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Beneficiary opt for lump sum?


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Hi,

Sole proprietor (with employees in plan) elected at age 70.5 to take his RMD based on 100% J&S with 15 years certain annuity. After a few year of taking his annual RMD, he passed away in 2018 and since then his wife (the survivor) has been taking the RMD based on the annuity that her husband elected. She now wants to take a Lump sum, and and after taking the 2021 RMD, will transfer the  lump sum to an IRA. Is a lump sum permissible, or must she continue to take the yearly annuity? Thank you.

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Why have they not terminated the plan?  If the sole proprietor died, who is the plan sponsor?

Either way, assuming she is now in control of the sponsor, she can amend the plan to allow the distribution.  There may be some fact and circumstances that need to be resolved depending on how it could impact other participants, but best alternative would be to just terminate the plan and allow retirees to take a lump sum.  This would apply to any other retirees as well. 

Keep in mind RMDs cannot be rolled over and 415 limits still apply to her lump sum.  

 

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The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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On 3/16/2021 at 6:03 PM, Effen said:

Why have they not terminated the plan?  If the sole proprietor died, who is the plan sponsor?

Either way, assuming she is now in control of the sponsor, she can amend the plan to allow the distribution.  There may be some fact and circumstances that need to be resolved depending on how it could impact other participants, but best alternative would be to just terminate the plan and allow retirees to take a lump sum.  This would apply to any other retirees as well. 

Keep in mind RMDs cannot be rolled over and 415 limits still apply to her lump sum.  

 

Thank you very much Effen. The wife now owns the company, and the participants are all HCEs. The plan is overfunded and at this point it does not appear that the plan will be terminated in the near future. I just want to clarify, the wife can take  a lump sum as beneficiary of her husband , even though the husband had elected and was taking his annual RMD in the form of a J&S with years certain annuity? Thank you.

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On 3/16/2021 at 6:03 PM, Effen said:

Either way, assuming she is now in control of the sponsor, she can amend the plan to allow the distribution. 

I would have assumed it was an irrevocable election.  Not necessarily though.  Could the bene and plan sponsor (same person now) override an irrevocable election?

Ed Snyder

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The election is irrevocable for the participant, but there are certain events when you are permitted to change.  Plan termination and death are two of those events.  If the plan was amended to permit the beneficiary to elect a lump sum, I am pretty sure that would be ok.  However, since he died 3 years ago, that might be problematic.  Also, it would need to apply to everyone.  

If the widow is now running the business, does she also have a benefit in the plan?   It still doesn't make sense to me why she doesn't terminate the plan.  Why is she retaining the risk/cost of maintaining the plan when the sole proprietor is dead?   

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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  • 4 weeks later...
On 3/18/2021 at 9:37 AM, Effen said:

The election is irrevocable for the participant, but there are certain events when you are permitted to change.  Plan termination and death are two of those events.  If the plan was amended to permit the beneficiary to elect a lump sum, I am pretty sure that would be ok.  However, since he died 3 years ago, that might be problematic.  Also, it would need to apply to everyone.  

If the widow is now running the business, does she also have a benefit in the plan?   It still doesn't make sense to me why she doesn't terminate the plan.  Why is she retaining the risk/cost of maintaining the plan when the sole proprietor is dead?   

Thank you so much Effen. If at death of her husband, the wife (new plan sponsor) elected to take a lump sum equivalent of her husband's annuity that he was taking, however, due to the the rough transition period, the lump sum was delayed until now (3 years later) and the wife in the interim took the annuity for the past 3 years, can this allow her (hopefully) to take the lump sum now?

Also, the plan has not been terminated  as the plan is very overfunded. The widow has been accruing benefits each year Thank you very much. 

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You need to talk to the plan's actuary and ERISA counsel and work through these issues.  

 

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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  • 3 weeks later...
On 3/16/2021 at 6:03 PM, Effen said:

 

Keep in mind RMDs cannot be rolled over and 415 limits still apply to her lump sum.  

 

Effen, do you mean that the surviving wife must take her annuity this year to salsify the RMD for this year, and then she can roll the present value of her annuity to an IRA, OR do you mean that since her husband, prior to his passing,  was already  in RMD status before  she can not roll the lump sum to an IRA and must take a taxable distribution? Thank you!

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I meant you need to talk to the plan's actuary and ERISA counsel and work through these issues.  

I believe if the plan permits the beneficiary to take a lump sum in leu of monthly payments (you need to work with ERISA counsel to ensure this is permitted), the beneficiary cannot rollover the MRD amount applicable for the year of payment.  These rules are tricky for DB plans so you will need to read the regs.  Yes, the beneficiary can rollover a lump sum, part of it will not be eligible for rollover due to MRDs.  Whose MRDs govern after the rollover I am not sure.  

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The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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6 hours ago, Effen said:

I meant you need to talk to the plan's actuary and ERISA counsel and work through these issues.  

I believe if the plan permits the beneficiary to take a lump sum in leu of monthly payments (you need to work with ERISA counsel to ensure this is permitted), the beneficiary cannot rollover the MRD amount applicable for the year of payment.  These rules are tricky for DB plans so you will need to read the regs.  Yes, the beneficiary can rollover a lump sum, part of it will not be eligible for rollover due to MRDs.  Whose MRDs govern after the rollover I am not sure.  

Effen, I really appreciate this.  Also, I do hear the two sides on the dilemma, of who will govern the RMDs after the rollover.. Unless they agree to pay for an ERISA counsel, we will go with the husband's older age ((higher RMD annualy) to be safe. 

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? There are no two sides on a dilemma.  This is all pretty black and white.  You just need to do some research and figure out which is correct.

Don't take on risk for a client just because they are unwillingly to pay for something outside your area of expertise.  

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The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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