IRS Issues Final Required Minimum Distribution (RMD) Regulations
After waiting about 18 years and living through two sets of proposed regulations, the IRS has at last issued final regulations that provide required minimum distribution rules for qualified plans under 401(a), IRAs, 403(b) and governmental 457 plans. The even better news is that the new final regulations simplify the required distribution process for participants, retirees and business owners over age 70½.
BENEFITS OF THE NEW FINAL RULES
Required distributions are much simpler to calculate and easier to explain. As a general rule, during the participant’s lifetime, we no longer need to consider who the beneficiary is and how old they are.
The amount of the distribution is determined by simply taking the December 31 prior year end account balance (without regard to amounts accrued but not yet paid in) and divide it by the number listed for the participant’s highest attained age from the new “Uniform Lifetime Table.” Each year thereafter the process is the same, i.e., take the prior year December 31account balance and divide it by the number listed for the participant’s newly attained age from the new “Uniform Lifetime Table.” Please note, however, that if the participant’s beneficiary is his or her spouse who is MORE than 10 years younger than the participant that the newly revised Joint and Survivor Annuity table reflecting the actual ages would be substituted for the Uniform Lifetime Table.
If the Participant takes only the minimum each year, the participant will never outlive his/her retirement funds.
The choice of beneficiary does not adversely affect the participant’s distributions.
The new rules use the “Uniform Lifetime Table” which is based only on the participant’s attained age. There is no longer a need to use the beneficiary’s age. The only exception is the spousal beneficiary situation referenced above.
The participant can freely change beneficiaries after age 70½.
The RMD calculation is no longer tied to the beneficiary of record on the April 1 after the year age 70½ was attained. Therefore, under the new rules, the participant can change beneficiaries at any time without it affecting the RMD calculation.
NEW LIFE EXPECTANCY TABLES
Effective in 2003, the new “Uniform Lifetime Table”, issued as part of the final regulations, will be used to determine the life expectancy when calculating RMDs. This table will be used to calculate the participant’s life expectancy unless he or she has a spouse who is more than 10 years younger. In such instances, the new joint life expectancy table is to be used. For example, under the new “Uniform Lifetime Table” an individual has a life expectancy of 27.4 years at age 70 instead of 26.3 years. The Joint and Single Life Tables have also been updated. To illustrate, the single life expectancy on the new table for an individual age 70 is 17 years instead of the old table’s 16 years.
REQUIRED DISTRIBUTION CALCULATION SIMPLIFICATIONS
Beginning in 2003, initial RMDs taken, after the close of the first distribution year but before the following April 1, will no longer have to be subtracted from the previous December 31 balance before calculating the second year’s distribution. Contributions made after January 1 for the prior year no longer have to be added back to the prior year December 31 balance except for rollovers which are not included in any December 31st account balance. Marital status changes are determined as of January 1 each year for calculation purposes. Thus, any change in marital status after January 1 will not be effective till next January 1 so that the payouts can be calculated as of a set time.
“DESIGNATED BENEFICIARY”
A “designated beneficiary” is an individual or a group of individuals who are formally named to inherit retirement benefits when the participant dies. Generally, under the new rules, the designated beneficiary(ies) will receive a payout starting by the end of the year following the year of death of the participant based on the beneficiary’s own single life expectancy drawn from the updated IRS Single Life Tables. In certain limited cases the calculation may be based on the life expectancy of the oldest beneficiary.
CLARIFYING DETERMINATION OF THE DESIGNATED BENEFICIARY RULES
The designated beneficiary will be any remaining beneficiary as of September 30th following the year of death. Thus, any beneficiary who took his or her interest after the participant’s death but before September 30th following the year of death and any beneficiary who disclaimed his or her right to be a beneficiary would be disregarded for purposes of determining the RMD for any remaining beneficiaries.
SEPARATE ACCOUNTS FOR MULTIPLE BENEFICIARIES
In the case of multiple beneficiaries, the funds should be divided into a separate account for each beneficiary by the September 30th following the year of death in order for each beneficiary to use his or her own life expectancy to calculate the RMD. If separate accounts are not established, the life expectancy of the beneficiary with the shortest life expectancy will be used to calculate the RMD amounts for all of the beneficiaries.
NAMING A BENEFICIARY WHO IS NOT A PERSON
Naming an institution, charity, or the individual’s estate as a beneficiary is, in the eyes of this regulation, the same as having “no beneficiary,” which means that the participant’s remaining assets must be distributed by the end of the calendar year containing the fifth anniversary of death. A “Trust” as beneficiary may allow for the individual trust beneficiaries to be treated as named beneficiaries if the appropriate rules were followed.
THERE WILL BE CHANGES NEEDED TO DOCUMENTS, CALCULATORS, COMPUTER PROGRAMS AND ESTATE PLANS
The Trustee/Custodian/Issuer will have to implement changes in all affected areas. Computer programs that calculate RMDs will need to be rewritten. Participants who are already receiving RMD’s will need to be notified of the changes. Plan documents will need amendments by the end of the 2003 year.
DISTRIBUTION Rules to Use for 2002 and after 2002
In 2002, the IRS has provided the option to select whether to use the 1987 proposed rules, the 2001 proposed rules or the new final rules. Please note that in order to use either the 2001 rules or the new final rules, the plan must be amended to incorporate these rules. Effective with the 2003 plan year, the Final Regulation rules must be used for all required minimum distributions. The IRS has just issued guidance and a sample amendment that must be incorporated into your retirement plan by the end of the 2003 plan year.
SPECIFIC RMD RULES THAT APPLY TO 403(b) PLANS
The RMD Rules that specifically apply to 403(b) Plans are found in IRS Regulation §1.403(b)-3.
Required Beginning Date (RBD) for all participants is the later of April 1 after year age 70 ½ is attained or after year in which employee retires. The 5% owner rule, which applies to qualified plans, does not apply to a 403(b) plan.
For purposes of applying the Minimum Distribution Rules 403(b)’s will be treated like Individual Retirement Annuities. Annuity payments from a 403(b) will satisfy §1.401(a)(9)-6T provided the relationship between the annuity payment and the retirement income accounts is not inconsistent with any required minimum distribution rules prescribed by the Commissioner of the IRS.
The surviving spouse of an employee is not permitted to treat a section 403(b) contract of which the spouse is the sole beneficiary as the spouse’s own section 403(b) contract.
Aggregation of RMD from more than one 403(b)
The RMD may be calculated for each 403(b) that the individual owns and then the aggregate of the entire 403(b) minimum required amounts for the year may be withdrawn from any one 403(b) (just like the IRA.) However, if the individual has a 403(b) of his/her own AND a 403(b) upon which he/she is a beneficiary, the individual’s 403(b) minimum may not be aggregated with the 403(b) minimum for which the individual is a beneficiary.
Pre-1987 403(b) Contribution Issues
The RMD rules apply to post 1986 contributions and earnings. The pre-1987 funds are not subject to the RMD rules provided records have been kept to distinguish the pre-1987 amounts. If the records can not distinguish the pre-1987 amount, then all the funds are subject to the RMD rules. The pre-1987 amount is not used in the calculation to determine the RMD. The pre-1987 amounts must satisfy the incidental benefit rules of 1.401-1(b)(1)(I) meaning that the plan must be for the primary purpose of providing retirement benefits for the participants. Pre-1987 amounts need not be distributed until the participant attains age 75.
Amounts distributed in excess of the RMD will be considered to be from the pre-1987 amount. If a pre-1987 amount is rolled over it is considered part of the post 1986 amount. If it is moved from one 403(b) plan to another, by a trustee-to-trustee transfer, the pre-1987 money retains the pre-1987 status provided the new trustee retains the separate recordkeeping of the pre-1987 amounts.
This article was excerpted from 403 Perspectives, McKay Hochman's exclusive newsletter for companies that administer tax-sheltered annuity plans. For more information, click here.