RMD and death in year one turns 70.5 Options

[J Simmons]

With all due respect, the problem inheres from the facts that the RMD from DC plan benefits is triggered for years in which the employee is 70 1/2 years or older (Treas Reg § 1.401(a)(9)-5, Q&A-1(b)) and the RBD is delayed to April 1 of the calendar year after the one in which the employee reaches age 70 1/2 (Treas Reg § 1.401(a)(9)-2, Q&A-2(a)).

So it is possible as the OP posits (albeit in the IRA rather than DC context) that an employee may live to trigger a first RMD and yet die before his RBD, the date that first RMD must be paid or face the 50% penalty. Regarding an employee that dies at any time before his RBD, Treas Reg § 1.401(a)(9)-3, Q&A-1(a) provides that all benefits must be paid within the 5 year rule (or life expectancy exceptions). This is so whether the employee dies at age 45, 62, or March 31 of the calendar year after that in which he reached age 70 1/2. Notice 2007-7, A-17, quoted by Sieve, is addressing the RMD's triggered by the employee's death, whether per the 5 year rule or the life expectancy exceptions. Neither of those as triggered by the employee's death requires an RMD for the year of the employee's death.

However, what -5, Q&A-1(b) provides is a different RMD trigger. Not the employee's death, but instead his having reached age 70 1/2 before dying. Treas Reg § 1.401(a)(9)-5, Q&A-1(b) specifies that the year that the employee reaches age 70 1/2 is a distribution calendar year, for which an RMD is required. This provision specifically deals with the calendar year the employee reaches age 70 1/2. Also note, -5, Q&A-1(b) does not indicate that the employee must live to at least April 1 of the next calendar year for the year of reaching age 70 1/2 to be a 'distribution calendar year'.

Canons of interpretation would suggest that the more specific (-5, Q&A-1(b)) is favored over apparently conflicting broader provisions (-3, Q&A-1(a)). That would favor there being an MRD being triggered by reason of the employee reaching age 70 1/2 before dying, per -5, Q&A-1(b). However, here, both may be accommodated in a single interpretation, see post #12 above, which is another interpretive preference. The two provisions are not logically inconsistent. The triggering of an RMD under -5, Q&A-1(b) because the employee reached age 70 1/2 before dying does not prevent his death beneficiary from also complying with the 5 year rule or life expectancy exceptions to that rule under -3, Q&A-1(a).

I understand the posts pertaining to IRA situations. There is the IRS statement from Publication 590 mentioned above in post #6. And the IRA regs provide that RMDs from IRAs are generally to mimic or piggyback off of the Treas Regs § 1.401(a)(9). I'm not sure that the clarity of a regulation about RMDs in the DC context (-5, Q&A-1(b)), i.e. that an RMD is triggered for the year the employee reaches age 70 1/2, may be ignored on the strength of a publication statement about RMDs from IRAs. The stakes being a penalty tax equal to 50% of a missed RMD amount, I'd want more basis for the DC context than the statement in a publication statement about RMDs from IRAs to ignore a regulation entitled, Required minimum distributions from defined contribution plans.

Maybe just my conservative nature, but before I'd hazard that 50% penalty tax I would want something a bit more authoritative.

This post has been edited by J Simmons: Oct 23 2008, 11:39 PM

[Guest_named_mjb_*]

The distribution rules for qualified plan participants who die prior to the required beginning date (April 1 of the year after attaining 70 1/2) are the same as the rules for IRAs in Pub 590: distribution must commence by the end of the 5th year after death or by commencing a periodic payment over the life or life expectancy of the beneficiary beginning by Dec 31 of year after death. See Pub 575 P 31 rt col bottom (required beginning date) and P32 rt col. top (distribution requirements). Pub 575 does not require that an RMD must be taken by a participant in a qualified plan who attains age 70 1/2 but dies before the following April 1.

[J Simmons]

Nor does Pub 575 specify that the RMD for the reader's "starting year" (the calendar year in which age 70 1/2 is reached) doesn't have to be made if you die after reaching age 70 1/2 and before April 1 of the next calendar year.

[Sieve]

John --

I don't disagree with your analysis. It certainly is acceptable, logical and consistent with the rules.

But I don't see anything in language of the regs (that has been cited here) that leads me to believe, in the instance of someone who dies before the RBD, that there is different treatment if the "triggering event" is the death of the individual before attaining age 70-1/2 rather than if the triggering event is the attainment of age 70-1/2 which then is followed by death before RBD. The cites discuss "death before RBD", both in the regs (1.401(a)(9)-3, Q&A-1(a)) and Notice 2007-7 (Q&A-17), not differentiating that event, as you point out, based on attainment of any age. In each case, death occurs before the RBD.

You indicate yourself that death before RBD includes death on March 31 of the year following the year of the 70-1/2 birthday. If so, the rule relating to death before RBD simply qualifies the normal distribution rule (i.e., distribution by the RBD after attaining age 70-1/2).

Also, let's look at the statute. IRC Section 401(a)(9)(B)(ii) covers all instances other than death after the commencement of distributions (IRC Section 401(a)(9)(B)(i)), and it says " . . . [a qualified plan must provide that] if an employee dies before the distribution of the employee's interest has begun [before the RBD], the entire interest of the employee will be distributed within 5 years after the death . . ." (Emphasis added.)

And, I don't think the normal RBD distribution after age 70-1/2 is the specific rule here. Rather, I think that the death rule is more specific, because you can die after reaching the age 70-1/2 RBD, but you can't reach the age 70-1/2 RBD after death. So, the instance in which both events occur (age 70-1/2 & death) is more specific than the one where only one occurs (attainment of age 70-1/2)--i.e., if 70-1/2 and living, rule A applies, but, if age 70-1/2 and then dead, rule B applies.

Also, just because 2 provisions can be interpreted consistently without one trumping the other, it doesn't mean that that always is the proper interpretation.

If there was doubt in my mind--although I haven't yet checked Natalie Choate's book--I, too, am conservative enough not to risk the 50% penalty for failure to distribute properly. I would not have a problem here, however.

[J Simmons]

Had Treas Reg § 1.401(a)(9)-5, Q&A-1(b) not been included as part of the regulatory set, I would wholeheartedly agree. I just don't think it's proper to apply Treas Reg § 1.401(a)(9)-3, Q&A-1(a) in isolation, and there is nothing of which I'm aware in the 401a9 regs that suggests that Treas Reg § 1.401(a)(9)-5, Q&A-1(b) is subordinate to and must yield to Treas Reg § 1.401(a)(9)-3, Q&A-1(a).

This post has been edited by J Simmons: Oct 24 2008, 01:00 AM

[Sieve]

How about Reg. 1.401(a)(9)-2, Q&A-6(a)? It gives an example of someone who starts distributions before age 70-1/2. then dies before the RBD (April 1 of the year following the year reaching age 70-1/2). In that case, the reg clearly says that MRDs must be made under IRC Section 401(a)(9)(B)(ii), (iii) or (iv), and NOT under IRC Section 401(a)(9)(B)(i). That means that death prior to RBD (no matter the age) will trigger a distribution based on death, not one based on reaching age 70-1/2.

[GMK]

Sieve - Thank you for your response in post #15, regarding the first 2 definitions of 'first distribution calendar year' in post #8 (for age 70-1/2 and retirement). Unfortunately, I did not state my question clearly.

To be more clear, my question is: In cases where the emphasized sentence in post #8 applies, are we to disregard the other 2 definitions (for age 70-1/2 and retirement) or can they also apply?

Until this thread, I thought RMD was due FOR the year of death if the employee attained age 70-1/2 and died before the RBD (separate from any RMD for the beneficiaries). jevd makes a strong argument that in this case the RMD shifts from the employee to the beneficiary, which shifts the first distribution calendar year. Hmmm. Fortunately, the situation has not come up yet, but it could.

Anyone - The statement in Pub 590 (in post #6), no minimum distribution if IRA owner reaches 70-1/2 and dies before the RBD, is very informative for IRA's. Do the IRA regs specifically say this, or is it an interpretation of the regs (and maybe the answer to this thread)?

Thanks to all who are contributing to this discussion.

[Kevin C]

I think 1.401(a)(9)-5 Q&A 4 supports John's position. It says the rules for required minimum distributions during the participant's lifetime apply for distribution calendar years up to and including the year of death.

Q-4. For required minimum distributions during an employee's lifetime, what is the applicable distribution period?

A-4. (a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee's date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee's age as of the employee's birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee's death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.

(b) Spouse is sole beneficiary --(1) General rule. Except as otherwise provided in paragraph (b)(2) of this A-4, if the sole designated beneficiary of an employee is the employee's surviving spouse, for required minimum distributions during the employee's lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with paragraph (a) of this A-4 or the joint life expectancy of the employee and spouse using the employee's and spouse's attained ages as of the employee's and the spouse's birthdays in the distribution calendar year. The spouse is sole designated beneficiary for purposes of determining the applicable distribution period for a distribution calendar year during the employee's lifetime only if the spouse is the sole beneficiary of the employee's entire interest at all times during the distribution calendar year.

(2) Change in marital status. If the employee and the employee's spouse are married on January 1 of a distribution calendar year, but do not remain married throughout that year (i.e., the employee or the employee's spouse die or they become divorced during that year), the employee will not fail to have a spouse as the employee's sole beneficiary for that year merely because they are not married throughout that year. If an employee's spouse predeceases the employee, the spouse will not fail to be the employee's sole beneficiary for the distribution calendar year that includes the date of the spouse's death solely because, for the period remaining in that year after the spouse's death, someone other than the spouse is named as beneficiary. However, the change in beneficiary due to the death or divorce of the spouse will be effective for purposes of determining the applicable distribution period under section 401(a)(9) in the distribution calendar year following the distribution calendar year that includes the date of the spouse's death or divorce.

[jevd]

I think 1.401(a)(9)-5 Q&A 4 supports John's position. It says the rules for required minimum distributions during the participant's lifetime apply for distribution calendar years up to and including the year of death.

Q-4. For required minimum distributions during an employee's lifetime, what is the applicable distribution period?

A-4. (a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee's date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee's age as of the employee's birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee's death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.

(b) Spouse is sole beneficiary --(1) General rule. Except as otherwise provided in paragraph (b)(2) of this A-4, if the sole designated beneficiary of an employee is the employee's surviving spouse, for required minimum distributions during the employee's lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with paragraph (a) of this A-4 or the joint life expectancy of the employee and spouse using the employee's and spouse's attained ages as of the employee's and the spouse's birthdays in the distribution calendar year. The spouse is sole designated beneficiary for purposes of determining the applicable distribution period for a distribution calendar year during the employee's lifetime only if the spouse is the sole beneficiary of the employee's entire interest at all times during the distribution calendar year.

(2) Change in marital status. If the employee and the employee's spouse are married on January 1 of a distribution calendar year, but do not remain married throughout that year (i.e., the employee or the employee's spouse die or they become divorced during that year), the employee will not fail to have a spouse as the employee's sole beneficiary for that year merely because they are not married throughout that year. If an employee's spouse predeceases the employee, the spouse will not fail to be the employee's sole beneficiary for the distribution calendar year that includes the date of the spouse's death solely because, for the period remaining in that year after the spouse's death, someone other than the spouse is named as beneficiary. However, the change in beneficiary due to the death or divorce of the spouse will be effective for purposes of determining the applicable distribution period under section 401(a)(9) in the distribution calendar year following the distribution calendar year that includes the date of the spouse's death or divorce.

My only reply is that this is the "General Rule" and the regulations go on to explain requirements for distribution when death occurs before RBD. Thus the general rule would apply to all other situations except Death before RBD. ALso my response was addressing the OP and IRAs although it is my opinion that the same applies to qualified plans.

That being said, unless there is a compelling reason not to take the distribution for the year of death before RBD, then I would err on the conservative side and have the beneficiary take it and avoid any question of underdistributions. Opinion only. Consult with your paid professional or if it makes sense request a PLR.

This post has been edited by jevd: Oct 24 2008, 09:51 AM

[GMK]

For me, the compelling reason to answer this question one way or the other is to ensure that the plans operate in the best interests of the participants and their beneficiaries.

As I understand it:

If the plan requires the beneficiary to receive an RMD (for the year the 70-1/2 year old died pre-RBD) and if that RMD is in fact not required, then the plan has forced the beneficiary to pay taxes (on the RMD) unnecessarily, which reduces the net benefit to the beneficiary.

If an RMD is required for the year the 70-1/2 year old died pre-RBD and the plan tells the beneficiary that that RMD is not required, then the plan puts the beneficiary at risk for a hefty excise tax penalty.

Thanks, as always, for your comments.

[Sieve]

jevd --

As you can see by my posts on this topic, I agree wholeheartedly with your conclusion that death before RBD does not require an MRD based on that RBD--even if the participant reached age 70-1/2 before death.

Your suggested conservative approach--paying out the 1st MRD by April 1 of the calendar year following the calendar year of attainment of age 70-1/2--may make some sense, except that it might also require a distribution of a very large amount (maybe in the hundreds of thousands of dollars) that, I believe, would be unnecessary.

In fact, if the death occurred during that portion of the calendar year prior to that April 1 (i.e., if death occurred in distribution calendar year #2), wouldn't it therefore require, in order to be consistent, that another MRD be made for distribution calendar year #2, and therefore 2 MRDs would be required in that one calendar year? That may be a lot of $$ unnecessarily distributed (assuming the beneficiary does not want the distribution).

Of course, many beneficiaries welcome the distribution--to the tune of gimme, gimme, gimme--and therefore render the determination moot.

[jevd]

jevd --

As you can see by my posts on this topic, I agree wholeheartedly with your conclusion that death before RBD does not require an MRD based on that RBD--even if the participant reached age 70-1/2 before death.

Your suggested conservative approach--paying out the 1st MRD by April 1 of the calendar year following the calendar year of attainment of age 70-1/2--may make some sense, except that it might also require a distribution of a very large amount (maybe in the hundreds of thousands of dollars) that, I believe, would be unnecessary.

In fact, if the death occurred during that portion of the calendar year prior to that April 1 (i.e., if death occurred in distribution calendar year #2), wouldn't it therefore require, in order to be consistent, that another MRD be made for distribution calendar year #2, and therefore 2 MRDs would be required in that one calendar year? That may be a lot of $$ unnecessarily distributed (assuming the beneficiary does not want the distribution).

Of course, many beneficiaries welcome the distribution--to the tune of gimme, gimme, gimme--and therefore render the determination moot.

Larry,
I agree. For those situations involving large numbers the individual should seek professional advice or possibly a PLR. In other situations where there is little tax impact, the conservative approach may cause less brain damage.

[GMK]

You can't always get what you want, but after re-reading this thread, I know how to get what I need.

[Sieve]

GMK --

Don't know if anyone ever answered your post #22 re: different RBDs and whether more than 1 can apply. The answer is No--if the death RBD applies, then the age 70-1/2 or termination of employment RBD no longer applies.

[J Simmons]

GMK --

Don't know if anyone ever answered your post #22 re: different RBDs and whether more than 1 can apply. The answer is No--if the death RBD applies, then the age 70-1/2 or termination of employment RBD no longer applies.

Although stated declaratively, that Sieve's opinion. Mine is different. The situation of the OP meets the explicit requirements of both -3 and -5, nothing in the regulations provides that if -3 applies then -5 cannot. My position is that both apply to the OP situation. Ignore -5 at your own peril--or get a legal opinion (so you might have malpractice recourse if need be).