RMDs based on final regs

[Gary]

Prior to 2006 under the good faith application I determined RMDs based on the account balance method.

The final regs seem to indicate that for a DB plan the account bal method is no longer available, thus requiring that the RMD be an annuity amount essentially equal to the vested accrued benefit.

With that saif, for one of my clients, the RMD goses from about 40k (under account bal method) to 110k (equal to his accd ben).

That's quite an increase to communicate to a client.

Is my general impressions on point and any observations out there to add?

Thanks.

[David MacLennan]

If your participant is at NRA (probably is), you can distribute his entire benefit, and use the account balance method to determine the RMD. You don't have to terminate the plan. Then he will get additional accruals in later years and you can handle them the same way if you want, although each year will presumably be a small increase dollar wise with a smaller RMD, so the client may find the annuity method acceptable. This does create MASD issues, which are harder to handle with lump-sums (less consensus).

Another option (which I believe originated first with Mike Preston), is to use a form of distribution which is a period certain with a 4.99% COLA increase, with the period certain from the Uniform Lifetime Table rounded down to a whole number. This will give you a RMD which is close to the account balance method. Most plan docs probably don't offer such a form of distribution, so that means amending the plan, etc.

Both of these methods can give your actuary a headache, and with the MASD issue, it can make what used to be an easy plan to administer, double in difficulty.

[Gary]

Ok good comments.

So for starters to use an in-service lump sum we need to amend the plan to provide for in-service distributions. Then of course each additional accrual can be distributed as a lump sum in ordr to avoid the "change in period" issues related to paying the future accruals as an annuity.

Yes the certain and life with COLA is another option until retirement.

Thanks.

[AndyH]

I agree those are good suggestions.

Consider, however, the uncertainties (IMHO) surrounding how to aggregate prior and current distributions for 415 purposes if that is an issue.

[Mike Preston]

I seem to flip-flop on this every week or two, and with the ASPPA Annual Conference coming up, my opinion next week may be different than what it is today, but for now, I'm recommending that if a plan wishes to take advantage of the 4.99% COLA option that said option be inserted into the plan before the end of the plan year that crosses 12/31/06.

I know that the IRS extended the due date for amending to conform to the 401(a)(9) regs to the end of the EGTRRA RAP, but there is just something that is telling me they might (I said MIGHT) take the position this is voluntary amendment requiring good faith adoption before the end of the year that the option is implemented.

It is sort of like chicken soup at this point...what can it hurt? (pronounced HOIT).

Can you tell my relatives from New York recently visited?

[Guest Jeff Hartmann]

I seem to flip-flop on this every week or two, and with the ASPPA Annual Conference coming up, my opinion next week may be different than what it is today, but for now, I'm recommending that if a plan wishes to take advantage of the 4.99% COLA option that said option be inserted into the plan before the end of the plan year that crosses 12/31/06.

I agree with the 12/31/06 deadline (for calendar year plans), because this is a discretionary amendment to add the new benefit option(s).

I also want to note that if the 4.99% increase is the part that makes you nervous, you still could amend the plan (if not already in there) to provide for (level annual) installment payments for the Uniform Life Table expectancy (27 years at age 70), and you get a result that is midway between the account balance method and the straight life annuity result i.e. perhaps around $70K vs. $40K for the account balance method.

[Mike Preston]

Doesn't make *me* nervous. I can point to the regulation section that says it is ok to do it!

Thanks, Jeff, for the vote on amendment timing.

[Guest Ron Sevcik]

I work in the small plan market and also have several clients whose RMD will increase from $40K to over $100K. The participant receiving the RMD is usually the owner. The plans are not fully funded so I can't pay out the lump sum since the remaining assets would not be 110% of the current liability.

Our plans do have the option to pay out over a period certain. My question is if the owner elects this option now and starts receiving payments for say 3 or 4 years and then terminiates the plan, can he then take a lump sum for the remaining payments? Or do we have to buy a period certain annuity from an insurance company when the plan terminates?

[Effen]

You may want to search the board for old discussions about this. I think there are some fairly lengthy threads.

Keep in mind your document must contain the proper language no matter what you do.

[FAPInJax]

One idea espoused at the ASPPA conference was to distribute a 1 year certain annuity for the vested accrued benefit. Next year, the same procedure is followed.

This must be handled carefully because the payments can not be more than 1 year apart.

Any ideas on this method???

[Guest merlin]

We use the Corbel volume submitter db plan document, which allows for payment of term certain annuities, but doesn't mention COLAs. Would the addition of a COLA option knock the plan out of vs status?

[flosfur]

I seem to flip-flop on this every week or two, and with the ASPPA Annual Conference coming up, my opinion next week may be different than what it is today, but for now, I'm recommending that if a plan wishes to take advantage of the 4.99% COLA option ....

I am curious about the math behind the magical 4.99% COLA? Why 4.99%? Why not a COLA of 8, 15, 20% or some higher %?

Isn't COLA a pre-deteremined % as published by some governmental entity such as Social Security Admin or CPI increases published by Bureau Labor Statistics ..? I don't think any of these have been in the 4.99% neighborhood recently (in USA).

[FAPInJax]

The 4.99% COLA is because the RMD regulations specifically permit a COLA that is less than 5%. The idea is to use a 5% interest rate and the 4.99% COLA and what you end up with is basically the certain period as your factor (it would be exact if the COLA were allowed to be 5%)

[flosfur]

The 4.99% COLA is because the RMD regulations specifically permit a COLA that is less than 5%. The idea is to use a 5% interest rate and the 4.99% COLA and what you end up with is basically the certain period as your factor (it would be exact if the COLA were allowed to be 5%)

Then that's really not a COLA in the regular (Economics) sense! Isn't that really an equivalent increasing annuity/pension, increasing at 4.99%?