penalties on failure to take disitributions of pre-1987 403(b) deferrals

[Guest svogelwsm]

I have an 85 year old client who retired in 1984 and has never taken distributions from her 403(b). She has been advised by her 403(b) representative that her account is not subject the current minimum distribution rules and that she will not be subject to the 50% excise tax on amounts which she failed to take after age 75. Can anyone give me some guidance on the rules applicable to distribution of pre-1897 accruals?

[joel]

Insofar as as your client retired prior to January 1, 1987 her entire balance is subject to RMD beginning at age 75 which was in 1994. She is 10 years tardy.

When does the rep say she must begin RMD, if ever?

Peace,

Joel L. Frank

[Guest svogelwsm]

Thanks for your input Joel. The age 75 RMD date is what we thought. The rep is telling her that the rules was changed "somewhere around 2000" to age 85 and has recently been upped to age 90. We have never heard of this. Has anyone else?

SVogel

[mbozek]

REg 1.403(b)-3 Q-3 describes the application of the MRD rules to pre 86 funds under the incidential death benfit rule. However it does not state the penalty. One result could be that the entire pre 86 account balance is deemed taxable if MRDs are not taken at 75 but after 6 years the S/l for collecting taxes will expire and the taxpayer can treat the pr 86 funds as after tax money for distribution purposes.

[joel]

Svog: I think the salesperson was using the rule for after tax annuities. What a lack of elementary competence!

Peace,

Joel

[joel]

Posted on Oct 29 2004, 09:59 AM

REg 1.403(b)-3 Q-3 describes the application of the MRD rules to pre 86 funds under the incidential death benfit rule. However it does not state the penalty. One result could be that the entire pre 86 account balance is deemed taxable if MRDs are not taken at 75 but after 6 years the S/l for collecting taxes will expire and the taxpayer can treat the pr 86 funds as after tax money for distribution purposes.

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Mbozek: Did you mean to include the word "death"? Moreover, are you saying that based on the 6 year Statute of Limitations no taxes are due? If this is so then it follows that all one needs to do is never take any RMD on a pre tax account and after 6 years begin taking tax-free withdrawals. Would you please clarify?

Peace,

Joel

[mbozek]

I dont know how the failure to comply with the incidential death benefit rule would apply to a 403(b) annuity other than to deem the pre 86 amt taxable in the year the ee attains 75 which would start the s/l for collecting taxes which would expire after 6 years. Its the old "if the tree falls in the forest and no one hears, it is there a sound?" question. The other option is to ignore Q-3 and tax the funds when they are paid to the employee or beneficary as an annuity payment under IRC 72.

[joel]

Svog:

Is not the custodian required by law to commence dispersments of the RMD on all tax-deferred retirement accounts by the owner's Required Beginning Date? If this is so then the custodian of your client's account is negligent, in my view.

Peace,

Joel L. Frank

[Appleby]

Not usually Joel.

For most 403(b) and IRAs, the documents are written to place the responsibility for satisfying the RMD on the account owner. Another reason why some organizations are trying to formalize 403(b) relationships with custodians by having them sign hold harmless agreements, which includes a requirement that the custodian takes on a more administrative role, which includes disbursing amounts for RMD when it is due, even without a written request from the account owner

[mbozek]

Custodians are not responsible for commencing mrds because they do not have discretion to begin payments under the agreements and they dont get paid enough to make calculations. Requiring 403(b) custodians to be responsible for commencing payments is unlikely since the mrd regs dropped a similar requirement for IRAs to report the mrd amount to the IRS. I dont see any need for hold harmless agreements since the er has no liability if an ee does not take an mrd in a 403b annuity.

[Appleby]

Custodians are not responsible for commencing mrds because they do not have discretion to begin payments under the agreements and they dont get paid enough to make calculations. .

Good point...especially the getting paid enough part.

Unfortunately, those organizations do not agree with you. They are trying to make the custodians responsible and possibly liable.

Requiring 403(b) custodians to be responsible for commencing payments is unlikely since the mrd regs dropped a similar requirement for IRAs to report the mrd amount to the IRS.  I dont see any need for hold harmless agreements since the er has no liability if an ee does not take an mrd in a 403b annuity

It all comes down to the decision makers. Many custodians would agree that your POV is logical and would wish that you were in charge or making these decisions…but... unfortunately these administrators does not see it your way, and for now, custodians who refuse to play ball are not being allowed to receive contributions into 403(b)s established by employees in the plans they administer.

[mbozek]

What are the liability issues for the custodians since under reg. 1.403(b)-3 Q-1 the MRD is applied on a contract basis similar to the IRA mrd which is applied separately to each IRA? There is no penalty or liability to the custodian or sponsor if the ee does not commence mrd or take an mrd amount because neither party has any control over the contract, e.g., the employee can take the mrd from another 403(b) contract of another fund co or insurer to satisfy the mrd. I am interested in the analysis under the 403b regs that creates liability for the employer or custodian.

What custodians are being prevented from offering their products? The 403b providers that I am familiar with do not have the capability to commence mrds because they do not have the information necessary in their distributon data base regarding all of a participants 403(b) accounts. What organizations are trying to force the change?

[Appleby]

I am interested in the analysis under the 403b regs that creates liability for the employer or custodian.

So are we.

I can’t put my hands on one of agreements with the RMD requirement right now--- I am part of a small group discussing these trends and one of the concerns brought up by the group is the requirement for the custodian to distribute the RMD without written request from the account owner. I am trying to get a copy of that agreement. During one of our earlier discussions, we all agreed (with your POV) that since the owner could satisfy the RMD from another 403(b), the requirement does not seem to be reasonable. OTOH, we could have a standing order on file or written confirmation that the RMD is being satisfied elsewhere- quite frankly, we prefer not to do more than provide the annual notification (reminder that RMD is due for the year) that we already provide…

I do have a copy of another agreement that places some unusual demands on the custodian. I can send you a copy VIA E-mail. I am not sure if it is OK to place it here.

[mbozek]

you can email the agreement to me. Can you tell me why these administrators are obsessing over the mrd requirement? The custodian can agree to any terms if it is adequately compensated and the cost passed to participants in the plan.