Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

and/or on the RBD or date of death. If the IRS tried to use this same approach for DB plans, then every DB plan participant who retired and started receiving a pension earlier than his RBD would have to calculate everything again when he reached age 70½, and annuities issued to participants younger than age 70½ would have to contain different death-benefit rules depending on whether the participant died before or after his RBD. The IRS did not so provide. If the ASD is prior to the RBD, the annuity contract can provide anything it wants to with respect to distributions prior to the first Distribution Year, but must provide for distributions that satisfy the RMD rules in the first Distribution Year and subsequent years. Reg. § 1.401(a)(9)-2 , A-4, last sentence. The ASD is treated as the RBD for certain purposes. Reg. § 1.401(a)(9)-6 , A- 10, first sentence. For example, if the participant dies after the ASD he is treated as dying after his RBD , even if his death occurred prior to April 1 of the year after the year in which he would have reached age 70½. Reg. § 1.401(a)(9)-6 , A-10(a), last two sentences. Treating the ASD as the RBD requires certain adjustments to the computations discussed at ¶ 10.2.04 (D). For example, we know that the General Maximum Period Certain is determined using the Uniform Lifetime Table (“ULT”; see ¶ 1.3.02 and Appendix A ), based on the employee’s age as of his birthday in the first Distribution Year, but the ULT does not have factors for ages below 70. Accordingly, the regulation provides that, for an annuity commencing prior to the year the participant reaches age 70, the maximum period certain is 27.4 (which is the ULT factor for age 70) plus the difference in years between 70 and the participant’s age as of his birthday in the year of the ASD. Curt Example: Curt retires from Acme in Year 1, taking his pension in the form of an annuity for a term certain, starting immediately. He will turn age 62 on his Year 1 birthday. The maximum term certain his annuity can last for is 35.4 years (27.4 + [70 − 62] = 35.4). Another adjustment required if the annuity starts before age 70 has to do with the maximum benefit payable to a nonspouse beneficiary under a joint and survivor annuity (see ¶ 10.2.04 (C)). Because the participant will be receiving the annuity payments for a longer time (because he is starting the annuity at a younger age), the participant will “automatically” be receiving a larger share of the joint and survivor life annuity, and the survivor’s share will “automatically” be less. Accordingly, the IRS allows the survivor benefit to be a larger percentage of the participant’s benefit. This is done by “adjusting” the age difference between the employee and the beneficiary for purposes of applying the table in Reg. § 1.401(a)(9)-6 , A-2(c)(2). First, determine the actual age difference between the participant and beneficiary. Then, reduce the age difference so determined by the number of years by which the participant is younger than age 70. For example, if the participant turns age 64 in the year of the ASD, and his nonspouse beneficiary is age 34 (30 years younger than the participant), the 30-year age difference is reduced by six (70 − 64), so the “adjusted age difference” is 24 (30 − 6), and the beneficiary’s maximum annuity is 67 percent of the participant’s annuity. Reg. § 1.401(a)(9)-6 , A-2(c)(1).

RMD rules for DB plan death benefits

The regulation provides different rules for death benefits depending on whether the participant died before or after his annuity starting date (ASD). Regarding whether any death benefits discussed here can be rolled over to another retirement plan or to an IRA by the beneficiary, see generally ¶ 3.2 regarding the ability of a surviving spouse to transfer or “roll over” inherited benefits to her own or an “inherited” retirement