following CY of EE’s
death
• If annuity starting date is in CY before 1st distribution
CY, period certain may not exceed life expectancy of
beneficiary in CY of annuity starting date
1.401(a)(9)-6 Q&A 4
• When distributions are made from
insurance company’s annuity contract
– Annuity contract must comply with all
RMD rules when purchased
– If contract is purchased after RBD
• 1st payment interval must begin on or before purchase
date
• Payment required for one payment interval must be
made no later than end of such payment interval
• If payments made under annuity contract do not meet
§401(a)(9), plans fails to satisfy §401(a)(9)
1.401(a)(9)-6 Q&A 5
• If DB annuity distributions have started,
how are additional accruals distributed?
– Distribution of amount that accrues in a CY
• Must commence in 1st payment interval ending in CY
immediately following CY in which benefit accrues
• Administrative delay is OK, if
– Actual payments commences as soon as practicable
– Must commence no later than 1st CY following CY in which
benefit accrues
– Total amount paid in 1st CY following CY in which benefit
accrues must be no less than amount required to be paid that
CY
1.401(a)(9)-6 Q&A 5 Example
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Normal form under plan: life annuity
RMD on RBD (4/1/11) is monthly, J&50%S
Additional accruals paid (as a J&50%S) each 1/1
Life annuity = $10,000/month
J&50%S factor on 4/1/11 = 0.92
J&50%S RMD annuity on 4/1/11 = $9,200/month
Additional benefit earned in 2011 = $1,000/month
(in form of life annuity)
– J&50%S factor on 1/1/12 = 0.90
– J&50%S benefit to satisfy 2012 RMD =
$10,100/month ($9,200 + 0.90 x $1,000)
1.401(a)(9)-6 Q&A 6
• If portion of DB benefits are not vested
as of 12/31 of distribution calendar year,
how is RMD determined?
– Any benefit amounts that are not vested as
of 12/31 of distribution CY are treated as
not having been accrued
– When additional portion of benefits become
vested, such vested benefit is treated as an
additional accrual (see Q&A 5)
1.401(a)(9)-6 Q&A 7
• If non-5% owner EE retires after CY in
which EE attains 70 ½, over what period
are benefits actuarially increased?
• Must be actuarially increased for any period after age
70 ½ in which no benefit payments were received
• Actuarial increase
– From 4/1 following CY in which EE attained 70 ½ or 1/1/97,
if later
– To date benefits commence sufficient to satisfy §401(a)(9)
• Actuarial increase does not apply if
– Plan states RBD for all ees is 4/1 of CY following attainment
of age 70 ½ and
– Plan makes §401(a)(9)-compliant distributions as of that date
1.401(a)(9)-6 Q&A 8 & 9
• What amount of actuarial increase is
required? How does actuarial increase
relate to §411?
– If increase required, resultant benefit must
never be less than
• AE of benefits payable at start of actuarial increase
• Plus AE of any additional benefits accrued after that
• Minus AE of any distributions after that start date
– AE use plan’s assumptions for §411 AE
– Actuarial increase even during ERISA
§203(a)(3)(B) suspension of benefits
period
1.401(a)(9)-6 Q&A 10&11
• What if distributions commence before
EE’s RBD over §401(a)(9)-compliant
period and in §401(a)(9)-compliant
annuity form? To EE? To Surviving
Spouse?
– Treat annuity starting date (ASD) as RBD
– Designated beneficiary distributions calc’d as of
annuity starting date
– Benefits continue to be distributed after death over
the remaining period
1.401(a)(9)-6 Q&A 13
• When can annuity periods change?
– Re-annualization circumstances
• EE retires or plan terminates;
• Prior to modification, RMD was period certain only; or
• New payments are QJSA over joint lives of EE and
spouse (as sole designated beneficiary) and change is
due to EE’s marriage to new spouse
– Conditions Required – Future §401(a)(9) pymts
• Date of change is new ASD for §§417 and 415
• Actuarial PV of pre-change remaining payments=entire
EE benefit
• Annuity satisfies §415 (with original ASD, int, mort)
• Period certain end is not later than original end point
1.401(a)(9)-6 Q&A 13 All Examples
• All Q&A 13 Examples
• Applicable Interest Rate is 5% for 2005
through 2008
• Applicable Interest Rate is 4% for 2009
• Mortality Table is R.R. 2001-62
• §415 limit in 2005 at age 70 for straight
life annuity is $255,344
1.401(a)(9)-6 Q&A 13 Example 1
– EE has 10 yrs participation in frozen DB, has not
retired, attains age 70 ½ in 2005
– Elects SL annuity, receives 4 pymts of $240,000
– Plan permits change to annuity at retirement
– PV of remaining payments of $240,000 at
retirement at age 74=$2,399,809 (§417(e) at 4%)
– $2,399,809 is AE to SL $250,182 at age 70, using
interest (§417(e) at 5%) and mortality at age 70.
This is less than the age 70 §415=$255,344
– Modification is treated as new ASD
– Lump sum satisfies IRC §§401(a)(9), 415, and
417
1.401(a)(9)-6 Q&A 13 Example 2
– Facts are same as Example 1, except
– Participant receives 4 payments of $250,000
– PV of remaining payments of $250,000 at
retirement at age 74=$2,499,801 (§417(e) at 4%)
– $2,499,801 is AE to SL $260,606 at age 70, using
interest (§417(e) at 5%) and mortality at age 70.
This is greater than the age 70 §415=$255,344
– Modification is treated as new ASD
– Lump sum fails to satisfy IRC §415, therefore
fails to satisfy §401(a)(9)
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1.401(a)(9)-6 Q&A 13 Example 3
EE has 10 yrs participation in frozen DB, attains
age 70 ½ in 2005, and retires
Elects 27-year certain only annuity of $37,000/yr
with a 4% COLA
EE receives 4 pymts, including annual 4% COLA
Plan allows modification to life annuity
AE (5%) of remaining original payments equals
annual life annuity of $92,133 without COLA
New annuity satisfies IRC §§401(a)(9), 415,
and 417 at the date of the modification.
New annuity satisfies §415 at original ASD (Life
annuity of $92,133 at 74 is AE to $82,539 at 70)
1.401(a)(9)-6 Q&A 14
• Are annuity payments permitted to
increase?
– Payments (whether over EE’s life, joint lives, or
period certain) must be a “non-increasing” unless:
• Includes COLA’s
– Example - Bureau of Labor Statistics
• Periodic plan COLA’s, not > COLA above
• Increases due to removal of beneficiary of J&S upon
death or divorce
• Additional accruals from plan amendment
• Beneficiary permitted to convert survivor portion of
J&S to single sum on EE’s death
1.401(a)(9)-6 Q&A 14 (Allowable Annuity Increases)
– Permitted increases under annuity contracts
purchased from insurance companies (i.e. Total
future expected payments exceed total value being
annuitized) if payments increase due to
• Constant percentage
• Final payment upon death of EE, less than total value
being annuitized over total of payments before death
• Dividend payment
• Acceleration of payments
– Permitted from trust, if
• Constant percentage less than 5%
• Final death benefit
• Dividend payment
1.401(a)(9)-6 Q&A 15
• What are special rules applicable to DB
payments to EE’s surviving child?
– Treated as if payments were to EE’s surviving
spouse, if
• Payments are payable to surviving spouse when
payments cease to child
• Child has not reached majority (i.e. has not completed a
course of education and is <26)
• Child is disabled at age of majority and rule
continues while child is disabled
– When payments become payable to surviving
spouse, not considered to be a benefit increase
1.401(a)(9)-6 Q&A 16
• What were the DB RMD rules for 2003,
2004, and 2005?
– Reasonable and good faith interpretation of
provisions of §401(a)(9)
1.401(a)(9)-7
• How are rollovers, transfer, mergers, and
spinoffs handled?
– Amount rolled over, merged from plan to another
• Treated as a distribution from distributing plan
– Treatment in receiving plan
• Treated as additional benefits in receiving plan in year
of distribution, for RMD in CY following CY of
rollover
– Even if received after valuation date in receiving plan
– Even if received in different CY from distribution CY
– In case of transfer – transferor plan treats as
decrease in benefits, unless after RBD
1.401(a)(9)-8 Q&A 1, 2, and 3
• What distribution rules apply if EE is in
more than 1 plan? Separate components?
– No aggregation of plans
– Each plan must satisfy §401(a)(9)
– §414(k) Plan is treated as 2 separate plans
• DC plan to the extent that benefits are based on an
individual account
• DB plan with respect to remaining benefits
– Plan may have separate components reflecting
separate interests of EE’s beneficiaries
• Each separate component must satisfy §401(a)(9)
1.401(a)(9)-8 Q&A 4
• Must RMD be paid if EE or spouse has
not consented to the distribution while
benefit is immediately distributable?
– Yes, even without EE or spousal consent
• §411(a)(11) and §417 require EE and spousal
consent to such distributions, but
• §401(a)(9) must be satisfied
– Without consent, plan distributes as QJSA or
QPSA and consent is deemed satisfied if
• Plan makes reasonable efforts to obtain consent and
• Distribution meets other provisions of §417
1.401(a)(9)-8 Q&A 5
• Who is an EE’s spouse or surviving
spouse?
– Definition of spouse is determined under
applicable state law
– In the event of death, EE’s spouse is determined
as of date of EE’s death
1.401(a)(9)-8 Q&A 6-7
• What are the special rules that apply to
alternate payee distributions (QDRO)?
– Former spouse is treated as a spouse (or as a
surviving spouse), regardless of whether QDRO
so provides
– QDRO benefit may be defined as a separate
account (share) and must satisfy §401(a)(9)
– QDRO benefit may be defined as portion of whole
so entire benefit is subject to §401(a)(9)
– Plan does not fail §401(a)(9) if it fails to
distribute full RMD during 18-month QDRO
determination period; the benefits are considered
non-vested
1.401(a)(9)-8 Q&A 8-11
• Special circumstances
– Distribution is reduced or suspended by state
proceedings when paid under an annuity contract by
a life insurance company in state delinquency
proceedings – treated as non-vested benefits
– Plan permits distributions on or after 4/1 of CY
following CY where EE attains 70 ½, but EE has not
retired or attained NRA – plan does not fail §401(a)
– Distribution of an annuity contract is not a §401(a)(9)
distribution
– Distribution to an estate or trust is a §401(a)(9)
distribution
• Trust need not distribute to trust’s beneficiaries (see -4)
• Estate is not designated beneficiary, must use 5-year rule
1.401(a)(9)-8 Q&A 12
• May a plan be amended to eliminate
optional benefit form that does not
satisfy §401(a)(9)?
– §411(d)(6) relief provided
– Can eliminate an optional form of benefit
that does not comply with §401(a)(9)
– 1.401(a)(9)-1 Q&A 3 requires a plan to
provide that it will not distribute benefits
under any option that does not satisfy
§401(a)(9)
1.401(a)(9)-8 Q&A 13-16
• What if a plan pays out benefits under a
TEFRA §242(b) election?
– TRA ‘84 repealed the distribution provisions of
TEFRA, but not §242(b)
– Satisfaction of §§417(a) and 417(e) spousal
consent requirements does not revoke a pre-1984
§242(b)(2) designation
– Rollover out of DB may revoke election
depending on methodology stated in §242(b)
election
– Transfers (including spinoffs and mergers) retain
§242(b) elections on transferred amounts only
1.401(a)(9)-9
• Life Expectancy and Distribution Period
Tables
– Q&A 1 = Life Expectancy for a Single Life (ages 0 to
111), used for determining remaining period of
distributions, based on the non-spouse beneficiary’s age
when the EE dies
– Q & A 2 = Applicable Distribution Period for an
Individual Account during an EE’s Lifetime (Uniform
Lifetime Table) (ages 70 to 115), used for remaining life
expectancy for single EE with non-spouse beneficiary or
married EE and spouse with <=10-year age difference
– Q&A 3 = Joint Life and Last Survivor Expectancy (ages
0/0 to 115/115), used for remaining joint life expectancy
for EE and spouse with >10-year age difference
More…
• EPCRS
– Correction available for missed RMD
• PPA ‘06 cited need for RMD rules for
governmental plans
– Proposed regs under §§401(a)(9) and 403(b) in
2008 for government plans
– To comply with RMD’s by good faith
compliance with the IRC (not regs)
• WRERA provided a 2009 RMD
exception for DC plans, not DB
Real Problems
• What if lump sums are restricted due to
low AFTAP?
– Does §436 restriction trump §401(a)(9)?
• IRS verbal explanation at 2009 EA meeting:
§401(a)(9) is Title II and §436 is Title I.
Title I trumps Title II.
• So, if full §436 restriction applies plan should
probably pay monthly benefits (not annual
annuity)?
Real Problems
• -6 Q&A 5
– Accruals to be included in the RMD are at
end of calendar year and need to be paid no
later than the end of the calendar year after
accrued. Could be an issue with noncalendar year plans.
Real Problems
• Lump sum rollover for majority owner in
plan termination where the assets are not
sufficient
– Majority owner signed election for forgo
benefits
– Presumably apply DC-type RMD factor to
reduced lump sum amount
Real Problems
• - 6 Q&A 2
– What happens if participant dies after
electing life annuity or J&S?
• Annuity can provide for final payment upon
death of participant of the PV of the annuity at
the new ASD minus payments already made
(see -6 Q&A 14)
• Period certain may be better for small plans
– Also add COLA (see -6 Q&A 14 regarding
COLA’s)
Real Problems
• -6 Q&A 1
– Cash Balance Plan Hypothetical Balance as of
12/31 prior to RBD would be annuitized using
plan AE
Real Problems
• - 6 Q&A 5
– Additional accruals earned after
distributions have begun
• Question: is a new spousal election form
needed? May be safer.
– If so, is this a new ASD?
– Will it affect §415 limits?
Real Problems
• Is 414(k) account in a DB treated as
separate DC (i.e. use account balance
method) under §401(a)(9)?
– Some are questioning -8 Q&A 1 wording
• “Yes” seems clear, but question wording
“…two separate plans, a defined contribution
plan to the extent that benefits are based on
an individual account and a defined benefit
plan with respect to the remaining benefits”
• Rollover from DC to DB is treated like a DC
for RMD calcs
Questions?