RMDs

[John Feldt ERPA CPC QPA]

A brand new DB plan is started 2-1-2018, plan year ends 1/31. It excludes years of service prior to 2-1-2018 for vesting purposes. Vesting is a 3-year elapsed-time cliff. One participant is also a 20% owner and they are 71 years old now.

The owner becomes fully vested on 1/31/2021.

The first RMD is the accrual on 12/31/2018, but it is not vested, so it gets added to the next year's RMD. The second RMD is the accrual on 12/31/2019 plus the prior unpaid (nonvested) RMD, but it is still not vested, so it gets added to the next years' RMD. The third RMD is the accrual on 12/31/2020 plus the prior amounts, but it is still not vested, so it gets added to the next year's RMD.

By 12/31/2021, the participant must take the distribution of their RMDs. They terminate in 2021 and elect a lump sum payment. The RMD for a full lump payment can be calculated using the "Account Balance" method (like a DC plan).

Can all of these RMD's be determined using the account balance method, or must the 3 prior year's RMDs be based on the DB annuity calculation method?

[Calavera]

When did the owner turned 70 1/2?

[John Feldt ERPA CPC QPA]

In 2016, 2 years before the plan was adopted.

[Manatee]

I don't think you have to accumulate non-vested benefits for RMDs in that way.  They are deemed to accrue when they become vested, so I believe there is simply a single year of RMD due once the three years have elapsed.  Tom Poje referenced 1.401(a)(9)-6 Q-6 in this thread:

https://benefitslink.com/boards/index.php?/topic/50458-required-minimum-distribution-0-vested/

 

[Calavera]

If this a new business that started in 2017 or 2018, he will not be considered a 5% owner. If business started before 2017, he will be considered a 5% owner. Either way, when he terminate his plan in 2021 and take full lump sum of his benefits in 2021, he will need only 1 year of RMD for 2021. Under the account method you will divide his full lump sum by the appropriate distribution period from 1.401(a)(9)-9.

[John Feldt ERPA CPC QPA]

Okay, I see in A-6, it states: "In the case of annuity distributions from a defined benefit plan, if any portion of the employee's benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that distribution calendar year. When an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual."

Thank you!