RMDs for DB Plans

[zimbo]

It is the time of year to revisit the DB rules on RMDs (post 70.5 variety). A few that need refreshing:

1. When using the "term certain" method, assuming no additional benefit accruals since the initial calculation was done, is it necessary to recalculate the prior years' periodic term certain payment due to changes in the 417e interest rates, or does the certain payment from prior years simply continue unaltered?

2. When calculating a term certain annuity for an RMD in 2008, do we value the benefit using the new 417e segment rules and divide by a term certain amortization factor using the 3 appropriate segment rates (analogous to the amort base for funding shortfalls)?

3. When calculating the initial RMD in a DB, assuming the initial distribution calendar year is 2008, is the benefit determined as of the beginning of 2008 or is it determined as of the end of 2008? The regs do say that for increases in benefits occurring after the distribution calendar year, you can wait until the following year to reflect them but the regs are SILENT on the initial distribution calendar year.

Any thoughts or opinions would be welcome!!

[ScottR]

It is the time of year to revisit the DB rules on RMDs (post 70.5 variety). A few that need refreshing:

1. When using the "term certain" method, assuming no additional benefit accruals since the initial calculation was done, is it necessary to recalculate the prior years' periodic term certain payment due to changes in the 417e interest rates, or does the certain payment from prior years simply continue unaltered?

Not sure. As a practical matter, I recalculate all of them every year, subtracting 1.0 from the prior year's term certain period. That way, I don't have to worry about whether additional benefits did or did not accrue. I'm basing the RMDs on term certain with 4.999% COLA, so there's always going to be a change in the RMD from year to year.

2. When calculating a term certain annuity for an RMD in 2008, do we value the benefit using the new 417e segment rules and divide by a term certain amortization factor using the 3 appropriate segment rates (analogous to the amort base for funding shortfalls)?

If the plan's definition of AE is PPA rates, then I'd say yes. Adjusted for COLA if you're using that. If the plan defines AE in terms of a fixed interest rate (eg. 5%), I use that (adjusted for COLA).

3. When calculating the initial RMD in a DB, assuming the initial distribution calendar year is 2008, is the benefit determined as of the beginning of 2008 or is it determined as of the end of 2008? The regs do say that for increases in benefits occurring after the distribution calendar year, you can wait until the following year to reflect them but the regs are SILENT on the initial distribution calendar year.

The initial RMD should be paid in the first 3 months of 2009, and subsequent RMDs should be paid on the anniversaries of the initial payment. The initial payment should be based on the PVAB (including PPA minimums) at the time of initial payment (or 3/31/09 to be safe), divided by the term certain annuity factor.