Death benefit if death AFTER RMD's have begun

[Belgarath]

I should know this, but DB plans are strange. Suppose someone is still working (100% owner) and becomes vested AFTER attaining age 70-1/2. Now must start taking RMD's.

Question is: if the RMD method selected is 100% J&S with his spouse as beneficiary, and he dies, since this is an RMD, the spouse should be able to elect a lump sum payment of the death benefit (assuming proper waiver had previously been executed, and plan allows a lump sum), correct? In other words, an RMD method election doesn't lock in that method as a post death payment method for the beneficiary, does it?

DC RMD's are so much simpler...

P.S. - it seems like 1.401(a)(9)-6, Q&A-14(a)(5) covers this? Or am I all wet? Thoughts on this situation - evidently participant is concerned that if both he and spouse die together while taking the RMD's that nothing further would be paid out to contingent beneficiaries.

[Effen]

favorite answer...what does the plan say?

If he truly elected a J&100, then the spouse gets the life annuity for her lifetime.  Can she convert that to a lump sum?  Does the plan give her this option?  Most plans don't, but some do.  You could also amend it to provide the option, if so desired.

However, did he really make an election at RMD, or did the plan pay him a J&100 by default?  If it was a default election, does the plan allow him, or his beneficiary, to make an actual election upon actual retirement or death?

You are mixing a lot of concepts in your statements in the 2nd paragraph.  What "waiver had previously been executed" that would impact her ability to get a lump sum?  Also, I don't think the spouses option has anything do with it being an RMD or not (unless you are arguing it was a default option).  If he actually elected a J&100, I would say she just continues to receive the annuity, unless the plan specifically allows for a beneficiary to elect a lump sum, which in my experience is a rare provision - but it could be added.

So, like many proper answers...what does the plan say?

[Belgarath]

Thank you!

P.S. - so I think I was simply asking the wrong question. The real question becomes, (assuming the RMD was NOT being paid from an annuity contract purchased from an insurance company) what happens to the remaining plan assets if both husband and wife die in a car crash after RMD's commence? Seems like there is no further plan retirement benefit to be paid, so funds will revert to employer? (Employer is sole prop, so I guess this ultimately means it reverts to estate?)

[Effen]

Sounds like a plan.  Not a very good plan, but a plan.

Again, RMD is not relevant.  Even the RMD wasn't being paid, and the sole participant died, the plan's death benefit would be paid.  If that didn't absorb all of the assets, they would revert to the sponsor - with a healthy excise tax.  They may then flow back to the estate.

In your questions, if the participant elected a J&100 and both were killed at same time, there would likely be a large reversion and large excise tax.  

Why not allow the primary to take a lump sum, then he could roll that to an IRA and let the IRA handle the MRDs?  He might be stuck if you already started the J&100, but he could change his election when the plan is terminated - assuming the plan document allowed for the change.

If you are trying to preserve the benefit for the next generation, electing a J&100 doesn't make much sense.

[Effen]

If you have access to the ACOPA board, there is a current thread discussing this exact topic, that you might also find very helpful.  It is titled "412(d)(2) Amendment?"

[Belgarath]

1 hour ago, Effen said:

Why not allow the primary to take a lump sum, then he could roll that to an IRA and let the IRA handle the MRDs?  He might be stuck if you already started the J&100, but he could change his election when the plan is terminated - assuming the plan document allowed for the change.

Thanks Effen. Let's see...I think he's looking at the Jt & 100 to receive the smallest possible RMD, as he's still working. He can't (I don't think) take a lump sum, since he hasn't reached Normal Retirement Age yet. I doubt his current accrued benefit is even fully funded on a lump sum basis, as the plan was started only 3 years ago. (I'm probably using the wrong terminology on that...) He could change the election when he retires (basically accelerate the payment, within the allowable 415 limits) but the question here wasn't involving a later RETIREMENT election, but a death benefit question if both he and his spouse die prior to his retirement.

I don't have access to the ACOPA board - as you can doubtless tell I'm not a "DB person" but I thank you for the suggestion and your information.

[Belgarath]

 

Question - do you think IRS Notice 2015-49 precludes an acceleration that was otherwise allowed in the regulations? It appears that an "acceleration" or lump sum option at RETIREMENT, even if otherwise allowed by the plan terms (such plan being drafted before this Notice) isn't allowed if already receiving an RMD? This Notice appears to have been intended to prevent large scale "risk transferring" programs, but also appears to paint with a very broad brush. I don't see a lot of wiggle room in the Notice. (A person much more knowledgeable in this arena brought this up - I had forgotten all about this...)

So in the case at hand, assuming no death, if the participant who is receiving the RMD just retires at a later date, he's stuck with the annuity payment - can't change to lump sum?

Yuk.

[Mike Preston]

If one is concerned about an actuarial gain on simultaneous death the plan should allow distribution in the form of installments increasing at 4.99% per year.  Anything else involves potential exposure to a malpractice claim.