Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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In order for the beneficiaries’ shares to be recognized as separate accounts, they must share pro rata in gains and losses after the participant’s death; see “D.” B. Separate accounts for ADP purposes. As explained at ¶ 1.7.05 , the ADP for benefits payable to multiple beneficiaries is generally determined based on the life expectancy of the oldest member of the group (or on the applicable “no-DB rule” if not all the beneficiaries are individuals). These rules can be avoided if separate accounts (see “A”) are established by the end of the year after the year of the participant’s death. The regulation provides that “However, the applicable distribution period for each such separate account is determined disregarding the other beneficiaries of the employee’s benefit only if the separate account is established on a date no later than the last day of the year following the calendar year of the employee’s death.” Reg. § 1.401(a)(9)-8 , A-2(a)(2). If separate accounts are established by that deadline, the beneficiary(ies) with respect to each such separate account will be considered the sole beneficiary(ies) of the account payable to such beneficiary(ies) for purposes of determining post-death RMDs; see the Road Map at ¶ 1.5.02 , Step 5. For example, if the surviving spouse is the sole beneficiary of a separate account payable to her, her account will be subject to the special minimum distribution rules applicable when the surviving spouse is sole beneficiary (see ¶ 1.6.03 – ¶ 1.6.05 ), even though the IRA was originally left to multiple beneficiaries. See § 1.401(a)(9)-8 , A-2(a)(2) (fourth sentence). The suspension of required minimum distributions for the year 2009 ( ¶ 1.1.04 ) did NOT extend this deadline. Thus, beneficiaries of decedents who died in 2008 had to have completed the establishment of separate accounts by December 31, 2009, in order to have such accounts recognized for purposes of establishing the ADP, even though they did not have to take any RMD in 2009. Notice 2009-82 , 2009-41 IRB 491, Part V, A-4. C. Separate accounts for all other RMD purposes. Multiple beneficiaries can establish separate accounts for their respective interests even after the deadline described at “B.” Reg. § 1.401(a)(9)-8 , A-2(a)(2). The advantage of establishing “late” separate accounts is that, even though the ADP will continue to be the same for all of the separate accounts, each beneficiary’s RMD will be determined solely based on his separate account balance for Distribution Years following the establishment of the separate accounts. Each beneficiary will be responsible only for taking the RMD from his respective account; there is no need to worry about a penalty because some other beneficiary fails to take his RMD (see ¶ 1.9.02 ). Separate accounts allow each beneficiary to choose his own investments. The ADP for all the late-established separate accounts will continue to be the ADP that applied to the combined accounts on the Beneficiary Finalization Date ( ¶ 1.8.03 ). See also ¶ 6.3.02 (B). D. Pro rata sharing in gains and losses. In order to establish separate accounts for any purpose, according to the regulations, the beneficiaries’ interests must share pro rata in post-death gains and losses occurring prior to the division. This requirement comes from the definition of separate accounts: “[S]eparate accounts in an employee’s account are separate portions of an employee’s benefit reflecting the separate interests of the employee’s beneficiaries under the plan as of the date of the employee’s death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures, for the period prior to the