Application of MRD rules to a post-death 401(k) distribution

[Guest erisafried]

Here's a somewhat esoteric question for everyone relating to the application of the minimum required distribution rules to a post-death 401(k) distribution.

The facts: Former participant (Mr. X) was receiving MRDs from the plan based on a single life table, even though Mr. X was married and his beneficiary was Mrs. X. Mr. X dies.

Small complication: MRDs continue to Mr. X following his death for a year or three.

Friendly multinational conglomerate/recordkeeper informs plan sponsor that Mrs. X should have received the entirety of Mr. X's account by 12/31 of the year following his death. Because she did not, the 50% excise tax applies. Friendly recordkeeper proposes to withhold this amount as a "service" to Mrs. X (what kind of "service" that is, I don't know--probably not one that I'd like to personally avail myself of).

As a basis for this position, friendly recordkeeper indicates that the MRD was calculated using a single life table. As a result, the life expectancy of Mrs. X doesn't matter (i.e., it's as if he named a non-spouse or trust beneficiary).

The 87 MRD rules apply to this determination, BTW.

Has anyone got any thoughts on this? Plan sponsor would like to avoid soaking Mrs. X, but friendly recordkeeper really really wants to give her the benefits of its withholding "service". Any of you work with a friendly recordkeeper who looks at the MRD world the same way?

Much obliged.

[jevd]

My understanding of the 87 regs is that the choice of joint or single life expectancy depends on the beneficiary status and relationship, not how the distribution is taken. What does matter is the election to recalculate or not recalculate the life expectancies.

First, look to the plan language as to what is allowed and what the defaults are in regard to recalculation or non-recalculation. At the very least under the at least as rapidly rules, the surviving spouse should have had the ability to continue under the surviving spouse's single life expectancy. If the distribution was being made under the deceased's single life expectancy, then it is possiblle that enough was being distributed to satisfy the minimum.

Again, check the plan language for restrictions and defaults. Some others on this site may have more details

JVD

[mbozek]

First Thing: Mrs X needs to hire a competent tax advisor to review the issues- She cannot rely on opinion of tax liability by TPA which cannot give legal or tax advice. Second focus on important issues-IRS only cares if MRD is paid not who it is paid to. If spouse is correct recipient of payments after death spouse has a legal claim for benefits against party who recieved the funds. Q1- were payments after death made to Mr. X's estate which then paid the spouse? Q2 how far back were the incorrect payments made? Statute of limitations for underpayment of income tax is generally 3 years which means that taxes on payments before 1999 cannot be collected by IRS. Q3 Who was the proper beneficary of the payments after MR X's death? Under 87 prop regs there were distribution options where payments were elected for a fixed period over joint lives of employee and beneficiary but the employees chose to receive a larger payment based upon life expectancy of employee. Payments would continue under joint life option to beneficary after death of owner. 87 reg options are available until end of 2002 if plan permits. Your client's adivsor has to do a lot of fact finding to determine the answers to the above questions.Q4 has a correct MRD been taken for 2002?

[Appleby]

If any excess accumulation penalty (penalty owed on RMD amounts not timely withdrawn) is owed , the individual ( in this case the spouse beneficiary) pays the amount to the IRS , and files IRS form 5329 to report the transaction/penalty. BTW, there have been many cases where the individual pleads ignorance, mistake, mis-guidance etc. to the IRS and ask for a refund of the penalty. The IRS has proven to be very understanding in these circumstances and will more.

THE ADMINISTRATOR’S THEORY IS WRONG- UNLESS THE SPOUSE WAS NOT DESIGNATED AS BENEFICIARY BY THE PARTICIPANT’S REQUIRED BEGINNING DATE.

This is how the 1987 rules would have applied.

If a participant had a named (person) beneficiary on the retirement account by the required beginning date, the joint life expectancy should be used to calculate the RMD. By using the single life expectancy, the participant was just taking more than the required amount.

Under the 1987 rules, the single life expectancy would be REQUIRED only if:

The participant had no beneficiary, or had a non-person beneficiary on the account as of the required beginning date or

The participant names the spouse as the beneficiary, use the recalculation method ( for both- or even the spouse beneficiary) to calculate the RMD and the spouse subsequently predecease the participant ( this obviously is not the case here).

If none of the two circumstances above applies, then the response given by the administrator is incorrect.

To determine what the available options are for the Mrs. X, we need to know:

1) Was Mrs.X the designated beneficiary as of the required beginning date?

2) What RMD calculation method was permissible under the plan document ?, i.e. recalculation/non-recalculation/hybrid and which method was selected by the participant.

Also, let us know the year of death.

[Guest erisafried]

Thanks to all of you for your input.

I have succeeded in backing friendly recordkeeper off of the mandatory withholding idea for the MRD excise tax, so now we are only left with the issues of the timing and amount of the MRDs.

The plan document is singularly unhelpful in this context. It appears to be a volume submitter document prepared by...the friendly recordkeeper. The document contains a fairly vague reference to 401(a)(9) and regs and the MDIB rules and not much else. It does not compel a particular calculation methodology nor does it mandate recalculation (or no recalculation). From this, I infer that Mr. X had all options open to him.

Mrs. X was a long-time spouse and was Mr. X's beneficiary on his RBD. Mr. X died in 1999. The friendly recordkeeper says that the full balance should've been distributed by the end of 2000.

Following Mr. X's death, Mrs. X continued to receive his RMDs (although the checks were apparently still issued in his name).

I am not certain at this point whether Mr. X elected to recalculate life expectancy or not.

Friendly recordkeeper is relying on Prop. Reg. 1.401(a)(9)-1 Q&A E-8 (1987) as the basis for its position (which is what I figured it must be relying on). At bottom, friendly recordkeeper seems to be saying that if you select a single life basis for your RMDs--even if you don't have to--your surviving spouse beneficiary is stuck with the consequences.

[mbozek]

You need to get the beneficairy designation form that Mr. X elected when benefits commenced. The Plan admin should have a copy or maybe its in Mr. X's records. Fact that benefits were being paid on single life basis does not mean that option was elected by Mr. X. A participant can elect benefits on a Joint life basis but actually receive payments on a single life basis. Also why cant the spouse rollover the account balance to her own IRA if she is the beneficary of X's account balance? Mrs. X needs her own tax advisor- She cannot rely on anything the Recordkeeper is saying. The reg cited by the recordkeeper applies only if the recalculation method was elected by X for a single life payment. You need to confirm what option was elected by X when MRD began. Finally there are ways to avoid the 50% tax penalty if a properly prepared request is sent to the IRS by a tax advisor.

[Guest erisafried]

I am in total agreement. What I am trying to ensure is that the recordkeeper does not do anything stupid that would constrain Mrs. X's tax planning. She does have (fortunately) a tax advisor and, if the issue is at least raised, can sort out what tax position she wants to take.

Problem is, friendly recordkeeper wants to pay out the entire balance right this minute, so I don't have as much time as I'd like to argue interpretations with them.

[mbozek]

I dont see how the distribution can be paid without the written request of the spouse. The issue is whether the recordkeeper can file a 1099-R showing a distribution for 2002. Even if the amt is distributed why cant the spouse do a tax free rollover as a preventive measure to avoid taxation. Her advisor should be able to come up with substantial authority for treating the IRA as being distributed as of 12/31/02. As an incentive for the recordkeeper not doing anything stupid how about the threat of lawsuit for failue to inform the spouse of the distribution issues they are now raising.