Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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(Payments can be set up so that they decrease after the ASD; in fact, in the case of death benefits paid to a nonspouse beneficiary, the MDIB rule may require that payments decrease after the participant’s death; see ¶ 10.2.04 (C).) The regulation permits several significant exceptions to the no-increases rule. The pension payable under a DB plan may provide for the following payment increases. All of these represent payout increases that are either built in to the annuity terms from the beginning (A–E), or added later as a result of a plan amendment (F) or the participant’s accrual of additional benefits under the plan (G). For other types of changes in the annuity payout after the ASD, see ¶ 10.2.06 . A. Cost of living adjustment (COLA). The payout may provide for an annual adjustment to reflect (or for periodic upward adjustments limited by) increases in certain IRS-approved cost-of-living indices. Reg. § 1.401(a)(9)-6 , A-14. B. Elimination of survivor benefit. If the employee’s benefit payments were in a reduced amount to reflect a survivor payment payable to his beneficiary, the contract can provide that the employee’s payments will be increased (eliminating the reduction prospectively) if the beneficiary either ceases to be the beneficiary “pursuant to a qualified domestic relations order” (QDRO) or dies. Reg. § 1.401(a)(9)-6 , A-14(a)(3). The IRS calls this a “pop up” of benefits. T.D. 9130, 2004-1 CB 1082, Preamble.

C. Lump sum conversion by beneficiary. A beneficiary may be allowed to convert his survivor annuity benefit into a lump sum. Reg. § 1.401(a)(9)-6 , A-14(a)(5).

D. Other permitted increases: contracts purchased from insurance company. If the benefit is funded with an annuity contract that the plan purchases from an insurance company, the contract can also provide for:

1. Annual percentage increases in the benefit that are not tied to a cost-of-living index;

2. A “final payment” at the employee’s death equal to the difference between the “total value being annuitized” and the payments made to the employee during his life;

3. Annual dividends or adjustments reflecting “actuarial gains” in the policy; this allows use of a variable annuity contract (see ¶ 10.1.03 ); and/or

4.

“Acceleration” of the annuity.

Generally, the total value of the future expected payments under the contract must be the same, regardless of which of these extras may be included. Reg. § 1.401(a)(9)-6 , A-14(c). However, the regulation is not overly strict on this point because essentially the IRS is relying on the insurance company that issues the annuity contract to “police” the values. Presumably a rational insurance company would not offer the annuitant a choice of packages that cost the same but have wildly differing values. If benefits are paid directly from the plan, on the other hand, options are more limited, presumably because the IRS does not trust private employer plans not to try to bend the rules for