RMD in DB plan

[cohendrake]

100% owner in a DB plan turns 70-1/2 in 2016.

Rather than beginning payments as of 4/1/17 of the accrued benefit has anyone had experience with the procedure for using the individual account method for the RMD instead? The Pension Analyst from October, 2011 seems to say you can:

"If a participant who has reached his RBD takes a single sum cash settlement of his benefits, the MRD portion of the payment (which cannot be rolled over to another qualified plan or Individual Retirement Account) is typically determined using the rules that apply to defined contribution plans. However, effective for plan years beginning in 2006, the final MRD rules for defined benefit plans allow plans to determine the MRD portion of a single sum cash settlement by using either the rules that apply to defined contribution plans or the rules that apply to annuities. Plan sponsors must incorporate in their plan document which rule they elected. The final MRD rules for defined benefit plans were discussed in greater detail in a November 2005 Pension Analyst."

Link: http://www.retire.prudential.com/media/managed/Defined_Benefit_Plans_10_11.pdf

If so,is it possible to use the PVAB as of 1/1/16 divided by 26.5 as the 2016 RMD? Then how would this get done? Can the PVAB stay in the DB Plan, possibly as a separate account? How would future benefit accruals handled?

Thanks in advance for any input.

[Lou S.]

The exception you are quoting is for a person electing a single sum distribution upon retiring or plan termination. You can not use it for an ongoing participant.

[chc93]

Yes... but for a single sum distribution of the entire PVAB if in-service distributions are allowed (cannot stay in the DB plan), I think the RMD can be calculated using the DC method. But have to check for 436 restrictioins, 110% funded, etc...

[Calavera]

Agree with chc93. In-service distribution should be allowed. Plan needs to be fully funded on a lump sum basis. Participant will take the in-service distribution as of 12/1/2016 of his full accrued benefit as a lump sum. The actual lump sum amount (not 1/1/16 PVAB) divided by the factor corresponding to his full age in 2016 (27.4 for age 70, or 26.5 for age 71) will give you the amount not eligible for a rollover due to RMD.

Alternatively you can wait until 4/1/2017. That will give you time to properly fund and amend the plan, if needed. Two amounts not eligible for a rollover due to RMD (one for 2016 and one for 2017) will need to be calculated at that time.

[GMK]

Thank you for getting your answer posted today, Manny (assuming you'll be busy at the travel agency tomorrow). IMHO, Grim Fandango is still the best.

[AndyH]

And my recollection (just check this) is that the entire distributable lump sum gets divided by the 26.5, not just the 1/1/2016 PVAB.

[Mike Preston]

Dancing angels here: the MDIB factor might be higher if spouse age differential greater than 10 years.

[thepensionmaven]

My client and his wife are 50/50 owners.

Wife active particpant needs to take RMD for 2016.

I have never the experience of having to calculate RMD for a DB.

She will not retire for some time.

My actuary mentioned taking the vested accrued x 12, but that seems too simplistic.

How is the RMD for DB calculated??

[david rigby]

My actuary mentioned taking the vested accrued x 12, but that seems too simplistic.

How is the RMD for DB calculated??

Should the actuary be doing this calculation?

[SoCalActuary]

to maven, the RMD rules for DB plans are relatively stable regulations, but widely misunderstood.

Unlike DC plans, the DB rules require 417 compliance, expressed as a default to the plan's J&S equivalent of the accrued benefit. If a plan offers a lump sum eligible for rollover, then there is an exception to make the rollover look like a DC plan.

But if the plan is not terminating, you should review the available elections in the plan for annuity benefits, present a relative value disclosure to the 5% owner, and follow their election.

Not quite as simple as the accrued benefit x 12, but similar in concept.

[dan.jock]

Similar question in reply to Calavera's reply...say a prior year employed this method. benefit was at comp limit and the plan stayed open. Participant's comp limit is now a little higher. Do we offset by an actuarially increased benefit of the prior distribution or not since we don't generally increase a comp limit? If we offset, I figure there would be no benefit accrual (it would probably be negative since the comp is growing at less than 5%)

[SoCalActuary]

to dan.jock: while your plan can provide an offset for prior distributions, and should do so for 415 purposes, it is optional, based on the plan provisions. The least you should do is continue to pay the prior elected benefit (J&S if none elected). If additional service and higher comp are involved, then compute the new benefit and follow the terms of the plan.

[dan.jock]

Thx. If the 415 limit goes up because of increased comp (or increased statutory comp limit), I don't think any offset to the 415 limit is necessary since the prior distribution was based on comp limit and comp limits are not actuarially adjusted.

[Calavera]

Mixing RMD, with 415, with multiple annuity starting dates (MASD) - it is so gray area. I am not an expert here. Need to follow plan document, 415 regs, MASD ideas, etc. I know there was a session on MASD at 2016 EA meeting. I am not aware of any clear guidance at this point.

[dan.jock]

With regard to the amount of RMD discussed above, the life annuity AB * 12 is the simplest compliant number. If we want to be more aggressive and use the life expectancy method, I don't think that we simply take the 417e LS and divide by 26.5 like an IRA. I think the participant needs to elect (and the plan needs to provide) for a term-certain annuity of 26.5 annual payments. This is compliant and should produce an RMD much less than the life annuity. I personally don't like this one because it makes future RMD's sufficiently confusing especially with additional accruals. Usually, the simpler answer is the better one.

I also believe that rolling over the 417e LS to an IRA before 12/31, taking the RMD off the IRA balance, and continuing to accrue in the open DB plan is a good option. Watch out for 436 restrictions and the 110% rule.