DB RMDs and Vesting

Say a 5% owner is well past 70.5 and starts a plan effective 1-1-19. Vesting is excluded prior to 1-1-19 and NRA is 65+5. 3-year cliff vesting is used, so the owner will first have vested benefits in 2021.

Is the initial RMD date 4-1-2022 or 12-31-2021?

There are several threads on this topic, but they give different answers, and some are more focused on the benefit amount instead of the starting date. One area of confusion appears to be that people get DC rules mixed up with DB rules. For example, in a DB plan, if an RMD starts at 4-1 with an annual payment, the second RMD is NOT due at 12-31 of that same year. The second RMD is payable at 4-1 each year. 

I think a second area of confusion is that I'm not sure the IRS gives a clear answer.

I can see an argument made for 4-1-22 or 12-31-21. How do others approach this? Thanks.

I've always approached as a 12-31 of year 3 issue. I believe he had previously reach an RBD and is due and RMD but the RMD is only paid to the extent vested which in this case is $0. So in the third year when he reached 3 years of vesting you have to pay the RMD to the extent vested which at some point in year 3 is going to be 100% vested.

I don't have a citation for this so if there is a citation that would allow the RMD to be deferred an additional year into year 4 by 4/1 then I'd be happy to shown that I'm wrong.

Thanks, Lou. Is there any particular reason why you do it that way? I'm just curious since I've had trouble finding a definitive reason why to do it one way or the other.

Also, what would you do about the fact that the 12-31 accrued benefit might not be known by the actuary until the following year (for example, say the formula is based on a percentage of Sch C or K-1 comp that is going to end up under the max comp limit, or even W-2 that's under the max comp limit but it's not reported until after 1-1)? Would it just be paid as soon as possible, but calculated as of 1-1 I guess?

Paraphrasing, 1.401(a)(9)-6 A-6 says that a benefit is treated as accruing at the time that it becomes vested.

Paraphrasing again, 1.401(a)(9)-6 A-5 says that distributions must commence for amounts that accrue after the RBD with the payment interval that ends in the calendar year following the year of accrual.

The participant becomes vested at some point during 2021. Therefore the benefit must commence with the payment interval ending in 2022. So in the case of an annual payment, by 12/31/2022, for a monthly payment, by 1/31/2022, and such.

With regard to your question about not knowing the actual benefit accrued as of the date payments begin, A-5(b) of the same reg also says (verbatim this time):

A plan will not fail to satisfy section 401(a)(9) merely because there is an administrative delay in the commencement of the distribution of the additional benefits accrued in a calendar year, provided that the actual payment of such amount commences as soon as practicable. However, payment must commence no later than the end of the first calendar year following the calendar year in which the additional benefit accrues, and the total amount paid during such first calendar year must be no less than the total amount that was required to be paid during that year under A-5(a) of this section.

C.B., A-5 only refers to benefits that accrue "after the employee's first distribution calendar year." In this case, 2021 is the first distribution calendar year. I don't believe A-5 is relevant here since we're not talking about distributions that accrue after 2021.

Otherwise, what would happen if the participant also turned 70.5 during 2021? You'd say that 12-31-22 would be the starting date and not 4-1-22? I don't think so - think it would have to be 4-1-22.

Even if you say that the first distribution calendar year was technically the year of 70.5 (even if no distribution was required because of no vested benefit), I think A-5 just says that the annual payment should commence at the same time each year. Which would be as of 4-1, right? Since that's the initial required starting date?

I think the first distribution calendar year would be the year they attain age 70.5 - since the definition does not make any reference to the amount of the accrued benefit or vesting.

I think you're probably right about using 4/1/2022, or really 3/31/2022; in effect you are saying that a distribution of $0 per annum commenced on the employee's RBD of 4/1/2020, and that it increases to the amount of the vested benefit during 2021, so the end of the payment interval in the next calendar year is 3/31/2022 and that is when the payment is due. I agree delaying it to 12/31/2022 seems like a stretch.

Just now, C. B. Zeller said:

I think the first distribution calendar year would be the year they attain age 70.5 - since the definition does not make any reference to the amount of the accrued benefit or vesting.

I think you're probably right about using 4/1/2022, or really 3/31/2022; in effect you are saying that a distribution of $0 per annum commenced on the employee's RBD of 4/1/2020, and that it increases to the amount of the vested benefit during 2021, so the end of the payment interval in the next calendar year is 3/31/2022 and that is when the payment is due. I agree delaying it to 12/31/2022 seems like a stretch.

Thanks, I think this seems like a good interpretation of the regs.

However, I'd still be curious if anyone stands by a 12-31-21 (or 1-1-22) starting date, and why. I've seen threads that end with that date being the answer. 4-1 seems to make more sense to me though.

Suppose a participant terminated employment prior to NRD, is now well over NRD at this time,and can not be found, client has attpted to locate.  Do he need to do a search each year?  How would the RMD  be paid? Beneficiaries have been attempted to be located to no avail. Participant shown on valuation as term vested.  

1 hour ago, thepensionmaven said:

Suppose a participant terminated employment prior to NRD, is now well over NRD at this time,and can not be found, client has attpted to locate.  Do he need to do a search each year?  How would the RMD  be paid? Beneficiaries have been attempted to be located to no avail. Participant shown on valuation as term vested.  

This article may be helpful:

http://www.penchecks.com/what-to-do-with-missing-participants-and-required-minimum-distributions/

I don't think there's a rule on how often you need to search. Once every year or two is probably not a bad idea though.