Required Minimum Distributions from DB Plan

[Gary]

Say a participant reaches age 70 1/2 in 2003, thus RBD 4/1/2004.

He has accd ben at 12/31/2003 of 10,000 per year.

The participant will receive his annuity in annual payments.

For purposes of this discussion we will assume the employee does not accrue additional benefits and that his spouse is less than 10 years younger. And the employee must begin on 4/1 following 70 1/2, because he is a 5% owner and still an active employee.

My understanding of the RMD requirements are as follows.

1. He can receive a payment of 10,000 by 4/1/2004 for the 2003 year and a payment of 10,000 by 12/31/2004 for the 2004 year.

2. The regs say the participant can recieve an annuity over the life of or life expectancy of the participant.

Does this mean that instead of 1. above, the particpant can receive 10,000 per year over the life expectancy in one of the tables? So if the table has 27 years, the annuity of 10,000 would be distributed over exactly 27 years (r3egardless of when and if death occurs during that period)? And is it based on the uniform life table or the single life expectancy table?

3. ANd then I believe the regs allow for the accd ben to be converted to a present value, where such value is spread over the remaining life on the uniform life table, and the present value is recalculated each year.

So if PVAB were 200,000 at 12/31/03 and the life expectancy were 20, the payment by 4/1/04 (for 2003) would be 10,000 and then another payment of 10,000 would be made by 12/31/2004 for 2004.

And then the PVAB at 12/31/2004 would be redetermined and the RMD for 2005 would be based on the PVAB and life expectancy using the uniform life table as of 12/31/2004.

And is the PVAB based on the lump sum assumptions under the Plan?

Any views on the above interpretations and what others are available.

Thank you.

[MGB]

It is my understanding that (3) is not allowed. This is the major change from old regulations, although the IRS claims that it was never allowed.

Item (2) is only allowed if the plan has a fixed-payout option (no life contingencies), and the participant elects that option. The $10,000 becomes irrelevant here. The amount of the annual payment is whatever the plan says is the correct amount under the conversion factors for that alternative form. The PVAB and life expectancy tables should never enter the calculation, other than to frame the allowable alternative form that is stated in the plan.

When the minimum distribution kicks in, the participant elects a form of distribution. That form stays in effect in the future, including at actual retirement.

[Gary]

Thanks for the response.

From your response my understanding is:

1. A participant chooses a form of benefit and elects a benny at the time the RMD begins and that stays in effect permanently. And that an annuity certain (or certain and life annuity) is allowed if the plan provides such and the particpant chooses. And the optional annuity is converted from the normal form based on the plan provisions, but the certain period cannot exceed the period in the uniform life table (for eg. 27.4 for an employee age 70).

2. So what if the RMD prior to 2003 was based on this individual account method? Does the employee prospectively have to choose an option and elect a benny or choose a life only with no benny (i.e. no pre ret survivor annuity applies, the only death benefit is based on the option chosen)?

3. ANd what about when the participant retires and terminates the plan. Does this mean he cannot take a lump sum at that time, since he was receiving an annuity under the RMD?

This may be more convoluted than I originally thought.

I will have to get my hands on the proposed regs.

Thank you

[Guest dsyrett]

MGB, I believe that your (3), the "account balance method" is still allowed at least for the moment under transitional rules.

[jevd]

Here is Noel Ice's annotated version of final regs with the proposed DB/annuity regs included

http://www.trustsandestates.net/MRDRegs/MR...htm#_Toc9937165

[Gary]

A couple of things.

1. I am not clear when the single life expectancy table is used. It seems that one need only apply the uniform lifetime table when determining RMD from a DB plan.

2. I am aware of converting a DB benefit into an individual account for RMD purposes, but where is it explicitly provided as an allowable method? And where do these transitional rules exist?

Thanks for the responses.

[Guest dsyrett]

I think it comes from Notice 2003-2 which allows for continued reliance on certain parts of the proposed 1987 regs.

My understanding is that you can continue to use the account balance along with the new Uniform Lifetime Table factors.

[Guest pension222]

How about if the owner/participant has elected the annuity form of distribution, terminates the plan, and rolls over the PVAB to an IRA?

The temporary DB regulations seem to allow that the account balance method could then be used to determine future RMDs.

Suppose the benefit is $500/month, the participant turns age 70 1/2 in 2003, he chooses an annuity distribution, and recieves $500 on April 1, 2004, then $500 on May 1, 2004 and then receives a lump sum distribution on April 15, 2004.

1.401(a)(9)-6T Q&A 1, (d) (2) seems to indicate that $500 x 12 = $6,000 would be treated as the RMD for the first distribution calendar year (even though benefits commenced on April 1) and then another $6,000 of the lump sum would be treated as the RMD for the second distribution calendar year.

It appears that from 2005 and on, that the account balance method would be used to calculate future RMDs.

Do I have this correct?

[Guest dsyrett]

This may not answer your direct question but in general, the individual would need to complete required minimum distributions from the qualified plan under his selected method through the year of the IRA rollover. In fact, these required minimum distributions are not eligible for rollover. Once the remaining money gets into the IRA it is subject to required minimum distributions under IRA rules but with first distribution beginning in the next year (since the curr year min was taken from the qual plan).