Pension RC

RMD in year of plan termination

Recommended Posts

A participant in a traditional DB plan retired and elected a life annuity to begin at age 65. When he is 85, the plan sponsor terminates the plan and lump sums are offered to all participants, including current retirees. The participant elects to rollover his remaining benefit, and the rollover is processed on 6/15, after he's already received 6 life annuity payments during the year. Does an RMD equal to 6 monthly payments need to be paid before the rollover is processed?

Thanks for any responses! 

Share this post


Link to post
Share on other sites

Offering lump sums to people 20 years out of the workforce is playing with fire.

If the participant elected a straight life annuity in 1997 with spousal consent, would spousal consent be required in 2017 to switch the payment from a life annuity to a lump sum?  Does your answer depend on whether the participant's current spouse is the same person who waived the QJSA in 1997?  The participant may have been single then but is married now. 

If the participant was married, was divorced, and remarried, it is possible that the consent of both the former spouse (if living) and the current spouse would be required.  It would, without question, be required if the elected benefit was a joint and survivor form (with the spouse as of 1997 being the joint annuitant).  Please don't tell me that people with joint and survivor forms would not be able to elect lump sums if people with life annuity forms could!

How can you make sure that the participant (and spouse, if married) completely understand the consequences of the election?  The participant has been long retired and is advanced in age.

Can an election to change the payment form from a life annuity to a lump sum be made by someone with a power of attorney or guardianship or can such an election only be made by the participant (and spouse) themselves?  If someone is living in a nursing home that has guardianship over the retired participant, any idiot can easily see that the nursing home being able to act to switch from a life annuity to a lump sum is fraught with conflicts of interest.

If it were up to me, the sponsor should bite the bullet and buy annuities, however much more they would cost.  Making the offer should only be done after obtaining an IRS PLR that says it's OK.

  • Like 2

Share this post


Link to post
Share on other sites

Consent issues aside...Yes you have to satisfy the RMD for 2017.

It's possible the 6 annuity payments are more than the RMD. In a terminating DB plan where lump sums are being taken I believe the RMD is based on the lump sum divided by the applicable DC divisor. I forget exactly where it is in the 401(a)(9) regs but it is there as someone on this board pointed me to the cite last year I believe.

 

Share this post


Link to post
Share on other sites
1 hour ago, My 2 cents said:

Offering lump sums to people 20 years out of the workforce is playing with fire..........

Do you think you could have spent MORE effort while COMPLETELY IGNORING the question being asked? :wacko:

Share this post


Link to post
Share on other sites
2 hours ago, Mike Preston said:

Do you think you could have spent MORE effort while COMPLETELY IGNORING the question being asked? :wacko:

My view is that asking "what RMDs are required when allowing 85 year old retirees to elect to switch from a lifetime annuity to a lump sum when a plan terminates?" is asking the wrong question.  Asking "does it ever make sense to offer 85 year old retirees the opportunity to elect to switch from a lifetime annuity to a lump sum when a plan terminates?" is the place to start.  Not a rational way to save the sponsor money and relatively unlikely to improve the quality of life for the retirees, whose ability to successfully manage the proceeds may be impaired by age.

Share this post


Link to post
Share on other sites

OK, you've said what's on your mind.  Do you have an answer to the original question?

Share this post


Link to post
Share on other sites
16 hours ago, Mike Preston said:

OK, you've said what's on your mind.  Do you have an answer to the original question?

My guess (for what that is worth) is that the RMD to be distributed outside of the rollover is equal to the lump sum present value of the life annuity as of the end of the prior year minus the 6 monthly payments already received, and as the monthly payments are stopping, the RMD can no longer be based on 12 equal monthly payments under the special rules for a defined benefit plan.  Of course, not having had to deal with such a situation myself, I could be all wet, but you asked for an opinion.

Share this post


Link to post
Share on other sites

No, I asked for an answer, not an opinion.

Share this post


Link to post
Share on other sites

My answer is based on an IRS publication from 1998 (referred to as "Chapter 6"), which I presume is essentially still true.  As noted, I am have not had to deal with such situations myself.

The general method for determining RMDs is to divide the present value as of the Valuation Date in the year prior to the RMD year in question (in this case, December 31, 2016) by a suitable life expectancy.  In the case of a defined benefit plan paying non-decreasing monthly benefits for at least the life of the participant, continued payment of such amounts (or the purchase of an annuity contract to make such payments) would be considered to satisfy 401(a)(9). 

The regulations as summarized in that document do not appear to divide the RMD year into portions.  With respect to the first RMD year and each subsequent RMD year, commencement of those regular payments by April 1 of the year after the first RMD year would seem to satisfy the RMD requirements (presuming no changes to the amount or frequency of the regular payments).  Therefore, it would appear that the 85-year old's RMDs are to be considered satisfied by the life annuity payments through the end of the year before the change to a lump sum approach.

If the payment methodology is being changed this year, it is my interpretation of the regulations as summarized that this year's RMD is NOT based on special rules applicable to defined benefit plans paying uniform amounts for at least the lifetime of the participant.  The rules say to me that this year's RMD is based on the value of the benefit as of the end of last year divided by a suitable life expectancy factor.  They also say to me that the first 6 monthly payments count towards the satisfaction of this year's RMD.  If the RMD net of those 6 monthly payments is greater than $0, that excess cannot be rolled over to an IRA (which would, perforce, not have an RMD until next year, since the 12/31/16 balance was $0).  As there is not an RMD for the first few months of the year and another for the last few, one cannot conclude that the amount that cannot be rolled over to an IRA is merely equal to the sum of the 6 monthly payments that are not going to be made.

Having reviewed this Chapter 6 document concerning the requirements of 401(a)(9), I consider my earlier "opinion" to be consistent with the regulations (as indicated above, assuming no material subsequent changes in the regulations as they would apply to this situation).

Share this post


Link to post
Share on other sites

I think any use of the account balance at the end of the prior year is limited to DC plans.  If you substitute the amount distributed during year of plan termination (the sum of the six monthly payments plus the remaining lump sum) for your end of prior year account balance I think you are probably safe.

Share this post


Link to post
Share on other sites
17 hours ago, imchipbrown said:

Somewhat off topic, but I get the sense that the annuity was never purchased by the Plan.  Odd, isn't it?

I think it's pretty safe to say that if an annuity had been purchased, no power on earth would have been able to pry the money away from the insurance company to be paid as a lump sum to the covered participant.  Insurance companies, who make ironclad guarantees of future periodic payments (which is what invariably happens if an annuity is being purchased), are never willing to release the value of the future payments, since they have guaranteed in writing that they will make those periodic payments.

Most pension plans with retirees receiving periodic payments pay those amounts out of plan assets (as opposed to locking the retirement payments in through an annuity purchase), although there do remain pension plans that do buy annuities when people retire.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now