Death before RBD - Spousal options?

[TBob]

Participant died in 2000 prior to their RBD at age 60. The spouse is the sole beneficiary. The spouse did not elect to take a full distribution prior to the end of the 5th year following the participants death. They would now like to take a distribution of the full amount.

Generally, they should be taking payments over their life expectancy which can begin at or before the participant would have been 70.5. Is there any way to accelerate the payments and get the $ out of the plan now or are they stuck with annuity payments?

[Bird]

Required minimum distributions are just that, minimums, so as long as the plan permits, you can take more, or all.

[TBob]

Bird - Thanks for the response. If we processed a full distribution now, wouldn't the IRS look at this as a lump sum payment that missed the 5 year cash out option and therefore be subject to penalties?

If that is not the case, is the distribution eligible for rollover to an IRA?

[Everett Moreland]

Required minimum distributions are just that, minimums, so as long as the plan permits, you can take more, or all.

[Everett Moreland]

IRC Section 401(a)(9)(B)(iv): "If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee . . . the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained age 70 1/2 . . . ."

[Bird]

TBob, I think you have it backwards. Generally, if systematic distributions don't start within one year, then you have to do the lump sum within 5 years. Since the spouse is the bene, neither one applied yet; the surviving spouse has until the employee would have attained age 70.5, as noted by Everett Moreland.

You don't have an RMD. You just have a death benefit payable to the spouse, and the spouse can roll it.

[Guest mjb]

See Reg. 1.401(a)(9)-3 Q-3 (a)- spouse has until end of calendar yr ee would have attained 70 1/2 to commence distribution or roll over the benefits to an IRA prior to that date.

[TBob]

I apologize if my head is just too thick to grasp this and I appreciate the help so far. However, I am not sure that I am convinced yet. I have read the code sections and regulations referenced above and am coming to a different conclusion. Here's my interpretation of things.

When a participant dies before RBD with a spousal bene, the bene has two distribution options:

1. 5 year rule under 401(a)(9)(B)(ii)

2. Life expectancy rule in section 401(a)(9)(B)(iii)

The exception under 401(a)(9)(B)(iv) allows a spousal beneficiary to delay the comencement of payments under option number 2 above until the participant would have been 70.5. It does not appear to allow you to delay the cash payment under the 5 year rule under option number 1 at all.

Also, 401(a)(9)(B)(iii)(II) appears to say that the payment must be in the form of annuity payments.

"such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary),

So, since the bene in my example blew it on the 5 year option, it would appear that the only option available to him is the life expectancy option. It would also seem to me that payment of the entire account this year would not be a payment over his life expectancy.

By the way, I am hoping that you can prove me wrong. I really want to get this money out of the plan and not have to worry about making annual payments to the bene. Please tell me where my brain is going off the track. If you need to just throw a heavy book at my head, I have a copy of the 2004 Erisa Outline in my office that will do quite nicely.

Thanks Again!

[Everett Moreland]

TBob:

Without knowing the facts or plan terms are you are dealing with, I think Bird's first answer answers your question. Here's at least one statement in the regulations suggesting that more than the minimum can be distributed; there are probably other such statements:

"Q–2. If an employee’s benefit is in the form of an individual account and, in any calendar year, the amount distributed exceeds the minimum required, will credit be given in subsequent calendar years for such excess distribution?

"A–2. If, for any distribution calendar year, the amount distributed exceeds the minimum required, no credit will be given in subsequent calendar years for such excess distribution."

[jevd]

Does this help?

3.4 Q-4. How is it determined whether the 5-year rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) applies to a distribution?

A-4.

(a) No plan provision.

If a plan does not adopt an optional provision described in paragraph (b) or © of this A-4 specifying the method of distribution after the death of an employee, distribution must be made as follows:

(1) If the employee has a designated beneficiary, as determined under §1.401(a)(9)-4, distributions are to be made in accordance with the life expectancy rule in section 401(a)(9)(B)(iii) and (iv).[83]

(2) If the employee has no designated beneficiary, distributions are to be made in accordance with the 5-year rule in section 401(a)(9)(B)(ii).[84]

(b) Optional plan provisions.[85]

A plan may adopt a provision specifying either that the 5-year rule in section 401(a)(9)(B)(ii) will apply to certain distributions after the death of an employee even if the employee has a designated beneficiary or that distribution in every case will be made in accordance with the 5-year rule in section 401(a)(9)(B)(ii). Further, a plan need not have the same method of distribution for the benefits of all employees in order to satisfy section 401(a)(9).

© Elections.

A plan may adopt a provision that permits employees (or beneficiaries) to elect on an individual basis whether the 5-year rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) applies to distributions after the death of an employee who has a designated beneficiary. Such an election must be made no later than the earlier of the end of the calendar year in which distribution would be required to commence in order to satisfy the requirements for the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) (see A-3 of this section for the determination of such calendar year) or the end of the calendar year which contains the fifth anniversary of the date of death of the employee. As of the last date the election may be made, the election must be irrevocable with respect to the beneficiary (and all subsequent beneficiaries) and must apply to all subsequent calendar years. If a plan provides for the election, the plan may also specify the method of distribution that applies if neither the employee nor the beneficiary makes the election. If neither the employee nor the beneficiary elects a method and the plan does not specify which method applies, distribution must be made in accordance with paragraph (a) of this A-4.