Final DB 401a9 Regs

[David MacLennan]

The final 401a9 regs were issued today (Monday), and my quick speed read indicates there is still no "account balance" method for determining the RMD in a DB plan (unless there is a single sum distribution). Does anyone come to a different conclusion? I know that some feel that the account balance method was never allowed unless there was a lump-sum distribution, but my impression is that it was common practice. For many of my clients, this will increase the RMD by a factor of 2 or 3 times, prompting them perhaps to terminate their plans and start a new DB plan. It doesn't seem like the IRS was concerned with equity between DB and DC plans on this issue. The regs state that employers do not have to comply with the final regs immediately, they can use a reasonable interpretation of 401a9 for the years 2003, 2004, and 2005. Does this mean we can continue with the account balance method until 2006? I suppose the answer is shades of gray based on a risk comfort level, unless it is in the plan doc and one has a favorable letter.

[FAPInJax]

I read through the regulations and found that the account balance method is officially gone (it is even mentioned in the preamble or whatever they call it - the bottom of page 13 regarding the maintenance of the DC rules for DB plans).

Interestingly enough, although they eliminated the option for most DB plans to use the DC method, it appears as though annuity contracts (albeit under an individual acoount plan - whatever that combination is) still retain the method??

Reasonable methods include anything permitted previously (in my opinion) which allows the use of the account balance method.

[JAY21]

So except for "possibly" the 2003-2005 years (if client feels comfortable with it) the account balance method cannot be used for a DB participant if they are not currently receiving a lump sum distribution, right ? In other words, some sort of special 401(a)(9) election stating a lump sum distribution will "ultimately" be taken (but is not currently being distributed) will not change the requirement that 401(a)(9) benefits be taken in annuity form (except for possibly the 2003-2005 years,...maybe) ? All opinions welcome.

[David MacLennan]

Jay21, I imagine that the annuity form of payment does not have to be elected, but that the amount of the annual distribution must be greater than or equal to an amount that is actuarially equivalent to one of the permitted annuity forms. The regs discuss how one is allowed to change the annuity payment period, and it looks like only a term-certain type of election with no life contingency can be changed at will. This would seem to allow for a partial lump-sum of any amount greater than or equal to the RMD. This would allow participants some flexibility, w/o locking into some annuity form they don't want (small DB plan participants never (in my experience) elect annuity forms of distribution). I still haven't read these regs carefully, I'm just skimming them.

Frank was good to point out that the preamble specifically mentions the account balance method for DB plans: "A number of commentators requested that the final regulations provide the rule in prior proposed regulations that allowed minimum distributions from a defined benefit plan to be calculated using the rule for defined contribution plans in ' 1.401(a)(9)-5." This seems to confirm w/o doubt that the account balance method is grandfathered until the end of 2005.

[FAPInJax]

The problem is all the participants who have been going on their merry way having minimum distributions calculated once a year. They will now be required to have an annuity commencing 'immediately' (timing to coincide with the effective date of the new regulations). This could require a substantial amount of the work by the actuarial firm to establish what these monthly benefits are.

[SoCalActuary]

I agree with your reading, but I think the way out is to make an election to distribute the PVAB each year into a DC account, which could include a separate account within the DB plan. The reg's did allow the account balance method for

this portion of a DB plan.

This is unfortunately a targeted tax increase for small business owners with DB plans. Sneaky regulation issued below the radar screen of small plan lobbyists.

The choice of annual rollovers of PVAB is burdensome, with plenty of opportunities to get it done wrong. Auditors will be delighted! In addition, it eliminates the

ability of the plan sponsor to catch up for bad investment years with added funding.

On top of that, the new regulation will cause a problem for new plans that grant substantial past service credits, because it will force higher current distributions even though the funding has not been completed yet for the past service benefit.