Satisfying RMDs with Lump Sum

[Randy Watson]

A plan provides for QJSA as the normal form of distribution. A participant retires, but never consents/elects distribution of his benefit. RMDs commence. The Plan is then amended to eliminate the QJSA and provide for lump sum distributions only.

I don't believe the retiree's annuity starting date has commenced as distributions were made under 401(a)(9). So I believe that the amendment to eliminate optional forms is in effect for this participant's benefit and the Plan is permitted to pay the retiree a lump sum distribution of the remainder of his benefit on the next RMD date. Anyone agree/disagree? Thanks.

[My 2 cents]

How could a plan with a QJSA as the normal form of distribution be amended to have a lump sum as the only form of distribution? How could a plan with a QJSA ever be amended to eliminate it? Certainly, it couldn't possibly be any sort of defined benefit plan (even a hybrid defined benefit plan). If it were a defined contribution plan with provisions involving a QJSA, how could it be amended to not only make it no longer the normal form of distribution but not available at all?

[Randy Watson]

How could a plan with a QJSA as the normal form of distribution be amended to have a lump sum as the only form of distribution? How could a plan with a QJSA ever be amended to eliminate it? Certainly, it couldn't possibly be any sort of defined benefit plan (even a hybrid defined benefit plan). If it were a defined contribution plan with provisions involving a QJSA, how could it be amended to not only make it no longer the normal form of distribution but not available at all?

Defined contribution plans are permitted to eliminate "optional forms of benefits" as long as the right to those benefits have not accrued and they receive an amount that is at least the actuarial equivalent of the benefit at normal retirement age. The rules are contained in Treasury Regulations Section 1.411(d)(4).

[Guest Sieve]

My 2 cents -- A DC plan which is not subect to QJSA requirements can eliminate all forms of benefit other than a lump sum with repsect to all accounts that have not begun distribution. (IRC Section 411(d)(6)(E) and Treas. Reg. Section 1.411(d)-4, Q&A-2(e).)

Randy -- I assume, therefore, that this must be a DC plan not subject to QJSA requirements. Are you saying that the plan's MRD provisions have eliminated all but a lump-sum distribution (i.e., periodic MRDs are not permitted)? Because, if not, and if the plan requires consent of the participant prior to distribution, then you must continue the periodic MRDs until the participant consents to a lump sum distribution. (Consent is not requried by law after participant reaches the later of age 62 or NRD under the Plan. Treas. Reg. Section 1.411(a)-11©(1) & (4).) On the other hand, if, also, only lump sum MRDs are now permitted, I would argue that the revision does not apply to this individual because his/her annuity starting date already has occurred as per IRC Section 417(f)(2)(A)(ii) (which also is the definition applicable to IRC Section 411(a)(11) -- see introductory phrase to 411(f)).

[Randy Watson]

[quote On the other hand, if, also, only lump sum MRDs are now permitted, I would argue that the revision does not apply to this individual because his/her annuity starting date already has occurred as per IRC Section 417(f)(2)(A)(ii) (which also is the definition applicable to IRC Section 411(a)(11) -- see introductory phrase to 411(f)).

It seems to me that the determination of whether the annuity starting date has passed for purposes of eliminating QJSA this participant would be based on 417(f)(2)(A)(i) instead of (ii), because at the time the plan was amended to eliminate the QJSA the normal form of distribution for the participant was a QJSA.

As far as 1.411(d)(4) goes, I believe the question boils down to whether the annuity starting date under 417(f)(2)(A)(i) passed if MRDs have commenced. If the commencement of MRDs means the annuity starting date passed then we cannot eliminate QJSA for this participant. Any thoughts on that???

[Guest Sieve]

I agree with your last paragraph that the issue is whether the annuity starting date has passed--if it has, then you cannot eliminte QJSA for this individual. Of course, even if you have eliminated QJSA for this retiree, how can your force a lump-sum distribution without consent unless the plan already permits a post-NRA distribution without consent?

As to whether the annuity starting date has passed, I agree that IRC Section 417(f)(2)(A)(i) is the appropriate provision (not (ii)). Focusing on the operative word "payable", hasn't "the first day of the first period for which an amount is payable as an annuity" already passed--i.e., when this individual retired? I would think that once the participant earned the right to the annuity (i.e., when it was payable--not paid--at retirement), then the type of payment permitted cannot be removed with respect to that participant.

But that begs the question, too, as to whether even a lump sum can be paid to this retiree without his/her consent. And how does the amendment change the MRD provisions in the Plan (which apparently permit periodic MRDs)?

(And, by the way, your earlier response to 2 cents said that all DC plans are able to eliminate the QJSA. Of course, MPPP cannot.)

[Randy Watson]

I agree...this was payable upon retirement/termination, so the annuity starting date has passed and the elimination of the QJSA for this particular individual would be a prohibited cutback.

The MRD provisions were changed when the lump sum provisions were added. Essentially, 401(a)(9) is satisfied through lump sum distribution. As you noted, consent is not needed after the later of NRD or 62.

Good point on MPPP....wasn't thinking about them!

Thanks for your help!