RMD with partially vested benefit

[Dougsbpc]

Reg 1.401(a)(9) - 6 indicates that if any portion of a participant's benefit is not vested as of December 31 of a DISTRIBUTION CALENDAR YEAR, the portion that is not vested will be treated as not having accrued for that distribution calendar year.

This seems to indicate that when determining periodic RMD payments for an upcoming year, we have to assume the participant (if not already fully vested) will have an increased vested benefit by year end and increase the payments accordingly. What happens if the participant falls just short of 1,000 hours and does not get vesting credit? he would have been paid too much.

Am I interpreting this wrong?

If not, it sure would have been better to be able to base your current year RMD payments on the vested accrued benefit as of the immediate preceding 12/31.

[SoCalActuary]

Reg 1.401(a)(9) - 6 indicates that if any portion of a participant's benefit is not vested as of December 31 of a DISTRIBUTION CALENDAR YEAR, the portion that is not vested will be treated as not having accrued for that distribution calendar year.

This seems to indicate that when determining periodic RMD payments for an upcoming year, we have to assume the participant (if not already fully vested) will have an increased vested benefit by year end and increase the payments accordingly. What happens if the participant falls just short of 1,000 hours and does not get vesting credit? he would have been paid too much.

Am I interpreting this wrong?

If not, it sure would have been better to be able to base your current year RMD payments on the vested accrued benefit as of the immediate preceding 12/31.

My answer is simple. You compute the RMD on the accrued benefit at the end of the prior year. But you only pay that benefit to the extent it is vested at the time of payment.

[Dougsbpc]

Thanks SoCal

That does make sense.

So if the participant is partially vested and receiving monthly RMD payments, you may need to increase those payments during the second half of the current year if the participant earns vesting credit by mid year.

[rcline46]

I seem to remember that if an RMD is reduced for vesting, that the future RMDs must be increased by the increased vesting on the prior payments - check on this.

[SoCalActuary]

Thanks SoCal

That does make sense.

So if the participant is partially vested and receiving monthly RMD payments, you may need to increase those payments during the second half of the current year if the participant earns vesting credit by mid year.

I doubt you need to perform a mid-year check on vesting status. I do not believe the intent is to watch out for each employee payroll to find the point where the participant crosses the vesting point. You just start the next year at the higher vesting level.

[Blinky the 3-eyed Fish]

I seem to remember that if an RMD is reduced for vesting, that the future RMDs must be increased by the increased vesting on the prior payments - check on this.

I don't think so. For example, let's say a new DB plan is set up with 3-year cliff vesting that excludes service prior to the effective date and has a retirement age of 65/5. The 80 year-old owner has no vested benefit after years one and two. Are you suggesting that person needs to take payments in year 4 to make up for the lack of payments taken in years 1-3?

[rcline46]

That is my understanding of the vesting rules on RMDs. See 1.401(a)(9)-5 Q & A 8 for DC plans, 1.401(a)(9)-6 Q&A 6 and 5 for DB plans.

[Blinky the 3-eyed Fish]

All that is saying under the annuity payment method is that the additional benefits that become vested are considered additional accruals for purposes of increasing the RMD for future years. The increase works exactly the same as if the person had an increased benefit due to additional service or higher compensation, i.e. the increase applies to prospective payments. There is no requirement to payout the payments missed on top of the current payments, which is different than the account balance method, which does require make up of the payments missed.