Required Minimum Distributions
Rev. 12/16/04, E-mail Alert 2004-25 Updated 11/14/08

How do you calculate a required minimum distribution (RMD) for an off-calendar year plan?

RMD calculations use the value of a participant’s plan assets as of December 31 of the year immediately prior to the year for which the minimum distribution is being calculated. For a calendar year plan, the value of the participant’s assets is determined as part of the annual statement preparation. Off-calendar-year plans are valued on a daily basis, including December 31, so the information for RMD calculations is readily available. However, calculating RMDs for a balance-forward, off-calendar year plan can be a bit trickier.

The defined contribution plan required minimum distribution (RMD) is calculated each year by dividing the prior year’s December 31 st account value by the life expectancy factor obtained from the appropriate life expectancy table; typically the Uniform Lifetime Table. The distribution year is each calendar year in which an RMD must be made. However, the first distribution calendar year is the anomaly. This is because while retirees are required to take a distribution for the year in which they attain age 70½ (or possibly later, if it is a qualified plan and the participant is not a 5% owner and is still employed), the first distribution may be delayed until the April 1 st of the following year. Thus, the second distribution calendar year may contain two distributions, because both the grace period distribution for the first distribution calendar year as well as the second distribution calendar year’s distribution must occur. (Note: if paying from annuity contracts, the grace period may be carried forward, so there is only one required distribution in any year.)

Example: If a retired participant in a calendar year 401(k) plan attains both age 70 and 70½ in 2009, the minimum required distribution for 2009 is calculated by dividing the participant’s December 31, 2008 account value by the factor for age 70 obtained from the Uniform Lifetime Table. Assuming the account value was $27,400.00 on December 31, 2008, that amount would be divided by the factor of 27.4 to arrive at a minimum distribution of $1,000 for 2009. This initial RMD amount may be distributed by December 31, 2009 or distribution may be delayed to April 1, 2010, the required beginning date (RBD). If the participant waits until the RBD to take the first minimum distribution, the second minimum distribution must be taken by December 31, 2010. The minimum for 2010 is calculated by dividing the December 31, 2009, account balance by the factor for age 71. Unlike under prior regulations, no adjustment is needed to the December 31, 2009 account value for the amount withdrawn on April 1, 2010, based on the new final RMD regulations, which are effective for years after 2002. (The earlier regulations would have required the April 1 distribution amount to be subtracted from the previous December 31 balance before calculating the second distribution calendar year’s amount, but this was not incorporated into the final regulations. This change was made to simplify the calculation.

Retirement plans with off-calendar years present unique issues for calculating the RMD. Such plans are required to determine the previous year’s December 31 account values. This is readily determinable in a daily valuation plan. However, according to Treas. Regulation §1.401(a)(9)-5, Q&A-3(b), a balance forward plan must determine the account value based on the most recent plan valuation that occurred before December 31 of the prior year and making adjustments for any transactions (contributions or distributions) that actually occurred after the valuation date through December 31 of that year. There is no adjustment for any amounts contributed after December 31.

Example: Assume that a balance forward 401(k) plan has a plan year ending June 30. The account value as of December 31, 2008 of a participant attaining age70½ in 2009 is calculated in the following manner. First, obtain the June 30, 2008, valuation value and add all 401(k) deferrals made by the participant from July 1, 2008 through and including December 31,2008. In addition, add any employer allocations made after June 30, 2008 and before January 1, 2009. From this amount subtract any distributions taken after June 30, 2008 but before January 1, 2009. This is best explained using actual numbers.

A participant has a June 30, 2008, account value of $62,500. The participant then made deferrals of $3,000 from July 1 through December 31 of 2008. The employer contributed $2,000 in employer contributions to the participant’s account during the same time period. These amounts were accrued before June 30 th, but were deposited after. The participant took distributions of $500 on November 15, 2008, and $1,000 on January 12, 2009. The value of the participant’s account as of December 31, 2008 is $67,000 determined as follows:

$62,500	value on June 30, 2008
+ 3,000	deferrals made from July 1, 2008 to December 31, 2008
+ 2,000	employer allocations to participant’s account between July 1, 2008 and December 31, 2008
- 500	distribution taken on November 15, 2008
$67,000	Account Value as of December 31, 2008

The Minimum required distribution is then calculated using the $67,000 account value. The distribution made on January 12, 2009 is disregarded because it occurred after the end of the distribution valuation year. This distribution will be reflected in the 2005 minimum which is based on the December 31, 2009 account balance which is calculated in the same method as above.

Bill Grossman, QPA