Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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following year. Reg. § 1.401(a)(9)-5 , A-1(c). That final deadline for the first year’s RMD is call the Required Beginning Date or RBD . § 401(a)(9)(C) ; see ¶ 10.2.07 .

Reg. § 1.401(a)(9)-6 , A-1(d), provides two methods whereby a DB plan can compute the nonrollable RMD portion” of a lump sum distribution.

Method #1: Under Method #1, you compute the RMD portion using the DC plan RMD rules (see ¶ 10.1.05 ), “pretending” that the lump sum distribution the employee receives is the prior year-end balance. Method #2: Method #2 is more complicated. Essentially you treat one year’s worth of pension payments as the RMD for the first year. The regulation permits “expressing the employee’s benefit as an annuity that would satisfy” the RMD regulations (apparently any annuity that would satisfy the RMD regulations), beginning as of the first day of the Distribution Year for which the RMD is being determined. Reg. § 1.401(a)(9)-6 , A-1(d)(2). Which method is better? Method #1 is easier to calculate, and will always produce a smaller RMD. It seems strange to have a “required minimum” distribution that could be any one of several different possible amounts. Suppose the participant postpones taking her benefits until her Required Beginning Date (RBD), then receives a lump sum distribution on the RBD. How much of that distribution is treated as a nonrollable RMD? The regulation gives us the same two methods, but in this case we must compute two years’ worth of RMDs, since the year of the RBD is actually the second Distribution Year. Method #1: This is tricky! We must compute two years’ worth of RMDs, using the “pretend” DC plan method. That means there are two different divisors, one for the first Distribution Year (the year the participant reached age 70½) and one for the second year (the year he reached age 71½). But the pretend “prior year-end balance” we use for both these computations is the same, the amount of the lump sum distribution. Reg. § 1.401(a)(9)-6 , A-1(d)(1). Any distributions the participant had received in the first Distribution Year would reduce the amount of the RMD for the “first Distribution Year” portion of the second Distribution Year RMD. Method #2: If the plan uses this method it would treat two years’ worth of annuity payments as the RMD for the second Distribution Year. The “annuity payments” for this purpose would be based on an annuity that started on the first day of the first Distribution Year. If an employee retires before age 70½, at, say, age 65, and starts receiving his pension then, he and the annuity issuer are making their insurance bargain irrevocably at that time. This situation poses another contrast to the DC plan situation, and again required the IRS to come up with different rules for DB plans. Under a DC plan, any distributions the participant takes prior to his first Distribution Year are irrelevant to the RMD rules. The DC rules kick into action during the first Distribution Year If participant’s ASD is prior to the RBD