Transcript RMD Training

Required Minimum
Distributions
ACOPA Actuarial Symposium 2012
Lauren Okum, ASA, EA, MAAA, MSPA
Premier Actuarial Solutions
Mary Ann Rocco, EA, MSPA
Mary Ann Rocco, EA Consulting Actuary
Scope
Brief History
Overview of IRC §401(a)(9)
 Relevant to DB plans and to this outline
Distribution Options
Benefit Calculations
Funding
Benefit Restrictions
Examples
2
Brief History
IRC §401(a)(9)

Effective 1/1/1985
1987 Proposed Regulations

First guidance
Small Business Jobs Protection Act of 1996

Revised definition of Required Beginning Date
2001 Proposed Regulations

Added the Uniform Life Table (more generous)

Beneficiary designation not necessary by RBD
Effective 1/1/2002 but may be applied to 2001
distributions

3
Brief History
2002 Final and Temporary Regulations
 Made significant changes for DB plans
 Removed the “Account Balance Method” for
calculating RMD’s from a DB plan



Updated mortality
Allow COLA increases for RMD’s, provided the
increase does not exceed an approved cost-ofliving index (e.g. CPI) for a 12-month period
Permit the beneficiary of a J&S annuity to elect
a lump sum upon death of the participant
4
Brief History
2002 Final and Temporary Regulations (cont)

Allow participants to change form of
distribution prospectively




If distribution is certain-only annuity, can change
the form at any time
If participant retires or plan terminates, can
change to any form provided by the plan
If participant marries, can change to QJSA
Effective 1/1/2003 but may be applied to 2002
distributions

Notice 2003-2 stated that compliance for DB Plans
not required until final regulations are issued.
5
Brief History
2004 Final Regulations

Finalized the 2002 Temporary Regulations for
DB plans

Permitted a fixed percent increase for payments
from qualified trust less than 5.00%

Effective retroactively to 1/1/2003, but transition
relief stated that 2003-2005 are deemed to
satisfy 2004 Final Regulations if they satisfied:



2002 Final and Temporary Regulations,
2001 Proposed Regulations, or
1987 Proposed Regulations
6
Brief History
Year
2004
Regs
2002
Regs
2001
Regs
1987
Regs
2006+
Mandatory
N/A
N/A
N/A
20032005
2002
2001
Permitted
Permitted
Permitted
Permitted
N/A
N/A
Permitted
N/A
Permitted
Permitted
Permitted
Permitted
19852000
N/A
N/A
N/A
Mandatory
Note: The above chart pertains to DB plans
7
Overview of IRC §401(a)(9)
GENERAL
§401(a)(9)(A): “In general.— A trust shall not constitute a
qualified trust under this subsection unless the plan
provides that the entire interest of each employee—


(i) will be distributed to such employee not later than
the required beginning date, or
(ii) will be distributed, beginning not later than the
required beginning date, in accordance with
regulations, over the life of such employee or over
the lives of such employee and a designated
beneficiary (or over a period not extending beyond
the life expectancy of such employee or the life
expectancy of such employee and a designated
beneficiary).”
Typically the goal is to defer payments as long as
possible under (ii) above, but not always.
8
Overview of IRC §401(a)(9)
REQUIRED BEGINNING DATE (RBD)
§401(a)(9)(C) – Required beginning date (RBD) is
April 1 of the calendar year following the later of:


The year the employee attains age 70½
The year the employee retires (does not
apply to 5% owners, as defined in section
416)
RBD determined by DOB, regardless of DOH. An individual
hired at age 70 may have an RBD before he’s accrued any
benefits, which we will cover later in the outline.
9
Overview of IRC §401(a)(9)
REQUIRED BEGINNING DATE (RBD)
Reg. §1.401(a)(9)-2 Q&A 3 – Examples for 5% owner:
DOB is 6/30/1933
Age 70 on 6/30/2003
Age 70½ on 12/30/2003
RBD is 4/1/2004
DOB is 7/1/1933
Age 70 on 7/1/2003
Age 70½ on 1/1/2004
RBD is 4/1/2005
10
Overview of IRC §401(a)(9)
DISTRIBUTION CALENDAR YEAR
Reg. §1.401(a)(9)-5 Q&A 1(b) – A calendar year
for which an RMD is required is a distribution
calendar year. The first distribution calendar year
depends on the RBD:

If RBD is April 1 following the calendar year in which
the employee attains age 70½, the first distribution
calendar year is the year the employee attains age
70½

If RBD is April 1 following the calendar year in which
the employee retires, the first distribution calendar
year is the year in which the employee retires
11
Overview of IRC §401(a)(9)
DEATH BENEFITS
§401(a)(9)(B) – Required distribution where employee dies
before the Required Beginning Date
§401(a)(9)(B)(ii) – The 5-year rule requires that the entire
interest of the employee be distributed within 5 years of the
employee’s death regardless of what entity receives the
distribution
§401(a)(9)(B)(iii) – The Life Expectancy Rule requires that any
portion of the employees interest payable to or for the benefit of
a designation beneficiary commence distribution by the end of
the year following the employees death over a period not
exceeding the life of the beneficiary
12
Overview of IRC §401(a)(9)
DEATH BENEFITS
§401(a)(9)(B)(iv) – If the beneficiary is the
spouse he/she can defer distribution until the
employee would have attained 70½
§401(a)(9)(D) – Life expectancy may be redetermined but no more frequently than annually
Life expectancy table at Reg. §1.401(a)(9)-9 Q&A 1
13
Overview of IRC §401(a)(9)
DEATH BENEFITS
Reg. §1.401(a)(9)-6 Q&A 3(b) – If annuity
distributions commence after the death of the
employee under life expectancy exception to the
5-year rule, the maximum period is measured by
the beneficiary's life expectancy using his/her age
as of birthday in the year of ASD
14
Overview of IRC §401(a)(9)
DEATH BENEFITS
Reg. §1.401(a)(9)-3 Q&A 4 – Covers ‘default’ methods of
distributions in conjunction with Plan language


If there is a Designated Beneficiary, default is the Life
Expectancy Rule
If there is not a Designated Beneficiary, default is the 5Year Rule
§401(a)(9)(E) – Designated beneficiary

Any individual designated as a beneficiary by the
employee

The regulations go into detail explaining how trusts can
meet this definition (§1.401(a)(9)-1 Q&A 2(c) and
§1.401(a)(9)-4 Q&A 5 and 6)
For purposes of the examples in this outline the spouse is the Designated
Beneficiary
15
Overview of IRC §401(a)(9)
DEATH BENEFITS
Reg. §1.401(a)(9)-3 Q&A 4 (cont) – Optional
provisions

The Plan can optionally specify the 5-Year
Rule even if the employee has a designated
beneficiary or that all of the distributions will
be made under the 5-Year Rule

Plan does not need to have the same method
of distribution for the benefits of all
employees
16
Overview of IRC §401(a)(9)
DEATH BENEFITS
Reg. §1.401(a)(9)-3 Q&A 4 (cont) – Elections

A Plan may adopt provisions that permit employees
or beneficiaries to make an irrevocable election on
which option to be paid

Such election must be made no later than the earlier
of the calendar year in which distribution would be
required to commence in order to satisfy the life
expectancy rules or the end of the calendar year
which contains the 5th anniversary of the employees
date of death

If a Plan provides for the election, the plan may also
specify which method of distribution will apply if
neither the employee or beneficiary makes the
election. If no election is made and plan does not
specify which method the ‘default’ methods above
will apply
17
Overview of IRC §401(a)(9)
DEATH BENEFITS
§401(a)(9)(B)- “Required distribution where
the employee dies after the RBD. Once
distributions have begun the remaining
benefits will be distributed at least as rapidly
as they were prior to death.”
18
Overview of IRC §401(a)(9)
DEATH BENEFITS
Suggestion for Plan Document Elections for Distributions
After Death of the Employee
In the small plan world, if a participant dies, the benefits will
usually be distributed and rolled over to the extent allowable
and future payments made from a spousal or inherited IRA. It
may be advisable to allow the 5-year rule to allow enough time
to make the distribution timely.
19
Distribution Options
GENERAL RULES




RMD’s are not eligible for rollover
Distributions must be taken in annuity form,
unless entire benefit is being distributed
(discussed more next)
Plan document must allow form of payment (e.g.
cannot take an increasing term certain annuity if
document does not allow for it)
As annuity, payment date of payment relevant

e.g. if initial annual annuity payment made
4/1/2012 subsequent payment should be made as
close as possible to 4/1/2013 but no later
20
Distribution Options
ANNUITY REQUIREMENTS
 Distributions must be paid in the form of an
annuity over either:


The employee’s life (or joint lives of the employee
and beneficiary)
A period certain that does not exceed a maximum
allowable period (discussed below)
Certain and life annuities are allowable if both
requirements have been met

Annuity must be paid in uniform payment
intervals over the entire distribution period
and must not exceed one year
Reg. §1.401(a)(9)-6 Q&A 1(a) and1(b)
21
Distribution Options
ANNUITY REQUIREMENTS
 Annuity payment must begin on or before the
employee’s RBD (or when distributions must
commence to beneficiaries under the
exceptions to the 5-year rule)


First payment must be the amount which is
required for one payment interval (monthly,
annually, etc.)
Second payment need not be made until the end
of the next payment interval even if that payment
interval ends in the next calendar year
e.g. If payments made annually with first payment on RBD,
the second is due a year later; not doubling up
22
Reg. §1.401(a)(9)-6 Q&A 1(c)
Distribution Options
ANNUITY REQUIREMENTS

All benefit accrual as of the last day of the
first distribution calendar year must be
included in the calculation of the annuity
payments beginning on the RBD

This could create complications for noncalendar year plan years.
Reg. §1.401(a)(9)-6 Q&A 1(c)
23
Distribution Options
ANNUITY REQUIREMENTS
 Must satisfy Minimum Distribution Incidental
Benefit (MDIB) requirement




A life annuity
A term certain, if otherwise meet requirements of
regulations
A joint & survivor annuity up to 100% with spouse
as beneficiary
A joint & survivor annuity with a non-spouse
beneficiary must have survivor % under 100% if
age difference if more than 10 years (see table)
Reg. §1.401(a)(9)-6 Q&A 2
24
Distribution Options
J&S MAXIMUM SURVIVOR % TABLE
Age Diff
Maximum %
Age Diff
Maximum %
10 or less
100%
22
70%
11
96%
23
68%
12
93%
24
67%
13
90%
25
66%
14
87%
26
64%
15
84%
27
63%
16
82%
28
62%
17
79%
29
61%
18
77%
30
60%
19
75%
31
59%
20
73%
32
59%
21
72%
33
58%
25
Distribution Options
TERM CERTAIN ANNUITIES

Maximum period beginning at RBD while employee still
alive is the applicable period under the Uniform Lifetime
Table (ULT) for the year that contains the ASD




Use ULT for ages 70+
If payments begin prior to age 70, the maximum period is
the period for age 70 (i.e. 27.4) plus 1 for each year prior
to age 70 that payments begin
A term certain, if otherwise meet requirements of
regulations
If spouse is sole beneficiary, maximum period is
permitted to be as long as the joint life of employee and
spouse, if longer than the ULT (but not in case of C&C)
Reg. §§1.401(a)(9)-6 Q&A 3(a) and 10(b)
J&S tables at Reg. §1.401(a)(9)-9 Q&A 3 if spousal beneficiary
26
Distribution Options
UNIFORM LIFETIME TABLE
Age
Period
Age
Period
Age
Period
Age
Period
70
27.4
82
17.1
94
9.1
106
4.2
71
26.5
83
16.3
95
8.6
107
3.9
72
25.6
84
15.5
96
8.1
108
3.7
73
24.7
85
14.8
97
7.6
109
3.4
74
23.8
86
14.1
98
7.1
110
3.1
75
22.9
87
13.4
99
6.7
111
2.9
76
22.0
88
12.7
100
6.3
112
2.6
77
21.2
89
12.0
101
5.9
113
2.4
78
20.3
90
11.4
102
5.5
114
2.1
79
19.5
91
10.8
103
5.2
115+
1.9
80
18.7
92
10.2
104
4.9
81
17.9
93
9.6
105
4.5
27
Distribution Options
SINGLE SUM DISTRIBUTIONS
Reg. §1.401(a)(9)-6 Q&A 1(d)(1) & (2)
If employee elects a single sum distribution of entire
accrued benefit during a distribution calendar year, the
amount of RMD (thus not eligible for rollover) can be
determined using one of two methods:
 Account Balance Method


Treat the payment as a distribution from a DC plan with the
lump sum amount as the employee's account balance
If the year of distribution is the year containing the RBD and
the RMD for the first distribution calendar year has not been
made, then the RMD portion for the first and second
distribution calendar year is not eligible for rollover
28
Distribution Options
SINGLE SUM DISTRIBUTIONS
 Annuity Distribution Method



Express the benefit as an annuity satisfying the annuity
rules above with an ASD as of the first date of the
distribution calendar year for which the RMD is being
determined
Treat one year of annuity payments as the RMD for that
year
If the year of distribution is the year containing the RBD
and the RMD for the first distribution calendar year has not
been made, the benefit must be expressed as an annuity
with an ASD as of the first day of the first distribution
calendar year and the payments for the first two
distribution calendar years would be treated as the RMD
29
(and not be eligible for rollover)
Distribution Options
SINGLE SUM DISTRIBUTIONS
First alternative used in most situations. In a
plan that allows for in-service distributions it
may make sense to apply annually. Each
distribution in excess of the RMD would have to
comply with the benefit restrictions under
401(a)(4)
30
Distribution Options
SINGLE SUM DISTRIBUTIONS
Example
Year participant attains age 70½
2011
Required Beginning Date
4/1/2012
First distribution calendar year
2011; no RMD has been made
Year of retirement
2012
Monthly accrued benefit*
$450
Lump sum
$50,000
RMD under Account Balance
Method
2011: $50,000 ÷ 27.4 = $1,824.82
2012: $48,175.18 ÷ 26.5 =
$1,817.93
Required distribution
$1,824.82 + $1,817.93 = $3,642.75
Amount that may be rolled over
$50,000 - $3,642.75 = $46,357.25
31
Distribution Options
SINGLE SUM DISTRIBUTIONS
Example
RMD under Annuity
Distribution Method*
2011: $450 x 12 = $5,400
2012: $450 x 12 = $5,400
Required distribution
$5,400 + $5,400 = $10,800
Amount that may be rolled
over
$50,000 - $10,800 = $39,200
*Assumes $450 is the monthly benefit payable on 1/1/2011 Annuity
Starting Date.
32
Distribution Options
SINGLE SUM DISTRIBUTIONS

§§411(a)(11) and 417(e) require employee and
spousal consent to certain distributions that are
immediately distributable




Reg. §1.411(a)(11)-1(c)(2)
Reg. §1.417(e)-1(c)
If an RMD is required, the distribution must be made
even if the employee (or spouse) fails to consent
Consent requirement deemed satisfied if:



Plan distributes in the form of a QJSA,
Plan has made reasonable efforts to obtain, and
Distribution otherwise meets the requirements of §417
Reg. §1.401(a)(9)-8 Q&A 4
33
Benefit Calculations
POST-RBD BENEFIT ACCRUALS

Where additional benefits accrue in a calendar
year after the first distribution calendar year,
distribution of the increase must begin with the
first payment in the calendar year immediately
following the calendar year in which the increase
accrues

Administrative delay OK (for the first year
following the accrual) provided payment of
increase commences as soon as practicable and
full required amount paid during following
calendar year
Reg. §1.401(a)(9)-6 Q&A 5
34
Benefit Calculations
POST-RBD BENEFIT ACCRUALS

Where a portion of an employee's accrued
benefit is not vested as of December 31 of a
distribution calendar year, such portion is
treated as not yet accrued for purposes of
determining the RMD


i.e., in determining the annuity stream only the
vested accrued benefit is considered
When additional portion becomes vested it’s
treated as an additional accrual subject to
above rules
Reg. §1.401(a)(9)-6 Q&A 6
35
Benefit Calculations
ACTUARIAL INCREASE FOR DELAYED RETIREMENT

If an non 5% owner employee retires after the calendar year in
which he/she attains age 70½, accrued benefit must be
actuarially increased to take into account period after age 70½ in
which the employee was not receiving benefits

Increases must be provided from April 1 following the calendar
year in which the employee attains age 70½ to the date on which
benefits commence even if there is a suspension of benefits.

These rules do not apply if non 5% owners have the same RBD
as 5% owners and have little relevance if the plan automatically
provides for actuarial increases at least as great as the following
slide and benefits not suspended.
§401(a)(9)(C)(iii)
Reg. §1.401(a)(9)-6 Q&A 7, 8 & 9
36
Benefit Calculations
ACTUARIAL INCREASE FOR DELAYED RETIREMENT

If actuarial increases are required in the preceding slides
the benefits payable with respect to an employee as of the
time distributions commence must be at least:




The actuarial equivalent of the benefits that would have been
payable as of the date the actuarial increase must begin if
benefits had commenced on that date; plus
The actuarial equivalent of any additional benefits accrued
after such date; less
The actuarial equivalent of any distributions made with
respect to the employee's benefits after such date
Actuarial equivalence is determined using plan's factors for
purposes of satisfying Code §411
Reg. §1.401(a)(9)-6 Q&A 8
37
Benefit Calculations
RE-AMORTIZATION OF PAYMENTS

Once an annuity commences, the annuity
period generally may not be changed,
except:



Participant retires or plan terminates
Original annuity is a period certain without life
contingencies
Participant marries and elects a QJSA
Reg. §1.401(a)(9)-6 Q&A 13, 1(a), and 1(b)
38
Benefit Calculations
RE-AMORTIZATION OF PAYMENTS

Must satisfy all of the following conditions:




Future payments under the modified stream satisfy
Code §401(a)(9) (treating the date of change as a new
ASD and the actuarial present value of the remaining
payments as the participant’s entire interest)
For purposes of Code §§ 415 and 417, the
modification is treated as a new ASD
After taking into account the modification, the annuity
stream satisfies §415 (determined at the original ASD)
The end point of any period certain is not later than the
end point available at the original ASD
Reg. §1.401(a)(9)-6 Q&A 13
39
Benefit Calculations
ALLOWABLE INCREASES IN PAYMENTS
Once an annuity commences, the benefit generally may
not increase, except when:

Increases do not exceed the increase in an eligible COLA

Increases reflecting better than assumed investment
performance due to actuarial gain, but only if the interest
rate for calculating the initial level of payments is at least
3%

Benefit increases due to a plan amendment

There’s a pop-up in payments in the event of the death of
the beneficiary or the divorce of the employee

Beneficiary elects to convert the survivor portion of a J&S
annuity to a lump sum upon the employee’s death

Fixed increases, but only if rate of increase is < 5%
Reg. §1.401(a)(9)-6 Q&A 14
40
Observations



It’s better to elect a form without a life
contingency, since beneficiary would lose
benefit if participant dies
It’s usually the goal to keep the RMD as
small as possible (since distributions are
taxed) in which case an increasing term
certain is the best option
It’s administratively easiest to have the
participant take payment intervals of one year
41
Funding
Two benefit pieces to value:

Amount not in RMD status

Amount in RMD status
With valuation software, you may need to enter the
participant twice: once with the amount not in RMD
status payable under the Plan’s normal form and
again with the RMD benefits in pay status under the
elected annuity form.
42
Benefit Restrictions

Restrictions based on plan’s funded status


IRC §436 applies to all participants and prevents
(or limits) ‘prohibited payments’ where plan less
than 60% or 80% funded
Reg. §1.401(a)(4)-5(b) restricts payments to
certain HCEs where plan not 110% funded

Prohibited payments are generally monthly
amounts in excess of the monthly amount
paid under a straight life annuity

So neither restriction should impede
satisfaction of RMD rules and IRC §401(a)(9)
43
Example #1
FACTS

Participant not fully vested

Participant not at NRD

Beneficiary is 14 years younger than participant

Exact age annuity factors based on
interpolation of Nx’s and Dx’s

417(e) lump sums greater than Plan AEQ lump
sums

RMD payments assumed annually
44
Example #1
PLAN INFORMATION
Plan Information
Effective date
1/1/2010
Monthly benefit
$500 x years of participation
NRD
Later of age 65 and 5 years of participation
Vesting
6-year graded, excluding years prior to
effective date
Plan actuarial
equivalence
Interest: 5.0%
Mortality: 94 GAR (post-retirement only)
417(e) assumptions
for all years
Segment rates: 2.07%, 4.45%, 5.24%
Mortality: 2012 Applicable Table (both preand post-retirement)
Available optional
forms for RMD:
Single life annuity
50% and 100% J&S annuity
Non-increasing and increasing term certain
annuity (installment payments with no life
contingency)
45
Example #1
PARTICIPANT INFORMATION
Participant Information
Date of birth
12/31/1939
Spouse date of birth
12/31/1953
Date of hire
1/1/2003
Date of participation
1/1/2010
Normal Retirement Date
1/1/2015 (age 75)
Year participant attains age
70½
Required Beginning Date
2010
4/1/2011
46
Example #1
2011 RMD
2010 Benefit Calculation
Valuation date
Annuity Starting Date
(ASD)
Participant age
Spouse age
Accrued benefit
2011 RMD
12/31/2010
4/1/2011
$500 x 1
71.25
57.25
$500
Vesting percent
1 year of VS
0%
Vested accrued
benefit (VAB)
$500 x 0%
$0
Vested benefit
payable at NRD
At ASD
$0
47
Example #1
2012 RMD
2011 Benefit Calculation
2012 RMD
Valuation date
12/31/2011
Annuity Starting
Date (ASD)
Interval between payments must
be uniform and not exceed 1 year
4/1/2012
Participant age
Spouse age
At ASD
72.25
58.25
Accrued benefit
$500 x 2
$1,000
Vesting percent
2 years of VS
20%
Vested accrued
benefit (VAB)
$1,000 x 20%
$200
RMD payable at
NRD
Increase in VAB = $200 - $0
$200
48
Example #1
2012 RMD – SINGLE LIFE ANNUITY
2012 RMD
2011 accrued benefit
@ NRA
ASD
$200
Interval between payments
must be uniform and not exceed
1 year
Age @ ASD
4/1/2012
72.25
$200 x APR75 x v(75-72.25)
= $200 x 103.19351 x 0.87444
$18,047
Monthly SLA accrued
benefit @ ASD
Plan LS ÷ APR72.25
= $18,047 ÷ 114.34186
$157.83
Annual RMD payable
as SLA
Monthly Benefit x 12
= $157.84 x 12
$1,893.96
Plan lump sum to
calculate options @
ASD
49
Example #1
2012 RMD – JOINT & SURVIVOR ANNUITIES
2012 RMD
Plan lump sum
to calculate
options @ ASD
From prior slide
$18,047
Annual RMD
payable as
50% J&S
Plan LS ÷ 50% J&S APR72.25:57.25
= $18,047 ÷ 143.5579 = $125.71
x 12
1,508.52
Annual RMD
payable as
100% J&S
Plan LS ÷ 100% J&S
APR72.25:57.25 = $18,047 ÷
172.7740 = $104.45
x 12
1,253.40
50
Example #1
2012 RMD – TERM CERTAIN ANNUITIES
2012 RMD
Monthly SLA
accrued @ ASD
From prior slide
$157.83
LS to calculate
Benefit at ASD x 417(e) APR72.25
options subject to
= $157.83 x 123.3773
417(e)
$19,473
Term certain
period
Spouse more than 10 years
younger, so use J&S table.
28 years
Non-increasing
term annuity
=19,473 / 417(e) 28 year annuity
factor =195.371248
x 12
$1,196.16
Increasing term
annuity
=19,473 / above factor using
4.99% COLA = 345.853203
x 12
$675.72
51
Example #1
2012 RMD

All of the above streams that have a life
contingency also have the downside of a loss
of death benefits in case of premature death of
participant (and beneficiary if J&S). i.e., other
than term annuities (no life contingency),
annuities stop paying when last annuitant dies.

If the goal is to minimize payments and
produce results close to old Account Balance
Method an increasing term annuity is optimal.
52
Example #1
2012 RMD
If the employee were to elect the increasing term
annuity the 2012 RMD would equal $675.72

The 2013 RMD would equal $675.72 x 1.0499 =
$709.44 plus any new RMD attributable to 2012
increases in accrued benefits payable in 2013


Subsequent payments in a similar fashion
For simplicity, from this point forward we will
assume the employee elects a non-increasing
term annuity instead of increasing.
53
Example #1
2012 FUNDING

For purposes of running the actuarial valuation you
will need to value 2 sets of benefits:

$1,196.16 payable in annual installments and

$800 payable under plan Normal Form at NRA

You may find the easiest way to value these benefits
is to run the participant as two separate people. Or
you may find a way to make your software get to the
right place

The purpose of the next few slides is to give you the
ability to calculate what the Funding Target should
be and compare to your software’s valuation results
to confirm you’re in the right ballpark
54
Example #1
2012 FUNDING
Funding
12/31/2012
Valuation date
12/31/2012
Attained age
73
NRA
75
Funding segment
rates
1.90%
4.90%
6.01%
Accrued benefit
BOY (for funding target)
$1,000
Accrued benefit
EOY
$1,500
For target normal cost:
$1,500 - $1,000
$500
RMD in pay status
Expressed as SLA
$200
BOY benefit not in
pay status
For funding target
$1,000 - $200
$800
2012 accrual
55
Example #1
2012 FUNDING
FT and TNC for benefits not in pay status
12/31/2012
1st segment
1.09% / 417(e)
APR75 = 129.12868
APR78, adj to 75 = 110.58207 x D78 ÷ D75 =
95.49233
V75-73 = 0.96306
(129.12868 - 95.49233) x 0.96306
32.39369
2nd segment
4.90% / 417(e)
APR78, adj to 75 = 92.71137 x D78 ÷ D75 =
73.38594
APR93, adj to 75 = 40.11616 x D93 ÷ D75 =
3.52699
V75-73 = 0.90876
(73.38594 - 3.52699) x 0.90876
63.48500
3rd segment
6.01% / 417(e)
APR93, adj to 75 = 38.96415 x D93 ÷ D75 =
2.83443
V75-73 = 0.90876
2.83443 x 0.88983
2.52215
Factor using
417(e) mortality
32.39369 + 63.48500 + 2.52215
98.40084
56
Example #1
2012 FUNDING
FT and TNC for benefits not in pay status
12/31/2012
Factor using
plan AEQ
5.0% / 94
GAR
APR75 = 103.19351
v(75-73) x 103.19351
(discount using 1st segment
rate)
99.38115
Funding
target
$800 x max(98.40084,
99.38115)
$79,505
Target NC
$500 x max(98.40084,
99.38115)
$49,691
57
Example #1
2012 FUNDING
FT for benefits in RMD pay status
12/31/2012
Annual benefit
$1,196.16
Remain Pmts
at val date
27
1st segment
5-year term certain =PV(1.90%,min(5,27),1,1)
4.81699
2nd segment
20-year term certain
=PV(4.90%,min(20,27),-1,1) = 13.18442
5-year term certain =PV(4.90%,min(5,27),1,1) = 4.55420
Factor = 13.18442 - 4.55420
8.63022
3rd segment
27-year term certain =PV(6.01%,27,-1,1) =
13.99049
20-year term certain
=PV(6.01%,min(20,27),-1,1) = 12.14940
Factor = 13.99049 - 12.14940
1.84109
Funding target
$1,244.88 x (4.81699 + 8.63022 + 1.84109)
$18,287
58
Example #1
2012 FUNDING
Total liabilities
Funding
From part 1: $79,505
target
From part 2: $18,287
Target NC
From part 1 only
12/31/2012
$97,792
$49,691
59
Example #1
2013 RMD
2012 Benefit Calculation
2013 RMD
Valuation date
12/31/2012
Interval between payments must
be uniform and not exceed 1 year
4/1/2012
Participant age
Spouse age
At distribution date
72.25
58.25
Accrued benefit
$500 x 3
$1,500
Vesting percent
3 years of VS
40%
Vested accrued
benefit (VAB)
$1,500 x 40%
$600
Additional RMD
payable at NRD
Increase in VAB = $600 - $200
$400
Distribution
date
60
Example #1
2013 RMD
Term Annuity
2013 RMD
$400
Additional RMD
payable at NRD
From prior slide
Plan lump sum @
ASD date
$400 x APR75 x v(75-73.25)
= $400 x 103.1935 x 0.91816
$37,899
Monthly SLA
accrued benefit
@ ASD date
Plan LS ÷ APR73.25
= $37,899 ÷ 110.3449
$343.46
417(e) lump sum
Benefit at ASD x 417(e) APR73.25
= $343.46 x 118.9960
$40,870
Term certain
period
Spouse more than 10 years
younger, so use J&S table.
27 years
Term annuity
=$40,870/ 28 year annuity factor =
192.3349220
$2,549.76
2012 + 2013 annuity payments
= $1,244.88 + $2,658.12
$3,745.92
Total RMD due
61
Example #1
2013 FUNDING
Funding
12/31/2013
Valuation date
12/31/2013
Accrued benefit
BOY (for funding target)
$1,500
Accrued benefit
EOY
$2,000
2013 accrual
For target normal cost:
$2,000 - $1,500
$500
RMD in pay
status
Expressed as SLA
2012 RMD + 2013 RMD
= $200 + $400
$600
For funding target
$1,500 - $600
$900
BOY benefit not
in pay status
62
Example #1
2013 FUNDING

As shown in detail for 2012:



BOY accrued benefit payable at NRA ($900
monthly) will be valued in a regular manner
BOY accrued benefit in pay status ($3,745.92
annually) will be valued as a term certain annuity
with 26 years remaining using the funding segment
rates
The two results are added together to
determine the participant’s total Funding
Target valued at 12/31/2013
63
Example #2
FACTS

Participant at NRD and 100% vested in all benefits

Beneficiary is 6 years younger than participant
Exact age annuity factors based on interpolation of
Nx’s and Dx’s
417(e) lump sums greater than Plan AEQ lump
sums
RMD payments assumed annually




All RMD benefits are payable as non-increasing
installment with annual payment intervals
64
Example #2
PLAN INFORMATION
Plan Information
Effective date
1/1/2006
Monthly benefit
NRD
Vesting
Plan actuarial
equivalence
417(e)
assumptions for all
years
$500 x years of participation
Available optional
forms for RMD:
Single life annuity
50% and 100% J&S annuity
Non-increasing and increasing term certain annuity
(installment payments with no life contingency)
Later of age 65 and 5 years of participation
6-year graded
Interest: 5.0%
Mortality: 94 GAR (post-retirement only)
Segment rates: 2.07%, 4.45%, 5.24%
Mortality: 2012 Applicable Table (both pre- and
post-retirement)
65
Example #2
PARTICIPANT INFORMATION
Participant Information
Date of birth
12/31/1939
Spouse date of birth
12/31/1945
Date of hire
1/1/2003
Date of participation
1/1/2006
Normal Retirement Date
1/1/2011 (age 71)
Year participant attains age
70½
2010
Required Beginning Date
4/1/2011
66
Example #2
2011 RMD
2010 Benefit Calculation
2011 RMD
Valuation date
12/31/2010
Annuity Starting
Date (ASD)
4/1/2011
Participant age
At ASD
71.25
Accrued benefit
$500 x 5
$2,500
67
Example #2
2011 RMD – TERM CERTAIN ANNUITY
2011 RMD
2010 Accrued
Ben
AEQ Benefit at
ASD 4/1/2011
From prior slide
$2,500.00
Benefit x APR71 ÷ APR71.25 ÷ v(71-
$2,550.70
71.25)
= $2,500 x 119.2314 ÷ 118.2954 x
1.0123
417(e) lump
sum @ ASD
Benefit x 417(e) APR71.25
= $2,550.70 x 127.6951
$325,712
Term certain
period
Uniform Lifetime Table
(integer value)
26 years
Non-increasing
term annuity
=325,712 / 417(e) 26 year annuity $20,661.72
factor = 189.168837
X 12
68
Example #2
2012 RMD
2011 Benefit Calculation
Valuation date
Distribution date
Participant age
2011 accrued
benefit
2010 accrued
benefit
2011 increase
2012 RMD
12/31/2011
4/1/2012
At distribution date
$500 x 6
72.25
$3,000
From prior slide
$2,500
$3,000 - $2,500
$500
69
Example #2
POST-NRA ACCRUALS

Many small DB plan documents are written to
allow a participant to work past NRA and delay
benefits

These plans provide actuarial increases when
retirement is delayed and follow the methodology
set out in §1.411(b)-2(b)(4)(iii)(B) proposed
regs demonstrated as follows.




A: 2010 accrued benefit = $2,500
B: Actuarial equivalent value at 12/31/2011 = $2,715
C: 2011 accrued benefit = $3,000
D: 2011 accrual (for TNC) = $285 (C-B)
70
Example #2
POST-NRA ACCRUALS
 The question arises on how to calculate the 2011
accrual increase when benefit payments have
begun

§1.411(b)-2(b)(4)(ii)(A) provides minimum
thresholds for actuarial increases required to satisfy
411 when distributions have been made

These requirements essentially reduce the 2011
accrual ($500) by the actuarial equivalent of the
distributions made in 2011 expressed as a SLA,
which gets you to the same place as the prior slide
71
Example #2
POST-NRA ACCRUALS

THE PLAN DOCUMENT PREVAILS (provided it
meets the 411 minimum requirements)

Pre-approved document language may not be as
specific as we would like

It is up to the actuary to interpret how to apply the
terms of the plan

The reduced 2011 accrual of $285 in our prior slide
represents the minimum required accrual to comply
with §1.411(b)-2(b)(4)

We will proceed in our outline assuming the plan
specifically defines the accrued benefit such that the
72
$500 is the 2011 accrual
Example #2
2012 RMD
Term Annuity
2012 RMD
From prior slide
$500.00
Benefit x APR72 ÷ APR72.25 ÷ v(72-72.25)
= $500 x 115.2867 ÷ 114.3419 ÷
1.0123
$510.32
417(e) lump
sum @ ASD
Benefit x 417(e) APR72.25
= $510.32 x 123.3773
$62,962
Term certain
period
Uniform Lifetime Table
(integer value)
25 years
Non-increasing
term annuity
=62,962 / 417(e) 25 year annuity
factor = 185.821802
X 12
$4,065.96
Total 2012 RMD
due
2010 + 2011 Annuity Payments
= $20,661.72 + $4,065.96
$24,727.68
2011 accrual
AEQ benefit at
ASD 4/1/2012
73
Example #2
2012 PLAN TERMINATION

We find out the plan terminated on 3/1/2012
before the employee took any 2012 RMD. The
participant is electing a lump sum distribution
and will be paid on 4/1/2012 (we made it really
easy)

There are two ways to calculate the RMD and
the amount eligible for rollover as covered in
Reg. §1.401(a)(9)-6 Q&A 1(d) (See prior slides
28 & 29)

The rules for distributions made in the calendar year
containing the RBD do not apply (i.e. no doubling up)
because we are in the second year. If we were in the
74
first year doubling up would be required.
Example #2
2012 PLAN TERMINATION

If using the Annuity Distribution Method in our
example the plan would pay the participant the
$24,727.68 ($20,661.72 + $4,065.96) as
calculated on prior slides.

This satisfies 401(a)(9) and is not eligible for
rollover.

The following slides demonstrate using the
single sum option outlined in 1(d)(1) of the Regs
(DC Account Balance Method) which typically
will produce a lower amount.
75
Example #2
2012 PLAN TERMINATION

The total lump sum distribution will be the
greater of the sum of the PVAB of the 2010
term certain benefit in pay status plus the
2011 accrual increase not in pay status under
Plan assumptions vs 417(e) assumptions.

We know that 417(e) will produce the greater
lump sum.
76
Example #2
2012 PLAN TERMINATION
4/1/2012 Lump Sum
Benefit in
Pay Status
Lump sum
(PVAB)
Monthly Benefit payable as Term $1,721.71
Certain (20,661.72 ÷ 12)
1,721.71 x 417(e) 25 year
annuity factor = 185.8218
$319,950
2011 AB
417(e) value
@ 4/1/2012
417(e) lump sum of the 2012
benefit not yet in pay status
From prior slide
$62,962
Total PVAB/
Lump Sum
Distribution
$319,950 + $62,962
$382,912
77
Example #2
2012 PLAN TERMINATION
4/1/2012 RMD Calculation
Total PVAB
Factor
2012 dist. not
eligible for
rollover
2012 dist.
Eligible for
rollover
From prior slide
$382,912
Uniform Lifetime Table
25.60
Not eligible for rollover =
$382,912 ÷ 25.60
$14,957
Not eligible for rollover =
$382,912 – 14,957
$15,512
Eligible for rollover =
$382,912 – $14,957
$367,954
78