401(k) funds used to purchase lifetime annuity outside a 401(k) with payments used to satisfy owner's RMD - SECURE 2.0 Act

The owner (plan sponsor) of a 401(k) plan is retiring. The owner turns 73 this November (2024) and his first RMD has been calculated for this year at ~ $150,000. Three months ago, the owner spent $2,850,000 from his share of the 401(k) plan assets to purchase a lifetime income annuity for himself outside the 401(k) plan.

Does SECURE 2.0 Act allow the monthly payments from the lifetime income annuity that are paid to the owner during 2024 to count toward satisfying the owner's 2024 RMD from his 401(k) plan account?

The 2024 RMD is based on the individual's accrued 401(k) account balance on December 31, 2023. The funds used to purchase the annuity this year (in 2024) came from his account under the 401(k) plan. The annuity is not owned by the 401(k) plan. I do not know whether or not the annuity was purchased into an IRA, but I think not.

I believe the answer to the original question is yes, assuming that the annuity purchase was handled properly. See SECURE 2.0 sec. 204, section 1.401(a)(9)-5(a)(5)(iv) of the 2024 final regulation, and 1.401(a)(9)-5(a)(5)(v) of the 2024 proposed regulations.

C.B.  It sounds like a calculation still needs to be done, but you can use the annuity payments to offset your actual RMD amounts.  Am I reading that correctly? 

That's how I read it as well, although I have not actually had to do this yet.

I would be more interested to know whether or not, if the Participant and his spouse divorce after the purchase of the lifetime annuity, a court enters a QDRO awarding the Alternate Payee a lump sum transfer of $2.425 million, whether that required lump sum transfer would supersede the lifetime annuity that the Participant purchased.  Or can the QDRO provide the Alternate Payee be awarded an if, and and whey payout of the lifetime annuity received from time to time by the Participant?.  Or can the QDRO provide that the plan provide the Alternate Payee with the equivalent of a 50% QJSA? 

I have been raising these issues since Secure 1.0 and never received a response.

Thanks, 

David 

@fmsinc  That is a wild question.  Normally a QDRO can only specify payment options allowable under the plan, I would want to read the plan document... 

Seems like the first question is whether the $2.85MM was a distribution from the plan.  If so, it's taxable income.

I would expect that the owner rolled over the money into an IRA and purchased the annuity therein. Do not believe distributions from the IRA can be applied to satisfy the QP RMD or vis-versa. Have to be separately accounted for. Prospectively, if he rolls over the remaining QP money (after first taking his 2024 QP RMD) he can, courtesy of Secure Act 2.0, aggregate, i.e. count the annuity distributions against the RMD for the combined value of the two IRAs. Again, I am assuming that he purchased an IRA annuity. As an aside, rolling over the QP balance would moot the issue raised about how a QDRO would be constructed.

It could just be a post-tax annuity, too, which means the purchase of the annuity was used with more than enough plan funds to satisfy the plan RMD.

So, because the annuity payments began mid-year 2024 and will total $105,000 during the second half 2024, only $105,000 of the $150,000 RMD will be offset by the annuity payments during 2024.

I wonder... Is it possible that the annuity payments in 2025, up to the "required beginning date" of the RMD, could also be used to offset the 2024 RMD?