• New Required Minimum Distribution Regulations
  • May 1, 2003 | Author: Robert F. Simon
  • Law Firm: Vedder, Price, Kaufman & Kammholz, P.C. - Chicago Office
  • On January 12, 2001, the Internal Revenue Service ("IRS") published proposed regulations significantly modifying the Internal Revenue Code's required minimum distribution rules for qualified retirement plans, including IRAs. Code § 401(a)(9) generally requires qualified plan participants to begin taking distributions at the later of age 70½ or termination of employment. The proposed regulations simplify and substantially liberalize the rules for calculating the amount of a participant's required annual distribution and for designating beneficiaries, and allow considerable flexibility in planning for minimum distributions after the participant's death.

    Plans that do not offer one or more distribution options permitting a benefit to be paid in installments over an extended period generally will not be affected by these new rules. However, sponsors of plans that do offer ex-tended distribution options (other than, or in addition to, annuities) should give serious consideration to amending their plans now to enable plan participants to take advantage of the flexibility offered by the new rules. IRA owners and IRA custodians also can apply the new rules immediately, even though the formal effective date is January 1, 2002.

    The principal changes relate to defined contribution plans, as does the discussion below. The rules governing annuity payments from defined benefit plans are largely unchanged.

    Uniform Lifetime Distribution Method

    In most cases, lifetime distributions to participants are governed by a single table of actuarial factors. These factors correspond to the former minimum distribution incidental benefit ("MDIB") table applicable under prior rules, and generally allow a greater income deferral than previously allowed. The MDIB factor is based on the joint life expectancy of the participant and an assumed beneficiary who is 10 years younger than the participant (determined under the tables published in Treasury Regulation § 1.72-9). Thus, a participant who designates his estate or an organization (e.g., a charity) as his or her beneficiary could still take lifetime minimum distributions based on a more favorable joint life MDIB factor. However, if the participant's designated beneficiary is his or her spouse, and that spouse is more than 10 years younger than the participant, the participant may apply an even more favorable joint life expectancy factor, as determined under Treasury Regulation § 1.72-9.

    Designated Beneficiary

    Generally, a participant can designate the beneficiary of his account at any time before death. In a departure from prior rules, the beneficiary determined at death, and possibly for a period after the participant's death, will govern the applicable minimum distribution factor thereafter. For example, for minimum distribution planning, a primary beneficiary could disclaim his or her interest in the plan at the participant's death in favor of a younger contingent beneficiary, allowing a longer income deferral and distribution period. Under the new rules, it no longer is necessary for the participant to fix his or her plan beneficiary, for this purpose, at age 70½ (as long as the plan does not require the lump sum distribution of benefits). Special rules apply to a surviving spouse, including a rollover of a participant's benefit to an IRA.

    Default Rule for Post-Death Distributions

    Under the new rules, the designated beneficiary may receive the remaining payments over the beneficiary's remaining life expectancy, unlike prior rules in which the participant's elections governed post-death distributions. The beneficiary's life expectancy is based on the beneficiary's age in the year following the participant's death and is reduced by a factor of 1 in each succeeding year. Moreover, if allowed under the employer's plan or IRA, a beneficiary now may designate his or her own beneficiary. If the initial beneficiary dies before the account is fully paid, the succeeding beneficiary could receive payments over the remaining life expectancy period of the initial beneficiary.

    If the participant does not have a designated beneficiary, a similar rule applies except by reference to the participant's actuarial life expectancy. In contrast, under the old rules, the account would be distributable by December 31 of the year after the participant's death if the participant had elected to recalculate his or her life expectancy for minimum distributions and died leaving no individual designated as beneficiary.

    Qualified Domestic Relations Orders

    The proposed regulations allow delays of required minimum distributions during the time the qualified status of a domestic relations order is being determined.

    Effective Date

    The proposed regulations are effective for distributions for calendar years beginning on or after January 1, 2002. However, until final regulations are issued, employers and IRA owners may rely on either the prior proposed regulations (issued in 1987) or amend their plans and rely on these new proposed regulations. Given this choice, the employer's circumstances and the plan's design, qualified plan sponsors should review their plans to consider whether to amend their plans and apply the new rules immediately, or to postpone action and rely on the prior regulations until the new regulations are finalized.