Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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The core provisions of the regulation tell us how long an annuity payout can last. Remember, the point of the RMD rules is to avoid unduly prolonged deferral of distribution of the plan benefits. Thus, the regulation could not allow a retiring employee to elect to have his benefits paid out over 1,000 years. A thousand-year payout would violate the fundamental concept of § 401(a)(9) , which is that retirement benefits must be completely distributed over the life or life expectancy of the participant and (within limits) of the participant’s beneficiary. Similarly, the rules could not allow a participant to choose a form of benefit that would defer all distributions until the participant’s death; such a payout form would violate the principle that death benefits must be “incidental” to the primary benefit, which is a retirement pension. Reg. § 1.401-1(b)(1)(i) . The regulation permits a variety of different possible durations for the annuity payments. The payments can last for the participant’s life, for a fixed term, or for life with a minimum guaranteed term. The amount of the employee’s monthly pension will vary depending on which form he elects; generally, the more survivor benefits and guarantees the employee opts for, the lower his own monthly pension will be. All forms of benefits are supposed to be of equivalent value (though often they’re not; see ¶ 10.4.03 ); those computations are a function of the plan’s benefit formula and actuarial calculations, not the RMD rules. Here are the forms of payout the IRS allows a DB plan to offer to a retiring employee who is commencing his annuity payout at approximately age 70. If the annuity starts at an earlier age, see ¶ 10.2.09 . Regarding the ability to delay “annuitization,” see ¶ 10.2.07 . A. An annuity for the life of the participant, with no minimum guaranteed term. Reg. § 1.401(a)(9)-6 , A-1(a), A-2(a). This would give the participant the largest annuity payments during his life, but would provide no benefits for his beneficiaries. B. An annuity for the joint lives of the participant and his spouse, terminating at the death of the surviving spouse, with no minimum guaranteed term. Reg. § 1.401(a)(9)- 6 , A-1(a), A-2(b). The monthly payments to the surviving spouse cannot be larger than the payments the participant receives, but can be the same amount or anything less. (The spouse’s consent would be required in order for her survivor payment to be less than 50 percent of the participant’s payment; see ¶ 3.4 regarding the spousal consent requirements.) This form of benefit would provide no benefits after the death of the surviving spouse. C. An annuity for the joint lives of the participant and his nonspouse beneficiary, terminating when both of them are deceased, with no minimum guaranteed term. Reg. § 1.401(a)(9)-6 , A-1(a), A-2(c). This option is the same as “B,” with one difference: If the nonspouse beneficiary is more than 10 years younger than the participant, the monthly payment to the beneficiary cannot exceed a certain percentage of what the participant was receiving. The percentage depends on the age difference between the participant and the beneficiary, using the Table in Reg. § 1.401(a)(9)-6 , A-2(c). (If the participant is married, his spouse’s consent is required for him to name a nonspouse beneficiary; see ¶ 3.4 regarding the spousal consent requirements.) This “minimum distribution incidental benefit” (MDIB) rule, by forcing most of the benefits out during the participant’s projected lifetime, assures that distribution of the benefits is not unduly prolonged. See “E” for how this rule interacts with a minimum guaranteed term.