I've been retired for more than a decade, so my legal and technical skills are pretty rusty.  But suddenly, it seems, I have the need (opportunity?) to put them to use once again.

My spouse just retired after working beyond age 70 1/2 and has not been subject to RMDs until now.  The plan is to take a lump sum of $105,358 from employer's defined benefit plan.  The payment election form states that the RMD is $7,599, which is not eligible for rollover.  This represents the correct amount under under Section 1.401(a)(9)-6(d)(2) (the annuity method).  Using the 6(d)(1) (individual account method) the RMD would be $4,115.

The plan document does not state which method the plan will use (although there may be some ancillary document I have not seen).  If memory serves me right, the annuity method (which is almost always far less favorable for the participant) is very uncommon.  I am trying to determine if the plan sponsor has formally adopted this less favorable annuity method.  From a plan perspective, I can think of no reason why a plan sponsor would knowingly disadvantage a participant.  In the meantime, I have two questions.

1.  Section 1.401(a)(9)-6(d) is written in a way that suggests the individual account method may be the default if no method has been formally adopted.  I say this because subsection 1 says the RMD "is determined by treating the single sum distribution as a distribution from an individual account plan."  Subsection 2, on the other hand says the RMD "is permitted to be determined by expressing the employee's benefit as an annuity."  If no method has been formally elected by the plan sponsor, does the individual account method automatically apply?

2.  The responsibility for determining the RMD ultimately belongs to the payee, not the plan sponsor or the administrator.  So, if the administrator distributes the larger amount to the participant, could the participant rollover the excess of the annuity method over the individual account method as a 60 day rollover.  In other words, does the choice of methods ultimately belong to the participant who is the one responsible for satisfying 401(a)(9) in the end?

Thanks for sharing your thoughts!

I won't be responding to your Question 1 (I'll leave that for others who might be able to answer off the top of their head), but I wonder where you get your understanding provided in Question 2 that it is the participant who determines how much the RMD is?

I have never heard that argument before and, while I have not researched it, I know our plan documents (and all plan documents that I ever remember seeing) have all the requirements for calculating RMDs in the plan language and that language determines the amount of the RMD.  And on top of that, the 1099R produced by the plan indicates that the distribution amount is a fully taxable distribution (so it can't be rolled over).  The determination of the 1099R reporting is made by the plan, not the participant.

FWIW.

Larry,

Thanks for your post.

With regard to Question 2, my understanding comes from IRS Required Minimum Distributions FAQs.  See Question 2 here:  https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions.

With regard to the 1099R produced by the plan, it is true that a 1099R is used to report taxable distributions.  However, that does not preclude a person from rolling the funds during the 60 day rollover period.  A direct rollover or trustee to trustee transfer is never required.  When filing the tax return, a taxpayer rolling part or all of a eligible rollover distribution would report the total amount of the distribution on line 16a of the 1040 (the 1099R amount), then indicate the net taxable amount on line 16b.

An eligible rollover distribution does not include any amount that represent a required minimum distribution, which gets us back to the question as hand.  Does 1.401(a)(9)- 6(d)(1) apply in the case of the recipient, or would a plan decision not to recognize 6(d)(1) mean it is no longer available to the employee?  (To me, this sounds like, "Yes, the IRC says this is an acceptable way to compute the RMD amount, but only if your employer says it's okay with them.")

It's actually Q 6; here it is for anyone who is interested; my emphasis:

Quote

Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.

 

I'm not sure what to do with that info though; it surprises me.  But I've seen IRS websites give bad info plenty of times - not saying that's the case here but it is possible.

And you're right, nothing on the 1099-R would indicate that it is ineligible to be rolled over, just that it was a taxable distribution as processed.

Thanks for posting the correct question number.

Actually, I'm not surprised by the IRS answer to the question.  Since the taxpayer is liable for the 50% penalty for failing to take the RMD,  the IRS would understandably hold the taxpayer liable for a failure to take at least the minimum.  I can't image the IRS sending a notice to the custodian or administrator looking for the unpaid taxes.

The taxpayer, on the other hand, could conceivably go after the custodian or administrator if he/she reasonably relied on that person's calculation.  Also, this would be a textbook example of a case which qualifies for a waiver of the penalty.  It may not the kind of experience one would enjoy, but the taxpayer should emerge relatively unscathed (financially, that is, not emotionally).

9 minutes ago, JMT44 said:

the IRS would understandably hold the taxpayer liable for a failure to take at least the minimum.  I can't image the IRS sending a notice to the custodian or administrator looking for the unpaid taxes.

True, but failure to make the correct RMD is a plan qualification issue, and the DOL is currently taking a hard look at RMDs as well.  So failure to distribute at least the minimum is more than a taxpayer problem.

1. You can try requesting plan sponsor to recalculate RMD amount based on the account method.
2. I do not think either method is considered to be a default method.
3. A lot of TPAs are using annuity method because they think it is easier, which is not true.
4. It appears your $4,115 not eligible for rollover out of $105,358 corresponds to the following:

• spouse terminated employment during 2018
• spouse will commence his/her benefits in 2018
• spouse is 72 years old as of 12/31/2018

if any of the above bullet points are not correct, the $4,115 needs to be recalculated

4 hours ago, Bird said:

It's actually Q 6; here it is for anyone who is interested; my emphasis:

I'm not sure what to do with that info though; it surprises me.  But I've seen IRS websites give bad info plenty of times - not saying that's the case here but it is possible.

And you're right, nothing on the 1099-R would indicate that it is ineligible to be rolled over, just that it was a taxable distribution as processed.

Thanks; I was going to quote that answer.

• Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.

And now.... who is the retirement plan ACCOUNT OWNER?  Not the participant, I assure you.  It is the trustee that actuallys OWNS all the accounts (yes, on BEHALF of the participants, but the trustees are the OWNERS).

So, the plan (trustees, if you wish) calculate the RMD not the participant.  

IRAs are different because the IRA account owner IS the participant; a custodian is NOT the owner.

I fully acknowledge that it is the participant who is hit with the 50% failure tax, but that is even though he has no control over it. It's unfair (stupid, even) but there it is....

FWIW.

Larry.

Calavera, thank you for your post.

You are correct (and so are your assumptions).  The $4115 (plus 56 cents) is the RMD amount using the individual account method.  I'm trying to make contact with the actuaries in hopes of getting their support, but so far I'm being told that they don't deal with the public.  (Time for an actuary joke.  How can you tell if an actuary is an extrovert?  The actuary looks at your shoes when talking to you!)

Sorry about that.  I've been retired from the pension field for well over a decade, but apparently that's  not long enough to be immune to flashbacks.

While the documentation already received clearly states that the RMD is $7,599, I'm hoping to convince the actuaries to use the lesser amount as the 2018 distribution as you suggest.  I don't know how this will turn out, but I might have better luck if I quit with the actuary jokes!

1 hour ago, Larry Starr said:

So, the plan (trustees, if you wish) calculate the RMD not the participant.

This is definitely one possibility for sure.  However, let me play devil's advocate for a moment.

Instead of withdrawing the RMD amount, let's say a participant takes a total distribution.  If the participant decides within the 60 day window to roll those some of all the distribution to an IRA (making up any shortfall due to income tax withholding out-of-pocket), would he/she turn to the plan trustees to determine the amount not eligible for rollover?  Or, would he/she be the one responsible for the RMD calculation?  Once the funds are no longer plan assets, would he/she not be the one to choose the calculation method (annuity or individual account)?

I'm not sure that there are definitive answers to these questions.  I don't know if these specific questions have ever been addressed.  The 401(a)(9) regulations were finalized after I retired, so if there are definitive answers, I would have no way of knowing.  However, based on years of experience, I understand that these kinfd of questions that can linger for years with no firm guidance.

7 minutes ago, JMT44 said:

Instead of withdrawing the RMD amount, let's say a participant takes a total distribution.  If the participant decides within the 60 day window to roll those some of all the distribution to an IRA (making up any shortfall due to income tax withholding out-of-pocket), would he/she turn to the plan trustees to determine the amount not eligible for rollover?  Or, would he/she be the one responsible for the RMD calculation?  

If it was one of my plans, we would have given the participant the RMD information even if they wanted to do a total lumpsum distribution.  We would also do the calculation for them if they asked down the road.  We have the data, the knowledge, and the software to do it.  It would just be bad customer service to tell a former participant that they are on their own simply because they decided on a 100% distribution a few months ago. 

13 minutes ago, JMT44 said:

Once the funds are no longer plan assets, would he/she not be the one to choose the calculation method (annuity or individual account)?

I don't see a reason why the participant couldn't choose at that point.  It is no longer a plan issue, it is a taxpayer and possibly IRA issue if RMD assets are improperly rolled into the IRA...

22 hours ago, JMT44 said:

I'm trying to make contact with the actuaries in hopes of getting their support, but so far I'm being told that they don't deal with the public.

Generally actuaries will not deal directly with participants (unless it is a one person business). I suggest to contact the company sponsoring the plan (HR, benefit administrator, etc.). Then company will request a recalculation from their actuary.

20 hours ago, RatherBeGolfing said:

If it was one of my plans, we would have given the participant the RMD information even if they wanted to do a total lumpsum distribution.  We would also do the calculation for them if they asked down the road.  We have the data, the knowledge, and the software to do it.  It would just be bad customer service to tell a former participant that they are on their own simply because they decided on a 100% distribution a few months ago.

If someone is taking a full distribution, I give them the RMD information because that amount is NOT subject to mandatory 20% withholding.  We give them the number as ask how much tax they want taken from the RMD (0, 10, 20%) and do the withholding on an aggregate basis (given a pooled account).  So, like RBG, the participant gets the RMD number before any 60-day window begins.

On 5/15/2018 at 2:15 PM, Larry Starr said:

And now.... who is the retirement plan ACCOUNT OWNER?  Not the participant, I assure you. 

The next three FAQs after the one cited above seem to suggest that for this purpose, the IRS is treating the participant as the "account owner:"

Can an account owner withdraw more than the RMD?

Yes.

What happens if a person does not take a RMD by the required deadline?

If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation. See the instructions to Form 5329.

The FAQs are not regulations or law and are not crafted with precision.  The use of account owner there is a generality.  In fact, if you look at the instructions for form 5329 for paying the excise tax for failure to take the minimum RMD, here is the instruction (note the last sentence):

"Qualified retirement plans (other than IRAs) and eligible section 457 deferred compensation plans. In general, you must begin receiving distributions from your plan no later than April 1 following the later of (a) the year in which you reach age 701 2 or (b) the year in which you retire. Exception. If you owned more than 5% of the employer maintaining the plan, you must begin receiving distributions no later than April 1 of the year following the year in which you reach age 701 2, regardless of when you retire. Your plan administrator should figure the amount that must be distributed each year."

That makes it clear that the plan is calculating the amounts.

Clearly, the rules are problematic because if the plan screw up the PARTICIPANT is subject to the 50% excise tax.  Not a well crafted regulatory scheme, and just one more reason why (I believe) we will eventually see even waiver of RMDs for 5% owners who are still working. Maybe not in our lifetimes..... FWIW.

18 hours ago, Larry Starr said:

Your plan administrator should figure the amount that must be distributed each year.

Perhaps the key word here is should.

As you suggest, if the plan screws up and understates the RMD, the penalty is payable by the participant.  That's because the true RMD is not whatever the plan happens to calculate, but the amount that meets the requirements of the law.  Similarly, if the plan calculates an RMD that greatly exceeds what the law requires, the true RMD is still that which satisfies the law.

The amount that must be distributed (in my opinion) is equal to the lesser of the individual account and the annuity calculation.  As long as the distribution is at least equal to the lesser amount, it satisfies the law.  That is why I have an issue with the RMD amount being used by the actuaries servicing the plan.  It is not the true RMD, but an amount that exceeds the true RMD by 85%.  But unless participants (or participants' spouses) have significant pension technical skills, they will (not surprisingly) rely on the reported figure.  Those who would like to minimize their distributions will end up with more withholding and higher taxes.  That may be better than a 50% excise tax, but it's still a disservice to the participant.

So, I made the case to the actuaries (communicating through the employer) that the RMD should be calculated using the individual account method.  My reasoning relied on the plan document.  The section dealing with RMDs was a copy and paste of the LRM language.  That language spelled out the calculation for every conceivable scenario except for a post-70.5 retirement lump sum from a DB plan other than an individual account (414(k)) plan.  If neither the individual account nor the annuity method was specified in the plan document, then either could be used.  In such a case, the method chosen should be the one most favorable for the participant.

This was rejected by the actuaries.  Their position was that 1.401(a)(9)-6(d), "does not require a choice to be made and memorialized in the plan document, but rather presents the Plan two options to be used when calculating this amount. Further, please see Section 6.10(a)(iii) of the plan document where the regulations, including these two methods, are incorporated by reference.  The Pension Plan’s process around RMD calculations is to use the annuity basis and it does so on a consistent basis when advising employees of this issue."

I responded with two requests.  First, I pointed out that policies could be revised for good and valid reasons, and a change to a method that better served participants was clearly a good and valid reason.  I requested that change.  Second, I stated my belief that the election to use the annuity method, even if not in the plan document, would nevertheless have been formally adopted and documented in some manner by the plan.  Such a document would have to be available for examination, so I requested a copy or the chance to examine the document at the office of the employer.

The employer's response was that the request for a change in policy would be forwarded to the appropriate parties, but that I should not expect a reply for at least several weeks.  One day later, the employer responded that the actuaries were recalculating the RMD using the individual account method!  No explanation was given!!

I can only guess at the reason for this abrupt change.  Perhaps someone immediately recognized that such a policy change should be implemented, and decided that it was not necessary to make us wait until the Administrative Committee was able to meet and formally approve the change.  Perhaps, since no mention was made of the request to examine documentation regarding this policy, the policy had never been formally adopted and documented.  Or maybe it was clear that the participant's spouse had decades of pension legal and technical experience, actually knew a thing or two, and (as a retiree) had lots of time and would keep the employer and the actuaries occupied with this issue for the foreseeable future.  If that was the case, maybe recalculating was considered the best way to make the problem go away.

The bottom line ... I don't know why the change was made, but I'm pleased with the outcome.

LOL.  Good job by you; thanks for sharing this.

Very nice. Glad you got the result you wanted. I remember some cigarette add when I was a kid - can't remember the name, but the motto was, "We'd rather fight than switch." Looks like the actuaries decided they'd rather switch than fight!

6 hours ago, JMT44 said:

Or maybe it was clear that the participant's spouse had decades of pension legal and technical experience, actually knew a thing or two, and (as a retiree) had lots of time and would keep the employer and the actuaries occupied with this issue for the foreseeable future.  If that was the case, maybe recalculating was considered the best way to make the problem go away.

Bravo!

6 hours ago, Belgarath said:

Very nice. Glad you got the result you wanted. I remember some cigarette add when I was a kid - can't remember the name, but the motto was, "We'd rather fight than switch." Looks like the actuaries decided they'd rather switch than fight!

Us Tareyton smokers would rather fight than switch!