How to calculate Required Minimum Distribution

[JRN]

Owner-Participant is required to take a Required Minimum Distribution this year from Defined Benefit Pension Plan. Owner-Participant's accrued benefit, as determined under the Plan's benefit formula, is $850,000. But, because of the Plan's investment losses during 2007-2008, if the Plan were terminated today, the Plan could pay the Owner-Participant only about $450,000. Generally, the RMD is calculated based on the participant's accrued benefit. Is there a reasonable argument for basing the RMD calculation on what the Owner-Participant would actually receive at this time, i.e., the $450,000?

[abanky]

Do you mean the present value of accrued benefit is $850,000?

[rcline46]

An ongoing DB plan can only pay an annuity of some type as an RMD - search for threads from about two years ago.

[SoCalActuary]

Owner-Participant is required to take a Required Minimum Distribution this year from Defined Benefit Pension Plan. Owner-Participant's accrued benefit, as determined under the Plan's benefit formula, is $850,000. But, because of the Plan's investment losses during 2007-2008, if the Plan were terminated today, the Plan could pay the Owner-Participant only about $450,000. Generally, the RMD is calculated based on the participant's accrued benefit. Is there a reasonable argument for basing the RMD calculation on what the Owner-Participant would actually receive at this time, i.e., the $450,000?

The only situation where you could use the lower amount is when the participant is receiving a lump sum distribution for their entire benefit.

Good luck funding the $400,000 shortfall.

[David MacLennan]

Terminate the plan and distribute the 450K as a lump-sum. You could then use the DC RMD rules on the 450K lump sum. I presume you can do the RMD this way but I have not carefully checked the regs - maybe someone else has thought about it and can chime in. On termination, 411 says the benefit is vested to the extent funded, and your document probably has this language. RMD's are computed with respect to vested benefits. That would be the reasoning but check your document.

With such a large shorfall you will probably want to terminate the plan anyway.

[My 2 cents]

I am somewhat uncertain about the reference above to ongoing defined benefit plans being limited to paying minimum distributions only as an annuity of some type. Most of the plans we see establish a formal annuity starting date as of the date a minimum distribution becomes payable, with all options (assuming no funding issues) being available, including lump sums if present in the plan, with spousal consent obtained if applicable, and treating the election as irrevocable. Owner or not, HCE or not, if the person must start collecting something, they are given the opportunity to elect whatever distribution form they want. The only limitations on making such a distribution (assuming no 415 issues) would be the 25-high restricitons and anything in effect under Section 436. Of course, one must monitor the situation thereafter in case any new accruals would have to be started.

My vote on the original question is that one calculates the minimum distribution without regard to the funded status of the plan. The minimum distribution rules for a defined benefit plan are framed in terms of the accrued benefit, not some sort of account balance. The value is what it is, even if there is only half enough money to cover the whole accrued benefit.

[AndyH]

Owner-Participant is required to take a Required Minimum Distribution this year from Defined Benefit Pension Plan. Owner-Participant's accrued benefit, as determined under the Plan's benefit formula, is $850,000. But, because of the Plan's investment losses during 2007-2008, if the Plan were terminated today, the Plan could pay the Owner-Participant only about $450,000. Generally, the RMD is calculated based on the participant's accrued benefit. Is there a reasonable argument for basing the RMD calculation on what the Owner-Participant would actually receive at this time, i.e., the $450,000?

Seems to me the answer is a clear no, for the reasons my 2 cents states, until/unless the accrued benefit is reduced, which can only happen at plan termination through a waiver, or by a reduction in the accrued benefit by a distribution larger than the accrued benefit, maybe through a installment payment type of option.