RMD in Cash Balance plans

[SoCalActuary]

The IRS recently highlighted the treatment of required minimum distributions for defined benefit plans.

In particular, cash balance plans were singled out for these calculations because of the confusion they cause.

A cash balance plan is a defined benefit plan. When a participant is required to take a minimum payment, the account is converted to an equivalent monthly benefit using the plan's actuarial equivalence assumptions.

That monthly benefit is paid as an annuity form of payment for RMD purposes.

A cash balance plan is not a defined contribution plan. You do not have the ability to use DC rules on the RMD.

The only way to use the DC rules is if the CB plan is paid out into a lump sum distribution as a rollover during the year that payment is due.

[ak2ary]

true... is there a question or is this a fun fact for us to share with friends

[SoCalActuary]

Gary had posted the question in another discussion that was getting off the point, so I thought it best to bring the issue out separately.

[ak2ary]

Sorry... I thought you had more coming

[John Feldt ERPA CPC QPA]

Assume the participant is 100% vested, a 5+% owner, age 70.5, and is still employed by the employer/plan sponsor

Assume the plan allows for a lump sum payment

Assume plan allows for an in-service distribution of your entire benefit if you are at least 65 and are 100% vested

A couple of questions:

1) If the participant takes a full lump sum (in-service distribution) by the end of their first RMD year, even though they are going to accrue more next year, can that RMD be calculated using the individual account plan method?

2) If the Plan has an optional form of payment such as a monthly installment not to exceed 20 years (or if less, the participant's life expectancy), increased by a fixed annual COLA of 4.99%, could the RMD from the plan be calculated on that type of annuity, or would additional plan language be needed to make the RMD be based on that optional form, or would the participant have to elect that form of payment for the RMD to be calculated under that form?

Please comment!

edit: typos