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