The new minimum distribution rules are now mandatory for distributions from qualified plans or traditional IRAs in 2002. Minimum distributions must begin by the Required Beginning Date (RBD), which is April 1st of the calendar year following the later of the calendar year in which the participant attains the age of 70½ or retires. To maximize income tax-deferral, most participants elect to take installment distributions in the form of a Required Minimum Distribution (RMD), rather than a lump-sum payment.
Under the new rules, the RMD is calculated by dividing the participant’s benefit by the distribution period found in the Uniform Table (Prop. Reg. § 1.401(a)(9)-5, A-4). If the sole Designated Beneficiary (DB) is a spouse more than ten years younger than the participant, the distribution period is calculated by reference to Table VI of Reg. § 1.72-9, which provides for slightly longer distribution periods.
To illustrate, the distribution period for a participant 70 years of age is 26.2. At the RBD, the participant would be required to take a minimum distribution of x/26.2, where x equals the plan benefit at the RBD. Thereafter, upon reaching the age of 80, the minimum distribution would be (x – y)/17.6, where x equals the plan benefit at the RBD, y equals the sum of previous plan distributions, and 17.6 is the distribution period for a person 80 years of age. Accordingly, the Uniform Table is used to determine the RMD during the participant’s life, irrespective of whether a DB has been named.
The failure by a participant to take the annual RMD commencing at the RBD will subject the participant to a 50% excise tax measured by the difference between the RMD and the actual distribution. IRC § 4974(a). New reporting requirements require IRA trustees and issuers to report the RMD for each calendar year to the IRS (as well as to the IRA owner and beneficiary.)
If the participant dies before the RBD, RMDs must be made either over the life expectancy of the nonspouse DB using the single life annuity table initially and subtracting 1 in each subsequent calendar year or, if no DB has been named, within 5 years after the participant’s death. If the DB is the surviving spouse, the distribution period is recalculated each year using the single life annuity table, which is preferable.
If the participant dies after the RBD, the RMD for a nonspouse DB is determined using the single life annuity tables and is reduced by 1 for each subsequent year. The RMD for a spouse DB is also determined under the single life annuity tables, but the distribution period is recalculated each year. If no DB has been named, the five-year rule does not apply. Instead, the distributions can be spread over the participant’s remaining life expectancy at his date of death (notwithstanding his actual death), utilizing the single life table. In subsequent years, the applicable distribution period is reduced by 1 for each year which has elapsed.
Under the new rules, a DB is determined as of the Designation Date (DD), which is the last day of the calendar year following the calendar year of the participant’s death. Any person who was a beneficiary as of the participant’s death but who is not a beneficiary as of the DD (e.g., by reason of the person’s (i) disclaimer; (ii) receipt of entire benefit to which she is entitled; or (iii) death) is not taken into account in determining the participant’s DB.
If there are multiple beneficiaries, at least one of whom does not qualify as a DB, and separate accounts have not been established, the participant will be deemed not to have selected a DB. However this rule is tempered with some leniency. To illustrate: An estate or charity may not be a DB. Assume a charity is entitled to $25,000 and separate shares have not been established. If $25,000 is distributed to the charity prior to the DD, the child will be considered the only remaining beneficiary entitled to a plan benefit, and the child’s life expectancy may be used.
A DB may be an individual or a beneficiary of certain irrevocable trusts. If there are multiple beneficiaries, the DB with the shortest life expectancy is used to calculate the distribution period. The trustee of the trust must, by the DD, provide the plan administrator with a copy of the trust and a final list of all trust beneficiaries (including contingent and remaindermen with a description of their entitlement).