RMDs

[Gary]

one approach that i have historically found to be reasonable w/r/t RMDs was as follows:

Say owner/employee reaches age 70 1/2 in 2011.

Say his AB at 12/31/10 was $10,000 per year.

An RMD for 2011 would be 10k.

Now to determine AB as of 12/31/11:

Say the gross AB is now 12k per year and

the actuarially increased AB is 11k and

the actuarial equivalent benefit of distribution is 500.

So the 12/31/11 AB would be max (11k, 12k) less 500 equal to 11,500 as the AB at 12/31/11. This amount could not be less than the 10k at end of prior year.

The above being one approach that seems reasonable and consistent with the proposed regs under 1.411-2(b).

I ran into a situation where such 12/31/11 AB was computed as the gross AB of 12k as described above (and not offset by value of distribution).

I am not personally opposed to the method in the sentence above per se; but is it reasonable? is it not overstating the AB? hmmmn

thoughts?

thanks

[SoCalActuary]

The numbers you show in your illustration are well below the 415 dollar limit.

So I would say the new AB is allowed to be $12,000.

[Guest AGreen]

My understanding is that an accrued benefit always has to be offset to reflect prior distributions, whether an RMD, an in-service distribution, etc. Thus I don't understand the logic of having $12,000 be the accrued benefit at 12-31-11. That would be the accrued benefit had no distributions been made. Maybe I'm missing something.

[rcline46]

My Opinion. In a DB plan, the RMD is an annuity. Paying the annuity never reduces an accrued benefit. Therefore, if there is an increase in the AB, then the RMD annuity increases. There cannot be a decrease.

The annuity reserve decreases due to advanced age, but not the annuity.

[SoCalActuary]

My understanding is that an accrued benefit always has to be offset to reflect prior distributions, whether an RMD, an in-service distribution, etc. Thus I don't understand the logic of having $12,000 be the accrued benefit at 12-31-11. That would be the accrued benefit had no distributions been made. Maybe I'm missing something.

If you are not discussing the 415 limits, then it is at the option of the plan sponsor.

Assume I have a lifetime payment of $10,000 annually, and I receive that payment each year.

Then assume that I have earned a new annual benefit of $2,000 by working longer. Now I get to add that $2,000 on top of the old benefit, because I worked to earn a new benefit.

This works fine for the 415 limit on compensation as well, so long as those annuity payments do not exceed the 10% pay x yrs of svc.

The 415 dollar limit is however adjusted for prior payments.

However, the plan document can and often does limit the current benefit by reducing for past payments received. This is a choice of the plan sponsor, who wants to limit their benefit liability.

This subject has also been discussed in other forums, like the ACOPA listserve, and the Q&A sessions with the IRS.

[Gary]

thanks good information