minimum required distribution

[Guest 401kproman]

If a DC plan account has after-tax, 401(k) and matching balances, is there any ordering of the distribution permitted or must it be proportional across all types of money (assuming the same beneficiary or no beneficiary)?

If you can choose to take the required amount from one type of money, such as 401(k), can you apply the after-tax non-taxable balance to the distribution?

[mbozek]

What kind of distribution are u referring to? If a participant/beneficiary elects to take periodic payments the after tax amt is determined under IRC 72(e) which is the number of expected payments at retirement age divided into the after tax amt., e.g., at age 65 number of expected payments is 260.

If the participant elects a lump sum, the after tax amount can be retained and only the taxable amt rolled over. If the after tax amounts are rolled over then they will be distributed under the IRA rules, i.e., the after tax amt is a proportional amount of the value of all IRAs owned by the participant.

[Guest 401kproman]

Sorry, I meant a Minimum Required Distribution.

[mbozek]

Under the mrd rules the plan admin determines the amount of the mrd under the plan based upon the account balance from all sources (e.g. after tax, elective contributions, employer contributions). The after tax amount is determined from the table in IRC 72(e) and is subtracted from the mrd to determine the taxable amount. There is no ordering of after tax distributions from a particular source or fifo distribution of the after tax funds. The participant should be able to withdraw the after tax amount before commencing distribution so that only taxable amounts will be received as mrd.

[Guest 401kproman]

As I read the regs, I can't find any rule as to where you get the MRD from, only that you pay the correct amount. Is there any prohibition in the regs from taking all the MRD in a particular year from, let's say, profit sharing even when there are 401(k) or after-tax balances still in the same plan?

If you can take the MRD from a particular source, such as Profit Sharing, can't you still draw down the non-taxable after-tax balance as an offset.

[mbozek]

Under the regs the mrd is based upon the participant's account balance under the plan. The source of the funds used to pay the mrd is irrevalent since the funds are fungible, eg., the mrd is the same regardless of the source of the funds used. The offset for the after tax amounts is computed under IRC 72(e) and is subtracted from the mrd to determine the taxable amt. The participant can elect to receive the after tax amounts before commencing distribution so as avoid having to do the tax computation under 72(e).

[Guest 401kproman]

Thanks

[Guest Ashley]

Under the final regs, how is a particpant's account balance determined? Specifically, must contributions made after the close of the plan year, but allocated during the year, be included?

[Brian Gallagher]

Ashley:

§ 1.401(a)(9)–5 Required minimum distributions from defined contribution plans.

Q–3. What is the amount of the account of an employee used for determining the employee’s required minimum distribution in the case of an individual account?

A–3. (a) In the case of an individual account, the benefit used in determining the required minimum distribution for a distribution calendar year is the account balance as of the last valuation date in the calendar year immediately preceding that distribution calendar year (valuation calendar year) adjusted in accordance with paragraphs (b) and © of this A–3.

(b) The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date. For this purpose, contributions that are allocated to the account balance as of dates in the valuation calendar year after the valuation date, but that are not actually made during the valuation calendar year, are permitted to be excluded.

© The account balance is decreased by distributions made in the valuation calendar year after the valuation date

[Brian Gallagher]

As for the original question: what is the money source of the dstribution?:

Does the document address this? Our default is pro-rata across all sources, but the client can choose any method, such as from rollover 1st, deferral 2nd, match 3rd, etc.

[Guest Ashley]

Brian-

The reason I am questioning the calculation is because while the Q & A section and the model amendment state the caluclation as you outlined, the preamble to the April 17 2002 Federal Register refers to a calculation simplification whereby contributions are not required to be added back. Likewise, the 2003 ERISA book states that the simplified calculation is optional but not required. Any insight?

[Brian Gallagher]

how has the plan been doing these calculations in the past? once you pick a way, i would stay with it.

why would a plan want to include contributions after the year-end? it just makes the mrd more.

[Guest Ashley]

Brian-

Last year the rmds were calculated in the way listed in the model amendment (ie, adding back the contributions allocated during that year, but contributed after the close of the plan year). However, as you mentioned, we would prefer not to have to add back contributions if not necessary. Yet, the model amendment (in the section defining a participant's account balance) does not reflect the calculation simplifications. I appreciate your thoughts-

[Brian Gallagher]

i don't see any reason why you couldn't change, but i would advise against switching back and forth a lot (year to year). if the plan ever gets audited, there better be a good reason for switching to and fro.

and, of course, if you change the calculation method, be sure to let the people know (and, i'd put it into the spd, as well).