TEFRA and RMD

[JanetM]

Fact set: Owner of company signed TEFRA agreement that stated he would start taking his balance out in 15 annual installments starting 2 years after he ended his employment. Our company bought his company and his payments began in 2001 as per the agreement. He had 77th B-day 3 months later.

My opinion is that his TEFRA payment must be made in 2009 or else he violates the agreement and faces penalty.

Am I wrong? If so please point me to the specific section of the regs.

[jpod]

Janet: Interesting issue. I admit to not having the time or the inclination to look at the regs or the new legislation. However, for what it's worth this is how I would proceed with the analysis. First, the new legislation (once signed by W) is law, which takes precedance over any regulation addressing the same subject matter. Second, the law waives the requirement to take an MRD from a DC-type plan for 2009. Third, is the obligation to take a distribution for the year under a TERFRA election an MRD subject to the 2009 waiver? One needs to parse through the terms of the TEFRA provision creating the right to an election, then the section of the regulations dealing with TEFRA elections, and then finally the terms of the new law. My gut tells me that your Company owner can skip his 2009 distribution under his TEFRA election (assuming it is a DC-type plan), but as I said I have not done the reading necessary to confirm.

[JanetM]

jpod thanks for your insight. TEFRA section 242(b)2 gave taxpayers the option of signing a TEFRA agreement and electing out of the RMD rules and staying under the pre TEFRA rules. This means the annual payments are not RMD payments so waiving RMD doesn't seem to affect TEFRA payment.

That is why I was questioning if there was a provision in the new law that addresses TEFRA payments. BTW There are two agreements that cover a DC and a DB plan.

[jpod]

Are you sure? I'm not certain that the effect of Section 242(b) and it's relationship to 401(a)(9) and the new legislation is what you say it is.

[JanetM]

Update. Just got off the phone with ERISA attorney who emphatically agrees that the TEFRA payments must be made or he renigs on agreement. If he does that he will be treated as if he was under RMD rules. Since his first payment was 6 years late the penalty and interest would wipe him out.

Wonder what the bill for that phone call will be?

[K2retire]

Update. Just got off the phone with ERISA attorney who emphatically agrees that the TEFRA payments must be made or he renigs on agreement. If he does that he will be treated as if he was under RMD rules. Since his first payment was 6 years late the penalty and interest would wipe him out.

Wonder what the bill for that phone call will be?

Undoubtedly less than the 6years of late penalties and interest.

[JanetM]

K2 you got that right. The guy gets over $400k per year from DC plan.

[jpod]

Saying that it must be paid might be the safest advice, because the damages attributable to incorrectly advising that the individual take a taxable distribution for a year in which he did not need to take one are speculative. I'm not convinced that it is the correct answer, but I'll wait until a client wishes to pay me for the analysis before I think about it again. Or, better yet, I would advise the client to defer the distribution as late as possible into 2009 in accordance with the terms of the TEFRA 242 election, and see if the IRS says anything pertinent to the issue between now and then.

[JanetM]

jpod, the TEFRA agreement says the payment will be made beginning one year after the date of termination and the remaining amounts paid at same time each year. Deferring the payment would blow the agreement.

[jpod]

If you are suggesting that necessarily means that the waiver legislation is inapplicable, I don't agree. The issue is whether the payments per the TEFRA 242 election are to be considered 401(a)(9) MRDs subject to the waiver. I don't think it's a simple issue. Your ERISA attorney may be correct, if he/she did all the research and analysis to support that conclusion. But if it was simply his/her knee-jerk answer, I'm not sure it's correct.

Insofar as my "wait and see" suggestion is concerned, by what date must it be paid each year?

[JanetM]

January 5. One yr following is orgiinal term date in 1999.

[jpod]

Fair enough. That means that you don't have the luxury of waiting for IRS guidance. If your client would really like to avoid the distribution if he can, I hope the ERISA atty's advice is correct.

[JanetM]

Thanks for you input jpod.