2002 Technical Terms

©  George H. Coughlin II  2002  All Rights Reserved          Return to Home Page


While the final regulations issued by the Service in April of 2002 are a lot less complex than the original ones published in 1987, they do not fall under the heading “tax simplification”.  The 2002 Rules of the Road still require travelers to know the definition of a few important terms and have a working knowledge of several interdependent concepts before leaving home for a trip across town. 

A.                Required Beginning Date (RBD):  All IRA owners as well as participants in qualified plans that own more than five percent of the sponsoring employer must begin distributions no later than April 1 of the year following the year in which the participant attains age 70˝.  The RBD for all other employees and §403(b) plan participants is April 1 of the calendar year following the later of either:  (1) the calendar year in which the employee attains age 70˝, or (2) the calendar year in which the employee retires from employment with the employer maintaining the plan.  [§401(a)(9)(C)]   Note, however, that under §1.401(a)(9)-2, A-2(e) a plan may elect to use the RBD rules mandated for IRA’s for all employees, i.e., April 1 of the year following the year the employee attains age 70˝.  Therefore, it is necessary to determine if such an election has been made for the plan in question before it is possible to be certain about the Required Beginning Date for its participants.  It is also important to keep in mind that the special rule for extending the RBD only applies to qualified plans and §403(b) plans maintained by the participant’s current employer.   The RBD rules for all plans associated with a former employer are the same as for IRA’s.   

B.                 Distribution Calendar Year (DCY):  A calendar year for which a minimum distribution is required is a distribution calendar year.  For example, the calendar year in which an IRA owner attains age 70˝ is his or her first DCY, even though the actual withdrawal may take place during the first quarter of the following year.  The year containing his or her required beginning date is that person’s second distribution calendar year.  The first DCY for a beneficiary occurs in the calendar year during which he or she must take the first distribution from the inherited account.  [§1.401(a)(9)-5, A-1(b)]   

C.                 Account Balance:  The benefit used in determining the minimum required distribution for a distribution calendar year is the market value of the account as of the last valuation date in the calendar year immediately preceding that DCY.  Although the valuation date may vary from one qualified plan to another, the final regulations specify that it must fall on December 31 for IRA’s and §403(b) plans.  The account balance used to calculate MRD’s for the second DCY is not adjusted when a participant delays taking the minimum withdrawal for his or her first distribution calendar year until the first quarter of the following year.  This differs from the 1987 and 2001 proposed regulations which stipulate that the account balance used for computing the required distribution for the second DCY is the market value at the end of the preceding year less the minimum distribution that was delayed.  [§1.401(a)(9)-5, A-3 and §1.408-8, A-6]     

D.               Applicable Distribution Period (ADP):  This is the divisor in the mathematical equation used to compute the required distribution for a given distribution calendar year.  For distributions during a participant’s lifetime, including the year of his or her death, the ADP is obtained in the manner described in the section of the 2002 Rules of the Road entitled “What Is The Minimum Annual Distribution During Your Lifetime?” and illustrated on Table 21A for Final Regulations.  The ADP used for computing distributions following the year of a participant’s death is derived from the Single Life Table in §1.401(a)(9)-9, A-1.  Postmortem MRD’s are calculated in accordance with §401(a)(9)(B) of the Internal Revenue Code as well as §1.401(a)(9)-5, A-5(a) and (b) of the final regulations.  (See the flow charts on Tables 22, 25A and 25B for a detailed explanation of postmortem distributions.

E.                 Designated Beneficiary (DB):  A Designated Beneficiary is an individual who is entitled to receive a portion of the benefits of a qualified plan following the death of the participant or another specified event.  It is important to note that it is possible to name a beneficiary for a qualified plan but NOT have a “Designated Beneficiary”.  (See Item “J” below for examples.)  Please refer to Item “G” below for a discussion of how to identify a DB when a trust serves as beneficiary.  Readers should also become familiar with the comments in Item “L” below that deal with the necessity to redetermine the identify of an account’s DB’s if the participant died before 2003.   

1.                  The “designation” must be spelled out in the plan itself or with an affirmative election by the plan participant.  [§1.401(a)(9)-4, A-1 and A-2]  

a)                 It is not valid if merely stipulated under state law.  

b)                 It is not valid to simply use a joint and last survivor annuity settlement without also naming a beneficiary.   

2.                  The Internal Revenue Code only allows a Designated Beneficiary to be an individual or group of individuals.  However, see Item “G” below for circumstances in which DB status is achieved if a trust serves as beneficiary.  [§.401(a)(9)(E)]  

a)                 The individual must be identifiable under the plan as of the participant’s date of death and remain a beneficiary as of September 30 of the calendar year following the year of the participant’s death – the Designation Date.   (See Item “F” below.)  [§1.401(a)(9)-4, A-4(a)]   

b)                 Members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, as of the date the designated beneficiary is determined, to identify the class member with the shortest life expectancy.  [§1.401(a)(9)-4, A-1] 

c)                  An individual who is a beneficiary as of the date of the participant’s death and dies prior to September 30 of the year following the year of the participant’s death without disclaiming, continues to be treated as a beneficiary on the Designation Date for purposes of identifying the DB, regardless of the identity of the successor beneficiary who is entitled to distributions as the beneficiary of the deceased beneficiary.   

3.                  Under the final regulations, a Designated Beneficiary must be a beneficiary as of the participant’s date of death and remain a beneficiary on the Designation Date.  Consequently, any person who is a beneficiary as of the date of the participant’s death, but is not a beneficiary on September 30 of the following year, is ignored.  [§1.401(a)(9)-4, A-4(a)]  That same citation in the final regulations mentions two circumstances in which a beneficiary on the participant’s date of death would not be considered a beneficiary as of Designation Date.    

a)                  If a beneficiary executes a qualified disclaimer under I.R.C. §2518 by the Designation Date, that person will not be taken into account in determining the participant’s Designated Beneficiaries.  When reading this provision please remember that unless a participant actually died on December 31, the deadline for making a qualified disclaimer differs from the September 30 Designation Date.   

b)                 If a beneficiary receives the entire benefit to which he or she is entitled before September 30 of the year following the year in which the participant died, that person or entity will not be considered a beneficiary for designated beneficiary purposes.   

F.                 Designation Date:  The designation date is September 30 of the year immediately following the year of a participant’s death.  This is the date of record used when determining if an account has one or more Designated Beneficiaries.   See paragraph 3 in Item “E” above for more details.  Please note that this term is the author’s own creation.  It does not appear in the Code or Regulations. 

G.               Trust As Beneficiary:  Under certain circumstances specified in the final regulations, DB status can be achieved if a trust is named as beneficiary.  Please note that the trust itself is not the Designated Beneficiary since only an individual human being may be a DB.  However, the beneficiaries of the trust will qualify as DB’s if the trust meets certain requirements.  [§1.401(a)(9)-4, A-5(a)]  Table 23 lists a summary of those requirements that are spelled out in detail below.   

1.                 A Designated Beneficiary can exist when a trust is the qualified plan’s beneficiary provided four requisites are met.  [§1.401(a)(9)-4, A-5(b)]   

a)                The trust is valid under state law, or would be but for the fact that there is no corpus. 

b)                The trust is irrevocable or will, by its terms, become irrevocable upon the death of the participant. 

c)                  The trust’s own beneficiaries who will be receiving proceeds from the qualified plan are named individuals or identifiable from the trust instrument, e.g., a class of beneficiaries such as spouse, children, etc. is acceptable.   The members of a class of beneficiaries capable of expansion or contraction will be treated as identifiable if it is possible to identify the class member with the shortest life expectancy.   

d)                Certain documentation is provided to the plan administrator so that the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the participant’s benefit are identifiable to the plan administrator.  Please note that for purposes of all the documentation rules outlined herein, an IRA trustee, custodian or issuer is treated as the plan administrator.   [§1.408-8, A-1(b)]  The trustees, custodians and issuers of TSA contracts under §403(b) are also treated as the plan administrator.  [§1.403(b)-3, A-1(b)]     

2.                  For purposes of required distributions during the participant’s lifetime, it is only necessary to fulfill all four of the requisites if the sole designated beneficiary is the participant’s spouse and that DB was born more than ten calendar years after the year of the participant’s birth.  It should be noted that no deadline exists for satisfying those four conditions in order to qualify for the Younger Spouse Rule.  Until all four are met, however, the participant must use the less advantageous ADP’s from the Uniform Lifetime Table.  Therefore, it is prudent to fulfill the four requirements not later than the date on which the trust becomes a beneficiary of the qualified plan or the participant’s RBD – as well as during all subsequent periods in which the trust serves as a beneficiary.  [§1.401(a)(9)-4, A-6(a)]   

a)                 The participant provides a copy of the trust instrument to the plan administrator and agrees that if the trust instrument is amended at any time in the future, he/she will, within a reasonable time, provide to the plan administrator a copy of each such amendment.   

b)                 The participant provides the plan administrator with a list of all the beneficiaries of the trust (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement.  He or she must certify that, to the best of his/her knowledge, the list is correct and complete and that the requirements of 1 a), b), c) and d) above are satisfied.  In addition, the plan participant must agree to provide corrected certifications if an amendment changes any information previously certified.  Finally, the participant agrees to provide a copy of the trust instrument to the plan administrator upon demand. 

3.                  For purposes of required distributions following a participant’s death, items a) and b) in item 1 above must be satisfied as of the date of death.  Requirement c) must also be fulfilled on September 30 of the year following the year of the participant’s death.  Requisite d) in item 1 above must be completed by October 31 of the year immediately following the year the participant dies.  Taking either of the following steps can satisfy the postmortem documentation requirement.  [§1.401(a)(9)-4, A-6(b)]   

a)                 The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.   

b)                 The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of October 31 of the year following the year the participant died (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement.  The trustee must certify that, to the best of the trustee’s knowledge, the list is correct and complete and that the requirements of 1 a), b) and c) above are satisfied.  In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.    

4.                  Payments to a trust from a qualified plan after the participant’s death need not be distributed to the trust’s own beneficiaries.  That is to say, such payments may be retained inside the trust for distribution to its beneficiaries at anytime in the future.  [§1.401(a)(9)-8, A-11]  

H.               Calculation-DB:  If a group of individuals are DB’s, the person with the shortest life expectancy will be the Designated Beneficiary for purposes of selecting the life expectancy factor to use in MRD calculations.  [§1.401(a)(9)-5, A-7(a)(1)]  This person is sometimes referred to as the “calculation-DB” although that term does not appear in the Code or Regulations.  

1.                  In the event one or more of the beneficiaries of an account as of September 30 of the year following the year the participant dies does not qualify as a Designated Beneficiary, the participant will be treated as not having any DB’s.  This is true even if the other beneficiaries are individuals that fulfill the DB requirements.  NOTE:  This rule applies regardless of when death occurs.  [§1.401(a)(9)-4, A-3] 

2.                  The existence of a contingent beneficiary usually has no bearing on determining the individual DB with the shortest life expectancy or whether there is a beneficiary that does not qualify as a DB.  However, a contingent will be treated as a primary beneficiary for either purpose if that contingent beneficiary is entitled to receive a portion of the participant’s benefit beyond being a mere potential successor to the interest of one of the participant’s primary beneficiaries upon that beneficiary’s death.  Here is the example that illustrates this point in §1.401(a)(9)-5, A-7(c)(1).  “If the first beneficiary has a right to all income with respect to an employee’s individual account during that beneficiary’s life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary's death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.” 

I.                    Separate Accounts:   The separate account rule is so technical that it is necessary to begin a discussion of the subject by providing the following direct quote from §1.401(a)(9)-8, A-3(a) of the final regulations.  “For purposes of §401(a)(9), separate accounts in an employee’s account are separate portions of an employee’s benefit reflecting the separate interests of the employee’s beneficiaries under the plan as of the date of the employee’s death for which separate accounting is maintained.  The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures, for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the separate accounts.  However, once the separate accounts are actually established, the separate accounting can provide for separate investments for each separate account under which gains and losses from the investment of the account are only allocated to that account or investment gain or losses can continue to be allocated among the separate accounts on a pro rata basis.  A separate accounting must allocate any post-death distribution to the separate account of the beneficiary receiving that distribution.”   Separate accounts with different beneficiaries under the plan can be established at any time, either before or after the participant’s RBD.  However, separate accounts must be established before the September 30th Designation Date in order to isolate non-DB’s from individual beneficiaries, thus allowing the latter to enhance their stretch-out potential.  Provided all beneficiaries of a single account qualified as DB’s on the Designation Date, it is permissible to subdivide that account into separate shares (accounts) by the end of the year following the year of the employee’s death and use the life expectancy of the oldest beneficiary of each respective share when determining the distribution period for that separate account.  Therefore, a Designated Beneficiary (with a short life expectancy) on one separate account within a qualified plan can be ignored when determining the calculation-DB on another separate account.  (If you truly understand this entire paragraph, please submit your résumé to the IRS – they have just the job for you.)  

J.                    Non-DB Status:  Naming a charity, partnership, corporation or an estate as a partial or total beneficiary of a separate account within a qualified plan means that at least a portion of the assets will pass to a non-human entity.  If there are beneficiaries for an account other than human beings, the account will be treated as not having a designated beneficiary.  [§1.401(a)(9)-4, A-3] 

K.                Spousal Rollover IRA:  There are two methods by which a person that is a beneficiary of his or her deceased spouse’s qualified plan or IRA may reposition those assets into an                 individual retirement account and treat the new account as his or her own.  This is true regardless of when the participant dies.  Throughout this document, that new account is referred to as a “Spousal Rollover IRA” – regardless of the steps taken to create it.      

1.                  A surviving spouse beneficiary may create a spousal rollover IRA by simply assuming ownership of the deceased owner’s individual retirement account.  It is important to note that this method is only available with IRA’s, not other forms of qualified retirement plans.  Furthermore, the surviving spouse must be the sole Designated Beneficiary of the entire account or a separate share and have the unlimited right to withdraw amounts from the IRA.   

a)                 If the assumption of ownership occurs in the IRA owner’s year of death, the surviving spouse beneficiary may NOT assume ownership of the portion of the decedent’s account equal to the MRD for the current year that somehow failed to be distributed to the participant before death.  [§1.408-8, A-5(a)]  Instead, the spouse must withdraw the previously undistributed amount of the MRD and recognize its taxable portion on that year’s income tax return.     

b)                 In the event the assumption of ownership takes place in any year following the year of the IRA owner’s death, the surviving spouse beneficiary is allowed to retitle the entire account or separate share – including the MRD, if any, for the current year that would otherwise need to be taken as beneficiary.  No aspect of the ownership change constitutes a taxable event.   Please note, however, that under this scenario, the account is treated as belonging to the survivor as of December 31 of the preceding year.  Therefore, the lifetime required distribution rules apply for the year of the ownership change based on the attained age of the surviving spouse.  [§1.408-8, A-5(a)] 

2.                  A surviving spouse may also create a spousal rollover IRA by rolling over assets distributed to him or her from a qualified plan that is not an IRA, e.g., a pension, profit sharing, stock bonus or §403(b) plan.  If this occurs, the tax treatment is identical to the explanation found in the preceding three paragraphs.  That is to say, the rollover from the qualified retirement plan is treated as if the surviving spouse assumed ownership.  [§1.408-8, A-7] 

3.                  A spousal rollover IRA may also be created when a surviving spouse that is not the sole beneficiary of a deceased IRA owner’s account transfers a distribution to an IRA in the survivor’s own name.  If so, the applicable tax treatment differs slightly from the procedures discussed immediately above.  Regardless of the year of the rollover, the surviving spouse beneficiary must treat withdrawals from the decedent’s IRA as first fulfilling the current year’s required distribution.   That is to say, any portion of the year’s required distribution that has not yet been removed from the old account may NOT be rolled over into the spousal rollover IRA.  Therefore, a spouse must first remove sufficient funds to satisfy the MRD (and recognize that amount as taxable income) before rolling over the balance.  Naturally, the survivor is the owner of the new account and will be subject to the lifetime required distribution rules beginning in the year following the year of the rollover.  [§402(c)(9) and §1.408-8, A-7]      

L.                 Redesignation/Reconstruction Rule:  The final regulations state that required distributions apply to account balances and benefits held for beneficiaries for calendar years beginning on or after January 1, 2003.  This is true even if the participant died prior to the start of 2003.  Therefore, in every case of a participant that died before January 1, 2003, the DB must be redetermined in accordance with the provisions of the final regulations and the applicable distribution period must be reconstructed using those same regulations when it is time to compute MRD’s for distribution years 2003 and later.  Please note that this rule cannot alter the recipients of the benefits, but it may well change the level of those distributions because the calculation-DB under the final regulations could differ from the person whose life expectancy is used for calculation purposes under the 2001 or 1987 proposed regulations.  [§1.401(a)(9)-1, A-2(b)(1)]   

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