DB Required Minimum Distribution Timing When Terminating Plan

[Manatee]

Hi folks,

I've been reading these boards for a while, but this is my first post.

Client has a DB plan (professional 100% owner and one other employee, not subject to PBGC).

The owner reached age 70.5 in 2016 and received his first RMD in 2017 slightly before the required beginning date of April 1.  The payment was a year's worth of accrued benefit (normal DB RMD paid annually).  Per 1.401(a)(9)-6, A-1(c)(1),  if the plan was ongoing, his next annual distribution should be made around that same date in 2018.

However, he terminated the plan in 2017 and is an electing a lump sum at plan termination.  Since it is the year of termination, I believe he can take his 2017 RMD via the account balance method using his lump sum as the balance.  His employee only recently received her distribution materials and may not have made her payment election before the end of 2017, so we don't know the cost to the plan for her benefit yet (could be her calculated lump sum or an annuity contract purchase at an as-yet unknown price).  Barring a large gain in plan assets at the last minute, the plan will not have enough assets to pay the owner's full lump sum, so he will forego some of it to the extent necessary.  He does not want to make an additional contribution to allow the plan to pay his full amount.  Therefore, we likely will not be able to calculate his RMD before the end of 2017 since the "account balance" is not yet known.

Question: Does the fact that we are using the account balance method for the 2017 RMD shift the payment due date to the end of 2017, or would it still be considered timely if he takes it by March of 2018 (one year after the first annual RMD was paid)?  We're aware that the RMD should be excluded from any rollover to an IRA.

 

 

[Bri]

Is the "account balance" the PVAB regardless of whether it's fully funded or not?

[imchipbrown]

Why wouldn't the "account balance" be the Present value of the accrued benefit a/o 12/31/16, reduced by the payment made in 2017?  I must be missing something....

[Manatee]

On 12/21/2017 at 4:06 PM, Bri said:

Is the "account balance" the PVAB regardless of whether it's fully funded or not?

Since the plan is terminating, my understanding is that the actual lump sum he will receive should be treated as the account balance.  This is from 1.401(a)(9)-6 (section (d) of the the answer to question 1): "(1) The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account plan and treating the amount of the single sum distribution as the employee's account balance as of the end of the relevant valuation calendar year."

On 12/21/2017 at 7:07 PM, imchipbrown said:

Why wouldn't the "account balance" be the Present value of the accrued benefit a/o 12/31/16, reduced by the payment made in 2017?  I must be missing something....

I take the piece of 1.401(a)(9)-6 I quoted to be saying that the single sum distribution is treated as if it were the end of the prior year balance if we were calculating a standard RMD for an individual account plan*.  It isn't really calculated as of that date though, it's the actual lump sum on the payment date (less the amount foregone by the owner to the extent necessary).  Also, the payment made earlier in the year was the RMD for 2016, so I don't think it would apply to the calculation of the RMD for 2017.

 

*typo correction - "single account plan" should have been "individual account plan."

[AndyH]

Some of this is a bit unclear but I'll make a couple of comments.

1. If he turned 70 1/2 in 2016 then he has a RMD due for 2017 that must be paid in 2017, not 2018.  No, you don't get 4/1 twice if this is the question.

2. If he does not get paid a full lump sum in 2017 then I would think he needs to take 12 months of payments in 2017, just like 2016.  I'm  not certain of this if he actually elected a lump sum but did not receive it.  That would take some review of the regulations, but my guess off hand is that both election and payment would be needed in order to use the account balance method.

3. I don't think any later waiver affects #2 or #3 for 2017.

Hope this helps.

[Manatee]

41 minutes ago, AndyH said:

1. If he turned 70 1/2 in 2016 then he has a RMD due for 2017 that must be paid in 2017, not 2018.  No, you don't get 4/1 twice if this is the question.

I'm getting the 4/1 twice (actually every year while the plan in ongoing) from 1.401(a)(9)-6 again.  Section (c) of answer number 1 begins with this:

"(1) Annuity payments must commence on or before the employee's required beginning date (within the meaning of A-2 of § 1.401(a)(9)-2). The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The 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." 

This appears to mean that if your interval is annual, each payment is due on the 4/1 following the end of the relevant year if you took your first payment on the required beginning date.  I have seen people argue this issue both ways.  This seems most persuasive to me from what I've seen so far.  There is a page on the IRS website which says the 2nd payment must occur by 12/31, but that doesn't seem to address periodic payments from DB plans, so my guess it was either written early and was never updated or the author was simply not thinking about DB.  There certainly could be some additional guidance that I haven't seen.

 

41 minutes ago, AndyH said:

2. If he does not get paid a full lump sum in 2017 then I would think he needs to take 12 months of payments in 2017, just like 2016.  I'm  not certain of this if he actually elected a lump sum but did not receive it.  That would take some review of the regulations, but my guess off hand is that both election and payment would be needed in order to use the account balance method.

 

This is the part that I was mostly asking about.  I think what you said here regarding the amount of the 2017 payment is the safest thing to advise the client unless I find something that talks about this situation more specifically.

Thanks for your help!

 

[Mike Preston]

Manatee, from where I sit you have found, read and understand the regulations.  The regulations are silent on the issue of determining the RMD (amount not rollable) in a transition year. The transition year in this instance is 2017.  The contemplation was that a distribution with a 1 year payment interval made on (or before) 4/1/2017 would satisfy 401(a)(9).  The next contemplated payment would be on (or similarly before) 4/1/2018.

With that said, are you really in a position whereby the remainder being distributed to this individual will take place in 2017?  Like, tomorrow?  If not, things get much simpler.

Essentially, the 2018 RMD becomes easy to calculate: the lump sum divided by the appropriate 2018 factor.

Things are more complicated because of the lack of guidance if, in addition to the 4/1/2017 payment, this individual is being completely cashed out in 2017.  Before taking the time to describe what that might mean, please confirm that is still being contemplated.

I'm sure all of us have stuff to do before 2018 that can't wait.

[Manatee]

On 12/28/2017 at 6:34 PM, Mike Preston said:

Things are more complicated because of the lack of guidance if, in addition to the 4/1/2017 payment, this individual is being completely cashed out in 2017.  Before taking the time to describe what that might mean, please confirm that is still being contemplated.

Thanks, Mike.

No, I did not expect that the final payment could or would be made before the end of 2017.  I told the client we couldn't know the exact amount of his 2017 RMD using the account balance method until his employee had made an election since we don't know exactly how much it would cost the plan to purchase an annuity for her if she chooses one.  The client was slow to hand out the paperwork, so her required minimum of 30 days to make her decision goes beyond the end of the year.

My concern was that using the account balance method for the lump sum payment might be treated as due at the end of the calendar year as typical DC/IRA account balance RMDs are.  Absent that issue, there should be no problem.  I figured if that turned out to be a real problem, he would be reasonably safe just taking 12xAB as his RMD if he took it within the 1 year interval after his first distribution.