RMD in year plan terminates

[YankeeFan]

A 5% owner sponsoring a one person defined benefit plan began taking required minimum distributions upon attaining 70 1/2 in 2011. The participant elected to receive the RMD in annual intervals. As such, the annual RMD was always taken in March of the subsequent year. For example, the 2011 RMD was taken in March 2012, the 2012 RMD was taken in March 2013 and the 2013 RMD was taken in March 2014. Let's assume the participant's monthly accrued benefit is $5,000 and furthermore assume the participant's high 3-year average annual salary is $60,000. The annual RMD paid for each year in March 2012, March 2013 and March 2014 equaled $60,000.

The plan is terminated effective 4/30/2014 with an assumed distribution date of 6/30/2014. The 5% owner will elect to take the remaining benefit in a single lump sum and rollover the distribution into an IRA. What is the RMD for 2014 that is not eligible for rollover? Note that the plan is slightly overfunded so the goal is to avoid use of the account balance method. The objective is to distribute the greatest amount possible to the participant.

Can $60,000 be paid to the participant in order to satisfy the 2014 RMD? If so, will the payment of $60,000 reduce the remaining lump sum as of 6/30/2014 or can the remaining lump sum as of 6/30/2014 be calculated as the PVAB of the unreduced $5,000 monthly accrued benefit using the 2014 applicable mortality table at 5.5%?

Please also suggest any other methods that would be deemed reasonable. Thank you.

[K2retire]

I thought the first year was the only year an RMD could be delayed into the next year -- hence the warning that if you do it the first year you'll have to take two in the second year.

[My 2 cents]

According to my understanding...

In the case described above (age 70 1/2 in 2011), the owner had until 4/1/12 to receive the 2011 RMD. The 2012 RMD had to have been paid by 12/31/12, etc. The RMDs for 2012 and 2013 appear to have been paid late.

Don't forget that the amount payable to him as a lump sum will have to be restricted because his annual benefit is limited to the 100% of pay limit, and the lump sum equivalent must be determined using Section 415 factors (if that would be less than the amount otherwise payable to him under the plan).

The 2014 RMD has not yet been paid to him, so it will have to be excluded from the amount available for rollover.

[NJ Mike]

My understanding under a defined benefit plan is that the benefit must commence prior to the RBD, which in this case was 4/1/12. The payment interval is established based on the first payment, in this case, annual. This first payment covers the period 4/1/12 to 3/31/13. The second interval is 4/1/13 to 3/31/14 and the annual payment can be made anytime in this period. If that is correc, the payments have been timely made. As far as the value of the lump sum, if the 4/1/14 to 3/31/15 payment has not been made, I would value the $60,000 on the date of distribution and add back in the value of "missed" payments. For example, if paid out on 7/1/14, value the benefit at that date and add back in the value of the 3 payments due (April, May and June).

[ScottR]

A 5% owner sponsoring a one person defined benefit plan began taking required minimum distributions upon attaining 70 1/2 in 2011. The participant elected to receive the RMD in annual intervals. As such, the annual RMD was always taken in March of the subsequent year. For example, the 2011 RMD was taken in March 2012, the 2012 RMD was taken in March 2013 and the 2013 RMD was taken in March 2014. Let's assume the participant's monthly accrued benefit is $5,000 and furthermore assume the participant's high 3-year average annual salary is $60,000. The annual RMD paid for each year in March 2012, March 2013 and March 2014 equaled $60,000.

The plan is terminated effective 4/30/2014 with an assumed distribution date of 6/30/2014. The 5% owner will elect to take the remaining benefit in a single lump sum and rollover the distribution into an IRA. What is the RMD for 2014 that is not eligible for rollover? Note that the plan is slightly overfunded so the goal is to avoid use of the account balance method. The objective is to distribute the greatest amount possible to the participant.

Can $60,000 be paid to the participant in order to satisfy the 2014 RMD? If so, will the payment of $60,000 reduce the remaining lump sum as of 6/30/2014 or can the remaining lump sum as of 6/30/2014 be calculated as the PVAB of the unreduced $5,000 monthly accrued benefit using the 2014 applicable mortality table at 5.5%?

Please also suggest any other methods that would be deemed reasonable. Thank you.

I think an RMD of $60k in March 2014 would satisfy the 2014 requirements. Alternatively, you could use the account balance method and divide his actual lump sum distribution by his life expectancy factor, which will probably yield a lower result.

Regardless of which method you use, the total payouts during the 2014 limitation year may not exceed the lump sum value of a $5k monthly benefit, based on 417e mortality and 5.5% interest (or plan rates if less favorable). Thus, the RMD will be carved out of the 415 lump sum limit for the remainder of this limitation year.

... Scott

[ac]

The portion of the lump sum distribution amount that is not eligible for rollover treatment is the RMD for the 2014 distribution calendar year.

Under the annuity distribution method, the $60,000 distribution paid on 3/31/2014 was the distribution for the 2013 distribution calendar year. So, if the lump sum is $600,000 paid in May 2014, the RMD for the 2014 distribution calendar year is not eligible for rollover. Since the participant has elected a lump sum, the RMD for the 2014 distribution calendar year is calculated using the account balance method with the prior 12/31 account balance deemed to be the lump sum.

Just my opinion. The ERISA Outline has a very good explanation.