Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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The minimum distribution rules for DC plans require that, for each Distribution Year (see ¶ 10.2.08 ), the participant (or beneficiary) must withdraw an amount computed by dividing the prior year-end value of the account by a factor taken from the applicable IRS life expectancy table. The DC minimum distribution rules are explained in Chapter 1 .

10.2 RMDs for Defined Benefit Plans

Introduction to the DB/annuity RMD rules

The DC plan RMD rules are based on a simple system: Each year, the prior year-end account balance is divided by a factor obtained from an IRS table. The factors (divisors) are designed to liquidate the participant’s account through annual distributions over the joint life expectancy of the participant and a beneficiary. See Chapter 1 . Under a DB plan, in contrast, there is no account balance to be liquidated. Instead, there is simply a promise by the plan to pay a certain amount periodically (typically monthly) to the participant for his lifetime, with or without a further promise to continue the periodic payments to the participant’s beneficiary after the participant’s death. So the IRS had to come up with a different approach to insure that DB plans are not used to accumulate money in a retirement plan for too long a period. It accomplished this with Reg. § 1.401(a)(9)-6 , issued in 2004 (well after the final RMD regulations for DC plans, issued in 2002). Because the DB plan RMD rules also apply to IRAs and other DC plans that are “annuitized,” the advisor needs to understand these rules for the sake of any client who wishes to purchase an immediate annuity inside his or her IRA, 401(k), 403(b), or other DC plan account. This explanation of the DB RMD rules is for the guidance of professionals advising individual retirees and small business owners. Most of the work involving DB and annuity RMDs is done by actuaries, plan administrators, and insurance companies, working on behalf of the employer and plan. They should consult a source designed for their use such as The Pension Answer Book (see Bibliography ). The DB regulation defines basic terms and concepts, such as “annuity,” “payment interval,” and “annuity starting date” (ASD). See ¶ 10.2.03 . The regulation’s core provisions tell us when the distributions must begin (see ¶ 10.2.07 ), and how benefits must be paid. The plan can offer the employee a menu of life annuities, fixed- term payouts, and combinations thereof, within limits set by the regulation. See ¶ 10.2.04 . Generally, the annuity payments cannot increase once the annuity payout has started, but the regulation allows several generous exceptions to that rule; see ¶ 10.2.05 . Once the form of annuity has been selected and the annuity payout starts, it cannot be changed, except in certain circumstances permitted by the regulation. See ¶ 10.2.06 . The regulation also deals with special situations, such as what happens if the employee starts taking annuity payments prior to his RBD; see ¶ 10.2.09 . The most difficult “special situations” arise when the DC rules and the DB rules interact with each other, for example, when the employee converts his annuity benefit to a cash lump sum ( ¶ 10.2.08 ), or annuitizes benefits in a DC plan account ( ¶ 10.3.01 ). The regulation focuses primarily on the type of annuity an employee can elect at or before his RBD, but also provides rules for death benefits paid under a DB plan. See ¶ 10.2.10 .