Required Minimum Distribution

[flosfur]

A plan's normal form of NRB is life only annuity.

To satisfy the RMD rules, among other alternatives, the payments can be made a) as an equivalent 100% J&S annuity and b) as an Equivalent increasing annuity with annual increases <5%.

Q1: Can these two be comined, i.e. as an Equivalent increasing 100% J&S? I don't see why not.

Q2: Are there any documents that are required to be executed to use these alternatives or does one just compute the numbers and keep them in file?

Thanks.

[Blinky the 3-eyed Fish]

1. Yes

2. The participant needs to complete standard election forms choosing that annuity form of payment. Spousal consent is needed if not the QJSA. The plan needs to allow for that option form of payment.

Just curious, but why are you thinking an increasing 100% J&S annuity is a good choice? What is your goal?

[AndyH]

The participant needs to complete standard election forms choosing that annuity form of payment

Why? Due to the restrictions on "reannuitization"?

I'm just interested in how others are handling these and why.

[SoCalActuary]

The increasing annuity with the extended payout period:

1. gives the lowest annuity payment,

2. deferring taxes to the maximum possible extent,

3. and comes the closest to the old account balance method for determining the amount paid.

If the plan document allows an open-ended option of "whatever an insurance company would offer"

you probably have the freedom to offer this form of payment. If you are not comfortable that your

document allows this, then you would have to use an add-on amendment that is not covered by your

volume letter (if you have one.)

Some people don't understand the "re-annuitization" issue, but the IRS is looking to db plan participants

to start taking their annuity payments (more taxes that way.) Treating the payments as a string of

lump sum amounts is more complex because you have multiple annuity starting dates, and even the IRS

is challenged to administer these.

[AndyH]

Blinky, I don't disagree that having a "final" election through the use of forms is preferable, but many tjmes these are restricted lump sum situations and that gets into the mess about what death benefit is due in the event of death following election of a restricted lump sum or a "temporary' annuity election .

Now the though of a restricted lump sum combined with a minimum distribution .......Uggh.

[flosfur]

1. Yes

2. The participant needs to complete standard election forms choosing that annuity form of payment. Spousal consent is needed if not the QJSA. The plan needs to allow for that option form of payment.

Just curious, but why are you thinking an increasing 100% J&S annuity is a good choice? What is your goal?

As SoCalActuary stated, to minimize MRD (i.e. make the MRD "really" the minimum!).

Since it is going to be a J&S with the spouse as the beneficiary why is the spousal consent needed? It's not a big deal to get the consent but why?

[Blinky the 3-eyed Fish]

SoCal and flosfur, the J&S will not provide a lower payment than a term certain. Also, a term certain without life contingencies doesn't have the reannuitization restrictions. Henceforth, I asked my question why J&S.

Andy, how would you differ as to what I said?

Flosfur posted while I was. In answer to the question why spousal consent, it is needed if the payout is not a QJSA. I didn't look into whether a J&S with a COLA increase would be acceptable. I would actually assume that it would be fine, but was just throwing out the thought.

[flosfur]

The participant needs to complete standard election forms choosing that annuity form of payment

Why? Due to the restrictions on "reannuitization"?

I'm just interested in how others are handling these and why.

How is it "reannuitizing", if one is just providing the permitted Equivalent alternative optional benefit?

May be I need the definition of "reannuitization".

[SoCalActuary]

3I - I agree. The increasing annuity for a period certain not to exceed the joint life expectancy

of the participant and spouse, or the joint life under the MDIB rules, should work best.

This option does need spousal consent, because it is not the automatic form of payment under

the plan document.

[Blinky the 3-eyed Fish]

You lost me with that last sentence. How is spousal consent not required when payment is made in a form other than a QJSA?

Sorry, I saw a phantom "not" in your post. I am reading too fast. We're good.

[flosfur]

SoCal and flosfur, the J&S will not provide a lower payment than a term certain. Also, a term certain without life contingencies doesn't have the reannuitization restrictions. Henceforth, I asked my question why J&S.

....

If the plan's A/E interest is 5% and one uses 4.99% as the annual increase, say, then that is almost like valuing an annuity certain with the certain period equal to the J&S life expectancy because the discount rate is almost zero % and it's a one step calculation. Whereas with annuity certain, one has to first look up or calculate the J&S life expectancy and then compute the annuity value.

[SoCalActuary]

flosfur, the J&S annuity has a different and lower APR than a period certain annuity for the same life expectancy. The same total number of expected payments is involved, but the J&S takes place over a longer period, so that some of the payments after the end of the joint life expectancy are discounted further.

With a lower APR under the QJSA than under the period certain, the reduced actuarial equivalence value ends up with a higher periodic payment.

3i - I was agreeing with you. This form of increasing annuity with a period certain is not the plan's QJSA form, so the spousal consent would be required.

[AndyH]

Blinky, I realize my question is a bit of a tangent, but you said:

The participant needs to complete standard election forms choosing that annuity form of payment

.

I am interested on your (and other) opinion(s) of the following situation:

Consider Dr. No who is 75 years old and owns his business and has a DB plan and he has been receiving minimums on the account balance method for 4 or 5 years on a joint life basis. The pre retirement death benefit is the pvab and Dr. No is still working.

In 2006 he cannot still use the account balance method. He does not want to make an election that governs the disposition of his benefits upon death other than the pvab because he is not retired and he is afraid of getting sued so he wants the money to remain in the plan.

Is there something that requires a "final" election governing his benefit distribution now? Or can administratively 12 payments of the 12/31/2005 accrued benefit, payable in a J&100 form (provided the plan allows it) suffice on the basis that it is continuation of the prior 401(a)(9) distribution method to the extent allowed? That way perhaps 401(a)(9) is satisfied and he still has the pvab payable to his spouse if he dies while working.

Thoughts? Perhaps there is no clear answer?

P.S. What do you do if there is no in-service distribution permitted? A 401(a)(9) - only election form I presume?

[flosfur]

Follow up question:

If the employee's sole beneficiary is the ee's spouse, Q&A-3 of the 1.401(a)(9) permits the period certain to be as long as the J&S life expectancy if it is longer than the applicable period for the employee, provided the period certain is not provided in conjuction with a life annuity under A-1(b) ... (last sentence of A-3(a))

What does this proviso mean and what is it trying to circumvent?

Is it saying that a life annuity with a period certain equal to the J&S life expectancy is not permitted "if" the resulting period certain is longer than the applicable distribution period for the employee?

Assuming the period certain satisfies the length requirement, one can use life annuity with period certain of J&S expectancy and get slightly better results than using annuity certain only.

[Gary]

Say you have a plan with just owners and one owner is 70 1/2.

What about converting the owner's benefit to a cash balance account and computing the RMD using the account balance method?

Also if plan's NRA is 65&5 and employee/owner joins plan at age 68 can he wait until age 73 to commence benefits or does RMD 70 1/2 override?