Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

the benefit of certain individuals; see “E.” For definitions of “total value being annuitized,” “actuarial gain,” “total future expected payments,” and “acceleration of payments,” see Reg. § 1.401(a)(9)-6 , A-14(e). E. Other permitted increases: benefits paid directly from the plan. If the benefits are paid directly from the plan, rather than being funded with an annuity contract purchased from an insurance company, acceleration of the annuity (D(4) above) is not permitted. The plan may provide for increases similar to those described at D(1)–(3) above, but subject to additional limitations (for example, an annual increase not tied to a cost-of-living index must be less than 5%). Reg. § 1.401(a)(9)-6 , A-14(d).

F. Plan amendment. Benefits may be increased to reflect a plan amendment. Reg. § 1.401(a)(9)-6 , A-14(a)(4).

G. Additional benefits accrued after ASD. If the employee accrues additional benefits after the ASD, and after his RBD, the distribution of the additional accrued benefit must begin with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. Reg. § 1.401(a)(9)-6 , A-5.

Other changes permitted after the ASD

The theory of an annuity is that, once the terms of the payout are set, they cannot be changed. That principle is fundamental to an insurance transaction in which one side is taking a risk regarding future events; if one party to the transaction can change his mind after the facts have become known, the system won’t work. Wanda Example: Wanda, age 70, believes she is in the best of health; coming from a long-lived family, she expects to live well beyond average life expectancy. She opts for a life annuity with no minimum guaranteed term, to get the largest possible monthly payments for herself. The insurance company that issues the annuity to Wanda is simultaneously issuing annuity contracts to thousands of other 70-year-olds who want to be protected against the risk of living too long. The insurance company knows some of them will live longer than average and some will die prematurely; the company will make a “profit” on those who die prematurely, enabling the company to stay in business and pay benefits to those who live “too long.” A year later, Wanda discovers she has a serious illness and is likely to die prematurely. She wants to change the type of contract she selected, to one that has a minimum guaranteed term. But if all the terminally ill people in the group are allowed to switch to a minimum guaranteed term, while the insurance company is still required to make payments for life to those who live extra long, the insurance company will go out of business. So the question of whether an annuity payout can be changed after the ASD is usually moot. The annuity issuer usually won’t allow such changes. However, in case a particular pension plan or insurance company does allow changes, the RMD rules also recognize the possibility of changes. For example, a payment can be modified in connection with plan termination or the employee’s retirement or marriage. For more on permitted post-ASD modifications, see Reg. § 1.401(a)(9)-6 , A-13.