More on RMDs made in 2006, 2007

[Gary]

A client begged for as low an RMD as possible.

So with a frozen accrued benefit of $50,000 per year as a 100% j&s (normal form), we provided an optional payment in the form of a 100% j&s annuity guaranteed for 26 years (per ULT) with 4.99% COLA.

The outcome was an annuity of close to $24,000 for 2007.

The client then tells us that he took a distribution of $40,000 for 2007.

He does not want to consider the excess as a plan loan.

My reaction to this is as follows:

1) when computing the 2008 RMD, base it on actuarial equivalence as a result of the actual payment made in 2007.

2) Or revise the payment form to be a method that can accomodate the $40,000 distributed, such as a flexible payment method that computes the annuity as a range from the RMD to the 415 lump sum. Then the following year a new actuarial equivalent amount is computed based on the actual payment made.

Any thoughts, comments?

[Mike Preston]

Your client isn't going to like the result. He stole $16,000 from the plan. He should give it back. With interest.

He is much better off doing that than any of the alternatives. Since his RMD for 2008 will exceed the amount repaid, he will receive from the plan the money back (plus some). Should be very easy to make this transaction work.

Any other alternative makes no sense to me.

Your second suggestion doesn't satisfy the 401(a)(9) regs so the whole plan loses its qualified status.

Hardly the best result.

[John Feldt ERPA CPC QPA]

In order to do the initial calculation and produce such a low RMD, was the plan required to have a payment option of a "100% j&s annuity guaranteed for 26 years (per ULT) with 4.99% COLA"?

Probably a dumb question, I know.

Also, I assume ULT = Uniform Life Table (which is how the 26 years was chosen so that the gurantee period does not exceed the life expectancy), is that correct?

[Gary]

The Normal Form of payment is a 100% J&S of the accrued benefit with no actuarial reduction for the survivor annuity.

The 26 year certain (maximum period per uniform life table), etc. is an optional form of payment.

I believe the payment can be a certain and life payment as opposed to a certain only payment form. Would like other observations on this? I believe if the period certain is based on a period that is longer than the ULT table and in accordance with the joint life expectancy of the married couple, then that payment form would need to be a period certain only with no life contingency aspect.

In terms of 401(a)(9) the flexible payment method previously mentioned entails:

A form of payment that is paid over a period certain, thus it is allowable for the annuity payment period to be changed (1.401(a)(9)-6, Q&A 13(b))

And the form is to be ajusted to comply with the four conditions under 1.401(a)(9)-6, Q&A-13©

I will need to verify the IRC cites (and their content) stated above, but wanted to lay out the references that I have been provided.

It

[Mike Preston]

Maybe I'm just not understanding what you are driving at. But my understanding of the regs is that you will find it difficult if not impossible to change the annuitization in such a flexible manner.

[AndyH]

Agreed. The 401(a)(9) rules no longer permit this type of thing.

Just call the client and tell him he's a thief. I've never done that but I did have one who was. But he was a client because he was a thief, not the opposite.

Or, if the payment was made in coins perhaps it could be revalued using the Blue Book instead of the Red Book?