2006 DB Minimum Distributions

[AndyH]

Very basic question:

What are a plan sponsor's options 1/1/2006 for a min distrib due where a complete lump sum is not being taken.

Clearly,

1 Allow participant to select full, final, retirement benefit (with spousal consent, etc), if plan permits in-service distributions.

What about:

2. Allow participant to select full , final, retirement benefit, (with spousal consent, etc.) even if plan does not otherwise permit in-service distributions?

How about, somewhat analagous to the account balance method:

3. Allow participant to elect to receive one year of payments based upon the relevant accrued benefit, in the life annuity amount, without having such election affect death benefits if he dies while such election is in effect.

Or

4. Allow participant to elect to receive one year of payments based upon the relevant accrued benefit, but with the reduced amount based upon a J&100 (subject to MIDB), but without having such election affect death benefits if he dies while such election is in effect.

Interpretations please?

[Guest saeissler]

2. We decided here that it would not be permissible to allow a lump sum distribution if the plan did not permit in service distributions.

3. + 4. Reannuitization (A-13) of 1.401(a)(9)-6 is only permitted if the employee retires or the plan terminates or the annuity payments were paid over a period certain without life contingencies or the employee gets married and elects a joint and survivor annuity. Based on that, I would say that since there isn't a provision allowing a change because of death, one would be stuck with the death benefit derived from the annuity form. But I haven't looked at the death benefit provisions with this in mind.

[FAPInJax]

My personal reaction is that the new rules require a formal election by the participant of a distribution option (lump sum, joint and survivor annuity, etc., certain only, etc.). The certain only option was mentioned earlier because it can 'mimic' the old rules of dividing the PVAB by the life expectancy.

What happens after the initial year (when the benefit presumably increases) is a good question!! They may have to make a second election or modify the first to satisfy the regulations for minimum distributions.

Several actuaries that I have spoken with are recommending the lump sum distribution route to get the problem out of the plan.

[AndyH]

Thanks for the comments.

Susan, regarding your #2, the lump sum issue seems obvious. What I was getting at is that a plan may normally not allow in-service distributions of any type, except that it must satisfy 401(a)(9), and all that requires is 12 months of payments per year, nothing more. By default, there would be no full, permanent election. Or is it necessary of offer full, final retirement options in order to satisfy 401(a)(9) as in effect in 2006? So I guess it it a two part question, what must be offered and what can be offered.

But I agree with your comments about the limits on the availability of annuitization, so doesn't that imply a mandatory full election (with death benefits dependend on)?

Frank, offering a lump sum is often not an option so that plan has limited use. And the regs clearly state that a recalculation is required each year to determine if the accrued benefit (and thus the minimum) would increase on account of additional service/compensation. So I don't see the need for a second election on account of that.

My preference is for requiring a complete election that would include a death benefit election but the death benefit is the problem. And, if he dies while still working, how are the QPSA rules satisfied (yes, another twist).

How many years did this simplification take the reg writers?

[Guest saeissler]

The way I was initially looking at these regs, and still prefer, is that a participant can elect a MRD of either lump sum or annuity, and that the election was not an election of the form of retirement benefits, but an election of the MRD form. Therefore a lump sum distribution would be permissible as a required minimum distribution, even if it is more than the annuity payments and if the participant was not otherwise eligible to elect a lump sum distribution. This view would solve some of the other issues. Does anyone see anything to contradict this interpretation?

It seems like the alternative is a full election with death benefits that correspond to that election, and spousal waiver requirements if applicable.

[AndyH]

Isn't that the account balance method? I prefer that also, but I think it is expressly prohibited, unless of course the "lump sum" happens to equal 12 months of monthly payments of the accrued benefit.

[Guest saeissler]

The lump sum method is to take the whole present value of vested accrued benefit at one time. Then the next year, if additional benefits are earned, the new PVVAB is taken as a lump sum. Did I misunderstand your last comment?

[AndyH]

I guess that makes sense if a lump sum is an option (i.e. not restricted).