Periodic Payments

[Guest ehe0219]

Taxing issues aside, does anyone know if there is a rule that requires periodic payments to be paid for no longer than the life exepectancy of the participant?

[ETA Consulting LLC]

That is a rule in 401(a)(9) that suggests payments may not be made to extent beyond the life or life expectancy. Arguably, when you are (let's say) 60, you may elect period payments to be made over the next 100 years. However, when you get age 70 1/2, you must meet the calculated amount based on your "life expectancy".

Many plans are written to ensure any elected payout will automatically meet the RMD by ensuring the initial period does not extend beyond life expectancy of the participant. This is done because the period payment remains a fixed period (i.e.25 years) while the life expectancy tables do not always reduce your life expectancy by a full year. Even under the period payments, you may still have to distribution an additional amount when the amount distributed does not meet the required amount for the year. When there is an actual (annuitization) or (payment of actual life), then no such calculation is necessary each year because you're not longer using an account balance calculation. You can also use life and period certain, but the concept of "life" gives you the exemption from RMD.

A bit long winded, but this concept is all derived from the RMD rules.

Good Luck!

[Guest ehe0219]

Thank you. If the periodic payments were not sufficient to meet the annual RMD requirements we would issue an additional payment at year end for the difference to make sure the RMD was met. So, if the employee wants to take periodic payments that would last until he is 102, by making the yearly top-up RMD payments we would effectively be reducing that payment stream to only the RMD LE age. I think we are good. Thank you for your reply!