Missed 1st RMD, how do I calculate it now?

[Guest DCquestioner]

Participant turned 70 1/2 in 2007, so he must take his first distribution 4/1/2008. This is a db plan and we want to use the annual annuity method.

He has not yet taken his RMD, so now that we're late, how do we calculate his distribution?

Do we calculate the annuity payable on 4/1/2008 and then credit it with interest to the next distribution date? or should we just calculat the annuity payable now?

In a related question, if we pay out the annuity now, do subsequent payments occur on this distribution date, or is the next payment due 4/1/09 (since he should have taken the last payment on 4/1/08)?

[david rigby]

Participant turned 70 1/2 in 2007, so he must take his first distribution 4/1/2008. This is a db plan and we want to use the annual annuity method.

Just to be sure: Before proceeding with the details, is this participant required to take a distribution at 70-1/2?

- 5% owner?

- Already terminated employment?

- What does the plan say?

[Guest DCquestioner]

The participant is a 5% owner, and this is a new plan effective 1/1/07. He is 100% vested in his benefit. There was a predecessor plan, so we could not design the plan to exclude past service for vesting.

The plan doesn't talk about what to do for missed payments. It does talk about actuarial increases for active employees that are post normal retirement age, but in this case NRA is 65 & 5, so he is not past NRA.

[AndyH]

Aaaah, a predecessor plan issue - my favorite.

I had to bite for that reason.

Seriousness aside, what is an "annual annuity option", and as the esteemed Mr. Rigby implies, is it an option under the terms of the plan?

In general, you need to do what should have happened. What were the options 4/1/2008, choose one of them, and do subsequently what would have been done.

I don't know if interest is appropriate for an HCE; I suppose it is - anybody know what the self correction programs say about this?. You then need to recompute the VAB at a later date (1/1/2009?) by factoring in both the minimus and the interest.

If the RBD date is 4/1/2008, isn't that based on the VAB 1/1/2007? Was there one? I don't know what the next payment date would be because I don't understand the "annual annuity option". If payments were monthly you could just pay 12 of the 1/1/2007 VAB monthly payments by 4/1/2008 and then another 12 monthly based upon the VAB 1/1/2008 by 12/31/2008, it seems to me.

But of course the document must be reviewed carefully first.

[flosfur]

If I remember correctly, the MRD is based on accrued benefit and not vested accrued benefit?

[ScottR]

If I remember correctly, the MRD is based on accrued benefit and not vested accrued benefit?

Agree. But if the person isn't vested at the time the payment would otherwise be made, it may be deferred until he/she is vested.

[ScottR]

Participant turned 70 1/2 in 2007, so he must take his first distribution 4/1/2008. This is a db plan and we want to use the annual annuity method.

He has not yet taken his RMD, so now that we're late, how do we calculate his distribution?

Do we calculate the annuity payable on 4/1/2008 and then credit it with interest to the next distribution date? or should we just calculat the annuity payable now?

In a related question, if we pay out the annuity now, do subsequent payments occur on this distribution date, or is the next payment due 4/1/09 (since he should have taken the last payment on 4/1/08)?

I don't think there's any prescribed method to "make it right", but I would compute the payment that he should have gotten by 4/1/08 and pay it asap. Subsequent payments should be made by 4/1 of each year. That's the best you can do, IMO.

[chc93]

Participant turned 70 1/2 in 2007, so he must take his first distribution 4/1/2008. This is a db plan and we want to use the annual annuity method.

He has not yet taken his RMD, so now that we're late, how do we calculate his distribution?

Do we calculate the annuity payable on 4/1/2008 and then credit it with interest to the next distribution date? or should we just calculat the annuity payable now?

In a related question, if we pay out the annuity now, do subsequent payments occur on this distribution date, or is the next payment due 4/1/09 (since he should have taken the last payment on 4/1/08)?

I don't think there's any prescribed method to "make it right", but I would compute the payment that he should have gotten by 4/1/08 and pay it asap. Subsequent payments should be made by 4/1 of each year. That's the best you can do, IMO.

We've also added interest from the date due (4/1/08 in this case) to the actual payment date. We used the 30-year Treasury rate for the appropriate plan year. We did this a few years ago, and I thought we read about this somewhere (can't recall).

[GMK]

ScottR - I think the "subsequent payments" in your post #7 are due by 12/31, not 4/1, e.g., 4/1/08, 12/31/08, 12/31/09, etc. (or as AndyH indicated in post #4).

[AndyH]

If I remember correctly, the MRD is based on accrued benefit and not vested accrued benefit?

Agree. But if the person isn't vested at the time the payment would otherwise be made, it may be deferred until he/she is vested.

Agreed. Thanks for the enhancement.

[ScottR]

ScottR - I think the "subsequent payments" in your post #7 are due by 12/31, not 4/1, e.g., 4/1/08, 12/31/08, 12/31/09, etc. (or as AndyH indicated in post #4).

Sorry, I don't agree. For a DB plan, what's required is a stream of annual (or more frequent) payments, with the first one occurring on or before 4/1/08. There's no need to "double up" in the first year, as you would with a DC plan. IMO.

... S

[D Syrett]

ScottR - I think the "subsequent payments" in your post #7 are due by 12/31, not 4/1, e.g., 4/1/08, 12/31/08, 12/31/09, etc. (or as AndyH indicated in post #4).

Sorry, I don't agree. For a DB plan, what's required is a stream of annual (or more frequent) payments, with the first one occurring on or before 4/1/08. There's no need to "double up" in the first year, as you would with a DC plan. IMO.

... S

I agree w/ ScottR. In other words, under the annuity method the second and later payments are made on the anniversary of the first payment.

[Guest Sieve]

Under normal circumstances (i.e., no missed payments, as in the OP), the regs permit the second annual annuity payment to be made at "the end of the next payment interval even if that payment interval ends in the next year. (Treas. Reg. Section 1.401(a)(9)-6, Q&A-1©.) So, if the initial MRD payment is made on the 4/1 required beginning date, subsequent annual payments can continue to be made on 4/1 of following years.