RMD and death in year one turns 70.5 Options

[Sieve]

Kevin --

Let's look at a Natalie Choate example in her book (this is from Section 1.3.07 of the 2003 edition--prior to current edition (my copy of the current edition is elsewhere)--but the regs were finalized before 2003, and nothing has changed to make the example inapplicable now).

Basically, an employee (Otto) retires in 1998 and turns 70-1/2 in 2001. By the end of 2001 he has not taken MRD #1 (for 2001), but he doesn't have to take that MRD until April 1, 2002 (this is his RBD for reaching age 70-1/2 in 2001). Of course, he also will have to take MRD #2 (for 2002) by the end of 2002--2 MRDs expected for 2002. Unfortunately for Otto--but fortunately for this discussion--he dies on March 31, 2002, prior to his RBD. Says Choate: "He has died before his RBD. The requirement for taking MRDs for 2001 and 2002 is simply erased, because he never reached his RBD." (Emphasis in original.)

Choate is not gospel. But some think she is close to gospel. I provide this for edification and for your consideration.

And, I think the apparent conflict between this state of affairs and a plan potentially making inappropriate and operationally deficient distributions to Otto before his death would not, on a practical level, be an issue. Do you think authorizing and making a 401(k) hardship withdrawal for surgical expenses and then having the employee suffer complications so that the surgery never takes place is an operational failure in a 401(k) plan? I think not. (Perhaps a bad example--as examples tend to be. But I think you get my drift--although it may only be my drift.)

But, asking the IRS is good, too . . .!!

This post has been edited by Sieve: Oct 31 2008, 03:23 PM

[GMK]

Sieve - thanks for connecting some of the dots for me. I understand your reasoning.

Sadly (to me), this is another case where the RMD rules for IRA's and qualified plans lack symmetry.

But tomorrow's another month, and I can keep hoping that I don't really have to know the what the IRS would say.

[Guest_named_mjb_*]

Here is my statement From #32:

"The symmetry in the above regulations and IRC 401(a)(9) demonstrate the obvious: No MRD is required if death occurs before April 1 of the year after the year the IRA owner or participant attains age 70 1/2."

MJB,

Your statement leads me to a question. A still employed 5+% owner turns age 70.5 in 2008. The 401(k) plan does not allow in-service distributions, except for required minimum distributions. He takes his 2008 RMD on 12/30/2008 and his 2009 RMD on 1/15/2009, then dies on 3/15/2009. Your statement is that his death means there are no RMD's for 2008 or 2009. So, he was not eligible for either distribution. What should the plan do about the retroactive operational failure caused by his death?

see reg. 1.401(a)(9)-2 Q/A-6 (a) :" Consequently if A dies before April 1, 2009 (A's required beginning date), distributions after A's death must be made in accordance with section 401(a)(9)(ii), (iii) or (iv) and reg.1.401(a)(9)-3 and not section 401(a)(9)(i). This is the case without regard to whether the plan has distributed the minimum distribution for the first distribution calendar year (as defined in A-1(b)) before A's death."

[Guest_named_mjb_*]

Kevin --

Let's look at a Natalie Choate example in her book (this is from Section 1.3.07 of the 2003 edition--prior to current edition (my copy of the current edition is elsewhere)--but the regs were finalized before 2003, and nothing has changed to make the example inapplicable now).

Basically, an employee (Otto) retires in 1998 and turns 70-1/2 in 2001. By the end of 2001 he has not taken MRD #1 (for 2001), but he doesn't have to take that MRD until April 1, 2002 (this is his RBD for reaching age 70-1/2 in 2001). Of course, he also will have to take MRD #2 (for 2002) by the end of 2002--2 MRDs expected for 2002. Unfortunately for Otto--but fortunately for this discussion--he dies on March 31, 2002, prior to his RBD. Says Choate: "He has died before his RBD. The requirement for taking MRDs for 2001 and 2002 is simply erased, because he never reached his RBD." (Emphasis in original.)

Choate is not gospel. But some think she is close to gospel. I provide this for edification and for your consideration.

And, I think the apparent conflict between this state of affairs and a plan potentially making inappropriate and operationally deficient distributions to Otto before his death would not, on a practical level, be an issue. Do you think authorizing and making a 401(k) hardship withdrawal for surgical expenses and then having the employee suffer complications so that the surgery never takes place is an operational failure in a 401(k) plan? I think not. (Perhaps a bad example--as examples tend to be. But I think you get my drift--although it may only be my drift.)

But, asking the IRS is good, too . . .!!

Choate's above example (now in section 1.4.08 of the 2008 edition) is a literal adaption of an example in Reg. 1.401(a)(9)-2-Q/A-6(a) which is cited as authority. So she is citing the gospel according to the IRS.

This post has been edited by mjb: Oct 31 2008, 08:08 PM

[GMK]

Kevin C - I agree with Sieve (post #42) that the plan's operations are acceptable, because at the time it made the RMD's, the RMD's were required. There is no way (that I know of) for the plan to foresee that a participant will die, so the event of the death should not retroactively count against the plan's otherwise proper actions. Of course, someone may know of a case where it has.

mjb - Thank you very much for your comments in this thread. My concern remains with what the IRS would actually do. In the reference linked in post #40, Ms. Choate points out that the IRS issues PLR's that quote the IRS's gospel on beneficiary distributions and then rule exactly the opposite of the gospel they cite.

To rephrase your question in post #32,

Does anyone know of any recorded cases where the IRS has ruled to impose or not to impose a 50% excise tax for the failure to take an RMD for the year a participant in a qualified plan attained age 70 1/2 (or if the participant was still an employee at age 70 1/2, for the year the qualified plan participant retired) but died prior to her/his RBD?

[Sieve]

Don't mean to stir up the pot (well . . . maybe!!), but what do you make of this:

"Will a plan fail to qualify as a pension plan . . . solely because the plan permits distributions to commence to an employee on or after April 1 of the calendar year following the calendar year in which the employee attains age 70-1/2 even though the employee has not retired or attained normal retirement age under the plan as of the date on which such distributions commnece?" (Treas. Reg. Section 1.401(a)(9)-8, Q&A-9. Emphasis added.)

The answer is "No", it won't fail to qualify, but payment has to be on or after that April 1 (whether or not a 5% owner) to fit within the 4 corners of the Q&A.

Notice that this is the normal RBD for someone reaching age 70-1/2. Based on the response to this question, payment prior to the RBD is not permitted, but payment ON the RBD is ok. I know that this is dealing with the issue of the permissibility of an in-service distribution from a pension plan, but I find it strange that payment prior to the RBD but after reaching 70-1/2 is not allowed. So, does this lend any credence to the earlier thought that perhaps payment of MRDs prior to that April 1 are not MRDs unless they literally are paid on April 1--or am I smoking something illegal?

This post has been edited by Sieve: Nov 3 2008, 01:49 PM

[GMK]

Sieve - I don't see any mention of RMD or RBD in the -8 Q&A-9.

I read it to say that a plan can allow distributions to participants who are over age 70-1/2 and who have not yet retired or who are past or not past the normal retirement age. Non-5% owner participants over 70-1/2 who are still employed are not required to take RMD's and do not have RBD's yet. This Q&A comfirms that the plan can allow them to take a distribution anyway. And it goes on to say that the plan can allow the 5% owners to take distributions of more than the RMD amounts.

Or is there something more subtle that am I missing?

This post has been edited by GMK: Nov 3 2008, 02:16 PM

[Sieve]

Well, I think this Q&A stands for the proposition--in fact, it says--that if you want to provide an MRD to a 5% owner who attains age 70-1/2 but has not reached the pension plan's NRD (i.e., an MRD that is required by IRC Section 401(a)(9), by the way) then you cannot pay that MRD until April 1 of the year following the year of attainment of age 70-1/2. You cannot pay it earlier, i.e., before the 5% owner's RBD (based on attaining age 70-1/2).

In the first place, I find that amazinglingly limited--and I would suspect that MPPPs do not operationally do it that way. Secondly, it suggests that a MPPP may allow 5% owner pre-NRD MRDs for the first distribution calendar year only if the distribution is made literally on the RBD itself, and, by insinuation, therefore, that any distribution after age 70-1/2 is not an MRD until that specific April 1. And, doesn't it force the 5% owner to take 2 MRDs in one year?

But I may be stretching. Just wondered what others may think of it.

This post has been edited by Sieve: Nov 3 2008, 02:33 PM

[GMK]

Sorry, but I don't think Q&A-9 limits RMD's, nor do I think is meant to. It doesn't 'say' MRD or RMD anywhere.

As I read it, Q-9 looks at the situation where RMD's would normally be due, but because the participant is still employed, they aren't due. And it asks if it's OK for a plan to allow distributions to participants even in this case where RMD's are not due. The answer says 'yes' and confirms that even for 5% owners (where RMD's are due), the plan can allow additional distributions on or after the April 1 date. It does not say, for example, that RMD's cannot be made before April 1. It only talks about distribitions made on or after April 1.

Yes, the 5% owner must take RMD's for the year she/he turns 70-1/2 and for each year thereafter, and the first part of the distribution(s) she/he takes is RMD until the RMD amount is satisfied, but none of that is because of Q&A-9. IMO, Q&A-9 simply says that the plan is OK if it allows distributions to participants who are over age 70-1/2 and still employed, without regard to whether or not they are required to take minimum distributions.

[Sieve]

OK, got it. I can accept that this Q&A is aimed at permitting pension plan non-MRDs after that April 1, and that it does not address MRDs per se. Not how I read it at first, but I see it now.

[GMK]

A most interesting thread.

I'll bet BruceC (aka BruceM), the OP, is happy he's dealing with IRA's. (What was the question?...)

You say potato, and I say potato. You say MRD, and I say RMD.
Potato, potato. MRD, RMD. Think we should call the whole thing off?
(or is it just part of the ERISA Mash?)

[jevd]

A most interesting thread.

I'll bet BruceC (aka BruceM), the OP, is happy he's dealing with IRA's. (What was the question?...)

You say potato, and I say potato. You say MRD, and I say RMD.
Potato, potato. MRD, RMD. Think we should call the whole thing off?
(or is it just part of the ERISA Mash?)

As i stated in a previous post RMD MRD

IT DRM ( Doesn't Really Matter)

[Guest_named_mjb_*]

Kevin C - I agree with Sieve (post #42) that the plan's operations are acceptable, because at the time it made the RMD's, the RMD's were required. There is no way (that I know of) for the plan to foresee that a participant will die, so the event of the death should not retroactively count against the plan's otherwise proper actions. Of course, someone may know of a case where it has.

mjb - Thank you very much for your comments in this thread. My concern remains with what the IRS would actually do. In the reference linked in post #40, Ms. Choate points out that the IRS issues PLR's that quote the IRS's gospel on beneficiary distributions and then rule exactly the opposite of the gospel they cite.

To rephrase your question in post #32,

Does anyone know of any recorded cases where the IRS has ruled to impose or not to impose a 50% excise tax for the failure to take an RMD for the year a participant in a qualified plan attained age 70 1/2 (or if the participant was still an employee at age 70 1/2, for the year the qualified plan participant retired) but died prior to her/his RBD?

How can the IRS impose the 50% excise tax on DC distributions when reg. 1.401(a)(9)-3 Q/A-1(a) explicitly states that if an employee dies before the employee's required begainning date (4/1 following year age 70 1/2 is attained according to -2 Q/A-2(a) unless the plan permits non 5% owners who continue active employment after age 70 1/2 to defer until the 4/1 following year of retirement) and thus before distributions over the employee's life commenced in accordance with 401(a)(9)(A)(ii), distributions will be made to a beneificiary as described in 409(a)(9)(B)(ii), (iii) or iv).

Further, reg -2 Q/A-6(a) states that distributions are not treated as having begun to the employee in accordance with IRC 409(a)(9)(A)(ii) (i.e., over the employee's lifetime) until the employee's required beginning date (see -2 Q/A-2(a) above) WITHOUT REGARD TO WHETHER PAYMENTS HAVE BEEN MADE BEFORE THAT DATE. "Thus if an employee begins receiving installment payments from a PS plan upon retirement at age 65 in the form of a joint and survivivor annuity, benefits are not treated as having begun in accordance with IRC 409(a)(9)(A)(ii) (i.e. over the employee's lifetime) until the April 1 following the year the employee attains age 70 1/2. The last sentence of subsection (a) of Q/A-6 states "This is the case without regard to whether the plan has distributed the minimum distribution for the first distribution calendar year (as defined in A-1(b) of 1.401(a)(9)-5) before the employee's death."

In both cases, those where the employee dies before April 1 of the year following the year age 70 1/2 is attained without taking the MRD and the case where an employee receives installment payouts for years after retirement but prior to April 1 of the year following the year age 70 1/2 is attained there is no required MRD under the 401(a)(9) regulations based upon the life of the employee, hence no 50% excise tax penalty will be applied.

[GMK]

mjb - I appreciate your thorough analysis. I'll say again that this has been a most interesting and informative thread.

At this point, I am just wondering if anyone knows of a recorded IRS ruling on this matter.

One could ask, "How can the IRS rule against its own regulations in the cases Ms. Choate describes in the link in post #40." But it did. As Ms. Choate writes, "But then, the IRS rules exactly the opposite of what its own regulation provides." And it did this not by ignoring those regulations, but after explicitly citing them in the PLR's.

[Guest_named_mjb_*]

mjb - I appreciate your thorough analysis. I'll say again that this has been a most interesting and informative thread.

At this point, I am just wondering if anyone knows of a recorded IRS ruling on this matter.

One could ask, "How can the IRS rule against its own regulations in the cases Ms. Choate describes in the link in post #40." But it did. As Ms. Choate writes, "But then, the IRS rules exactly the opposite of what its own regulation provides." And it did this not by ignoring those regulations, but after explicitly citing them in the PLR's.

The problem with answering this thread is that several posters added extraneous information on the MRD regs which does not pertain to the question in the orginal post: whether MRDs are required to be taken if a participant or IRA owner dies prior to 4/1 of the year following the year age 70 1/2 is attained.

There is a substanial difference between the application of the MRD Regs to factual circumstances where death occurs before the required beginning date and the situations described by Choate regarding spousal rollovers where a trust or estate is designated as the IRA beneficiary. Where, under the facts described in the final MRD regulations -2 and -3, death occurs after age 70 1/2 is attained but prior to 4/1 of the following year, an MRD is never required and the IRS cannot enforce any penalty for the failure to take a MRD. There is no exception which allows the 50% excise tax to be imposed under those facts because the regs exempt a death under those circumstances from being subject to an MRD, unlike an IRA owner or participant who on dies or after 4/1 of the year following the year age 70 1/2 is attained where an MRD is required to be taken based upon that person's life expectancy by 12/31.

What Choate was describing are situtations where the MRD regs explicitly do not permit a rollover by a spouse because a trust or estate is the named beneficiary of the IRA instead of the spouse (i.e., the spouse is the beneficiary of the trust or estate, not the IRA). However, the IRS will allow a spousal rollover under a PLR if specific facts are present which would make the spouse the actual IRA beneficiary, e.g., such as when the spouse is both the sole beneficiary and sole trustee of the trust with the power to pay the entire amount to herself. In other words, under the situations described by Choate the spouse must present additional facts to the IRS which are not stated in the regs in order to allow a tax free rollover under a PLR, whereas satisfying the facts stated in regs 1.409(a)(9)-2 and 3 is sufficient to prevent a 50% excise tax penalty if an MRD is not taken.

In conclusion think about this: If the IRS could disregard its own final regulations and impose the 50% excise tax where no MRD is required how can taxpayers ever rely on any regulation issued under the IRC?