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flosfur

Required Minimum Distribution - Final Regs for DB plans

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1. What is the effective date of the Final 1.401(a)(9)-6 regulations?

Q&A 17 appears to imply that the regs are effective for 2006 - as it allows MRDs for years thru 2005 based on a good faith interpretation of Section 401(a)(9).

2. Calling ASPA summer conference attendees:

In the Q&As sessions, I recall hearing that the Account Balance method of determining RMD from a DB plan is OK for 2004 (but not for 2005).

The question is: Is the Account Balance method Ok for 2004 and 2005 or just 2004?

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It is not specifically allowed. What is allowed is a "reasonable interpretation" of prior proposed regulations. The IRS's position (i.e., the authors of the regulations -- the same ones have been working on all of them back to the 1980s) is that it was never allowed. If you can make a case that the method is a reasonable interpretation, then you can still use it. Just because you were using it before, doesn't automatically mean it is a reasonable interpretation.

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I agree with MGB that it must be considered a "reasonable interpretation."

For those who wish to continue to use the "account balance" method for 2004 and 2005 as a reasonable interpretation, I refer you to the Proposed Regulations, published in the Federal Register on December 30, 1997 (62 FR 67780) and amended on March 25, 1998 (63 FR 14391.) (Actually, I believe the question # referenced below wasn't changed, and probably appeared in the proposed regulations issued July 27, 1987 (52 FR 28070) but I don't have those handy. But I think the 1997 version only amended D-5 and D-6, and added D-7.)

Specifically, Q&A F-3 (e), which states, "If distributions from a defined benefit plan are not in the form of an annuity, the employee's benefit will be treated as an individual account for purposes of determining the minimum distribution. See F-1 to determine the minimum distribution if distribution is being made over life expectancy."

As an editorial comment, the current IRS position that it was never allowed seems singularly stupid to me. But what the heck - some of my own positions seem singularly stupid to me when I look back at them. The difference is - no one has comply with my positions!

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ASPA's ASAP on Final Regs issued June 21 had the followng:

...... This transition relief allows plans to make increasing annuity payments so long as the payments comply with prior regulations, and also permits defined benefit plans to continue calculating required minimum distributions using the “account balance method,” to the extent permitted under prior regulations.

_____________

What does "to the extent permitted under prior regulations" mean? They were either allowed or not allowed.

Belgarath, I have never seen the Proposed 1997 regs cited anywhere by anyone before. All cites are generally to the proposed 1987 & 2001 regs, 2002 Final and -1.401(a)(9)-6T regs.

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flosfur - well, you have now! As I said in my original message, I didn't have a copy of the 1987 regs handy when I was typing the response. But I had a few minutes this morning, so I dug out a copy. See 1.401(a)(9)-1, Q&A F-3(e) of those regs. Also, See 1.401(a)(9)-6, Q&A 1(e) of the 2001 regs.

Aside from the plain language of the regulations, it's also instructive to note the preamble to the 2001 regs. Under the "annuity payments" section, there is a paragraph stating that ,"One of the rules in the 1987 proposed regulations that the IRS and Treasury are continuing to study and evaluate is the rule providing that if the distributions from a defined benefit plan are not in the form of an annuity, the employee's benefit will be treated as an individual account for purposes of determining required minimum distributions. The IRS and Treasury are continuing to consider whether retention of this rule is appropriate for defined benefit plans..."

I don't know how it could be any clearer that using this rule was a reasonable interpretation, since the regs specifically provided for it, and I have no hesitation about referring anyone to these sources in support of this.

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The allowable use of the account balance method is only for TESTING of whether or not the distribution satisfies the RMD rules, the quoted passage is not saying that the account balance method is an acceptable form of distribution. The regulators position is that the account balance method is not an acceptable form of distribution (although it would pass the RMD rules when tested).

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MGB, you have been driving those English cars too long!

Now I am a simple person. If I can test a distribution against the account balance method to see if it satisfies RMD, then what have I done? Pick a distribution out of thin air, pull it from some dark place?

No way. It was calculated from the account balance method! I don't care what the IRS tries to say - if we can test against a method, then that method is acceptable and therefore a reasonable interpretation.

What you said looks like doubletalk! Shades of 1984! And you are better than that!

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Only conveying the doubletalk I've been forced to listen to from the authors. (I "think" the issue is that the account balance method does not meet other rules, such as definitely determinable benefits, not that it violates RMD rules.)

But then, they continuously said their hands were tied by legislative history and could not liberalize their earlier restrictive stance on COLAs. Then they went on to do a complete about face on that position in the final regulations, which caught me totally by surprise. So, the doubletalk does go away once in awhile.

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.......... I didn't have a copy of the 1987 regs handy when I was typing the response. But I had a few minutes this morning, so I dug out a copy. See 1.401(a)(9)-1, Q&A F-3(e) of those regs. Also, See 1.401(a)(9)-6, Q&A 1(e) of the 2001 regs.

Both of these say "if distributions from a db plan are not in the form of an annuity, the employee's benefit will be treated as an individual account......."

All of the DB plans I have seen in my life have either Life annuity (with/without period certain) or J&S annuity (with/without period certain) as the Normal form of benefit with optional lump sum and other form of distributions.

In such cases, how can one argue that distributions from these DB plans are "not in the form of an annuity"?

At least in the small plans, one is generally determining RMDs when the participant is still working and has not made an election about the form of distributions. Wouldn't the default form of benefit distribution be a life annuity or a qualified J&S annuity if the employee is married?

So how is the account balance method for determining RMD a good faith interpretations of the regs for the above mentioned db plans?

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For 2003, 2004 and 2005, if I use the account balance method for computing RMD must I use the life expectancy tables from the 1987 or the 2001 proposed regs or can I use the life expectancy tables from the 2002 final regs - i.e. in doing this, am I basing my calcs on a reasonable and good faith interpretation of the provisions of section 401(a)(9), remembering that the 2002 regs don't allow the account balance method?

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From the bottom of page 14 of the final regs:

"A number of commentators requested that the final regulations provide the rule in prior proposed regulations that allowed minimum distributions from a defined benefit plan to be calculated using the rule for defined contribution plans in ' 1.401(a)(9)-5. The primary argument for allowing this level of flexibility in calculating distribution amounts from year to year is to allow employees to adjust to changed circumstances. The rules in these final regulations allowing a change in distribution form upon retirement or plan termination, and at any time when distribution is in the form of a term certain only, address this need."

Given the above statement in the final regs, I don't see how one can argue that the account balance method is not allowed for 2004 and 2005. The IRS is acknowledging in the final regs that it was a calculation method under prior proposed regs, are they not? Since the final regs retain the account balance method in the year of a lump-sum distribution, we know that the above statement is not referring to that narrow application. MGB and others on this post, am I missing something?

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From the bottom of page 14 of the final regs:

Given the above statement in the final regs, I don't see how one can argue that the account balance method is not allowed for 2004 and 2005.  The IRS is acknowledging in the final regs that it was a calculation method under prior proposed regs, are they not?  .....

But where in those regs does it permit use of Account Balance method? Is it buried somewhere in the preambles or discussions? Or is this from some Q&As at a conference? Or is this just an Urban legend?

I don't see it in any of the RMD regs themselves!

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I agree that the recently issued regulations are silent on the use of the account balance method for DB distributions. However, what about amending the plan to allow a lump sum distribution upon the attainment of normal retirement age (not the actual termination of employment due to normal retirement). Then, assuming that the plan allows a lump sum distribution, the paticipant can do a direct transfer of the lump sum to an IRA and calculate minimum required distributions from the IRA using the general rules for RMDs. This is not perfect, because as long as the participant is still employed and accruing a benefit, subsequent distributions will need to be transferred made to an IRA. Is this too aggressive? Did I miss any issues?

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One issue you missed is the top 25 paid HCE restrictions that often come into play in all but larger plans, and it is in these plans where the 5% owners are generally employed. This will generally preclude this approach.

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The account balance method for DB plans is in the 1987 proposed regs (quoted in one of the posts above - not buried at all and quite clear!) and was left alone in the 2001 modifications. Not to mention, all those plan documents that were approved since 1987, and probably the LRM's had the language too. Also, from the final regs:

"For a plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001 proposed regulations, the 2002 temporary and proposed regulations, or these final regulations, a distribution will be deemed to satisfy a reasonable good faith interpretation of section 401(a)(9)."

This leaves no room for doubt on whether the account balance method can be used up to 2005 (as long as the document permits). The final regs are not silent on this issue at all, they clearly allow for it up to 2005. As a one-man operation, it's easy to miss something, but I just don't see an argument here for an opposite opinion. It seems to be one of those issues that has "spooked" people and revealed the natural conservatism of the profession.

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............. However, what about amending the plan to allow a lump sum distribution .... Then, assuming that the plan allows a lump sum distribution, the paticipant can do a direct transfer of the lump sum to an IRA and calculate minimum required distributions from the IRA using the general rules for RMDs.......  Is this too aggressive?  Did I miss any issues?

Other considerations aside, in the small plan arena, the owner/participant, who is generally affected by this, does not want to lose the "protection against creditors" provided by an ERISA plan by rolling over the lump sum to an IRA.

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The account balance method for DB plans is in the 1987 proposed regs (quoted in one of the posts above - not buried at all and quite clear!) and was left alone in the 2001 modifications. Not to mention, all those plan documents that were approved since 1987, and probably the LRM's had the language too. ...

Where in the prposed 1987 regs does it say so? The Q&A from the 1987 regs you previously quoted clearly says "if distributions from a defined benefit plan are "not" in the form of an annuity......" (as prviously quoted).

As stated previously, the default benefit in a db plan is an annuity (J&S if married). Lump sums and other forms are optionally provided.

QUOTE=David MacLennan,Aug 4 2004, 05:06 AM].......Also, from the final regs:

"For a plan that satisfies the parallel provisions of the 1987 proposed regulations, the 2001 proposed regulations, the 2002 temporary and proposed regulations, or these final regulations, a distribution will be deemed to satisfy a reasonable good faith interpretation of section 401(a)(9)."

......

But those prior regs allow the account balance method only where distributions are "not" in the form of annuity...

-----------------------------------------------

Personally I think they should allow for account balance method for DB plans to be consistent with the DC plans. Otherwise, a DB plan participant with a PVAB of $X has to take out much more as RMD and pay more in taxes than a DC plan participant with an account balance of $X. But, who says law has to be consistent!

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Personally I think they should allow for account balance method for DB plans to be consistent with the DC plans. Otherwise, a DB plan participant with a PVAB of $X has to take out much more as RMD and pay more in taxes than a DC plan participant with an account balance of $X. But, who says law has to be consistent!

Why wouldn't the calcs yield the same figure DB vs. DC?

P.S. If the account balance method is not available, then I will give you my account balance.

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Yes I agree the account balance method only makes sense for partial lump-sum distributions, and the document must allow for the partial lump-sums. Interesting question is whether you can avoid doing distribution forms every year, by somehow electing a series of partial lump-sums determined by the individual account method . . . but I suppose that could be considered an annuity and therefore ineligible under the regs (although the amount of each future payment is generally not knowable).

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Does the top-25 restrictin apply accross the board or only if the plan is underfunded?

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Personally I think they should allow for account balance method for DB plans to be consistent with the DC plans.  Otherwise, a DB plan participant with a PVAB of $X has to take out much more as RMD and pay more in taxes than a DC plan participant with an account balance of $X.  But, who says law has to be consistent!

Why wouldn't the calcs yield the same figure DB vs. DC?

P.S. If the account balance method is not available, then I will give you my account balance.

Because under the new rules (whenever they become effective), unless the DB participant takes a lump sum distribution at 70-1/2 etc, his RMD is the annual accrued benefit which is far greater than the PVAB divided by the distribution period. So a DB participant with PVAB of $X who does not take the lump sum distribution will be taking out more than a DC participant with an account balance of $X.

Yes, the account balance method has been used and will continue to be used thru 2005 (and I intend to so myself) but it is not permitted explicitly in any of the proposed or temp regs - that's all I am saying.

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Flosfur, just to clarify, you are correct that using the annuity method will cause minimum distributions to increase versus the account balance method. But reread your statement again. You were questioning the comparability of the account balance method for DB plans versus DC plans. I now know you meant not to make that comparison, but were merely pointing out how the new rules will negatively impact DB plans.

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Guest dsyrett

I haven't yet checked it myself but I believe that Mike Preston indicated that the option in the final regs to allow for an increasing annuity will get you somewhat close to the account balance result, FWIW.

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