Benefit payments in owner-only DB plan

[Guest Clain]

I am an financial advisor and was approached by a prospective client with a question I don't know the answer to. Hopefully somebody here can help.

He is a business owner and is the only employee in the business. He has a DB plan of which he is the only participant. The plan has a normal retirement age of 65, but he turned 70 in June of this year. When does he need to start receiving his benefit payments?

Thanks in advance.

[AndyH]

By the April 1 of the year following the year in which he attains age 70.5. Same as a traditional IRA.

[Guest Clain]

I assumed that is was the same as the IRA and DC rules, but wasn't sure. Thank you for the confirmation.

[David MacLennan]

He may want to take it by Dec 31, or he will have 2 taxable distributions in 2007, as opposed to just one.

The amount of the RMD might be lowered to be considerably less than his monthly accrued benefit x 12, if certain distribution options are available under the terms of the plan document, or are added by amendment.

[Guest Clain]

Are you saying that the RMD for 2006 needs to be for a full 12 months of benefit? That would make his payment for 2006 a total of $120,000. He isn't going to be happy with that response.

[Belgarath]

I think what David is saying is that there are other options that may reduce the amount - say if his annuity distribution method is annual, then he'll only need one payment in 2007. For example, starts his annual annuity payments on March 15th, 2007. Next annual payment will be March of 2008, etc. Or depending upon the options allowed, might be only, say, 9 monthly annuity payments in 2007 if the monthly option is chosen and payment commences on 4-1-07.

Take a look at 1.401(a)(9)-6 for details. It'll tell you more than you ever wanted to know. While the IRS sometimes actually works with the benefits community to make things easier and more rational, this was not one of their finer efforts.

[Mike Preston]

As is said occasionally, Treasury is theoretically downwind from the DEA and these regs evidently were drafted on a day when a big stash was being burned.

Notwithstanding the above, I think that there are options which can significantly decrease the RMD from the annual benefit of $120,000 you mention. The old regs would have required a minimum distribution of about $52,000. The new regs have options therein, as David referenced, which allow a minimum distribution in the first year of about $53,000, assuming all things fall into place, like the willingness and ability to amend the plan to provide for the options available in the regulations.