REQUIRED MINIMUM DISTRIBUTIONS

Transcription

1 REQUIRED MINIMUM DISTRIBUTIONS AND PLAN DISTRIBUTIONS March 22, 2018 Presented by: John P. Griffin, J.D., LL.M. ASC Institute, LLC Littleton, CO General Rules for Required Minimum Distributions Account Balance Method Minimum Distributions When Participant Dies After Required Beginning Date Annuity Distribution Method Minimum Distributions When Participant Dies Before Required Beginning Date Special Minimum Distribution Rules 1

2 Forms of Distribution Qualified Joint and Survivor Annuities Distribution notice requirements Lifetime Income Initiatives Required Minimum Distributions Policy qualified retirement plans are not estate building tools and benefits should be paid during participant s and beneficiary s lifetimes Code 401(a)(9) requires distributions to commence by employee s Required Beginning Date Required minimum distribution (RMD) rules are a plan qualification requirement Excise tax on participant for failure to receive required distribution RMDs must be made over life or life expectancy of participant and designated beneficiary 2

3 Required Minimum Distributions Payment methods and timing depend on the type and terms of plan Participant may withdraw more than minimum Calculation methods Account Balance Method Default method for DC, IRA, 403(b) and 457(b) plans Annuity Distribution Method Default method for DB plans Required Minimum Distributions RMD requirements apply even if participant dies No parallel rule under Title I of ERISA Governmental plans subject to good faith standard RMDs apply to IRAs, 403(b) plans and 457(b) plans Longevity initiatives Qualified longevity annuity contracts 3

4 Date by which a participant must commence distributions For non-5% owners the later of: April 1 following the close of the calendar year in which the participant reaches age 70½, or April 1 following the close of the calendar year in which the participant retires For 5% owners: Required Beginning Date April 1 following close of the calendar year in which participant reaches age 70½ 5% owner definition Required Beginning Date Use the key employee definition for top heavy plan determination Determined for the plan year ending in the calendar year in which the employee attains age 70½ Attribution rules apply Change from 5% owner status to non-5% owner status after age 70 ½ does not affect RMDs Change from non-5% owner status to 5% owner status after age 70 ½ apparently does not require a new Required Beginning Date 4

5 Required Beginning Date When does a participant retire? No regulatory definition Facts and circumstances determination When employee-employer relationship ceases? Independent contractor situation Retirement date determined as of last day of work Can plan suspend RMDs if a participant is rehired after RBD? Probably not! Distribution Calendar Year A calendar year for which a minimum distribution is required First RMD distribution calendar year the calendar year that precedes the RBD If RBD is April 1, 2018 first distribution calendar year is 2017 RMD is not required until April 1, 2018 Second distribution calendar year - the calendar year that includes the RBD If RBD is April 1, 2018 second distribution calendar year is 2018 RMD is required by December 31,

6 Designated Beneficiary Designated beneficiary definition important for: Calculation of proper Life Expectancy Factor under Account Balance Method Determination of permissible payment period under the Annuity Distribution Method Determination of the period over which distributions may be made after the participant s death Designated beneficiary must be an individual Designated by participant or by plan terms Designated Beneficiary Underlying beneficiaries of a trust may be designated beneficiaries The trust must be irrevocable and valid under State law Beneficiaries must be identifiable Plan administrator must have a copy of trust or list of beneficiaries 6

7 Designated Beneficiary Date on which designated beneficiary determined For lifetime distributions to participant Account Balance Method applicable when spouse is more than 10 years younger January 1 of distribution calendar year Annuity Distribution Method annuity starting date For post-death distributions Account Balance Method September 30 of the calendar year immediately following the calendar year of participant s death Annuity Distribution Method annuity starting date Designated Beneficiary Multiple designated beneficiaries Use the oldest of the beneficiaries Contingent beneficiaries generally not taken into consideration 7

8 Account Balance Method Default method for defined contribution plans (as well as IRAs, 403(b) plans and 457(b) plans) Annuity Distribution Method may be required if QJSA payout Defined contribution plans may use the Annuity Distribution Method Defined benefit plans must use the Annuity Distribution Method Calculations - Account Balance Method Account Balance Method RMD = Account Balance / Life Expectancy Factor Use Account Balance as of last valuation date in calendar year preceding distribution calendar year Life Expectancy Factor determined based on Uniform Lifetime Table using participant s age in distribution calendar year [ 1.401(a)(9)-9, Q&A-2] Exception - if spouse is sole beneficiary and spouse is more than 10 years younger than participant, then use joint life expectancy table instead Uniform Lifetime Table is used even if no beneficiary (e.g., estate) 8

9 Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period and over Calculations - Account Balance Method 1 Balance on December 31 preceding distribution calendar year $ 2 Distribution period from Uniform Lifetime Table 3 Line 1 divided by number on line 2 $ 9

10 Calculations Account Balance Method Participant s RBD is April 1, Participant s beneficiary is her husband, who is 5 years older than participant. The participant is age 71 on her birthday falling in Her vested A/B as of 12/31/16 is $90,000 and her vested A/B as of 12/31/17 is $97,000. The first distribution calendar year is 2017 The Life Expectancy Factor is the distribution period factor for age 71 (26.5) Second distribution calendar year is 2018 Calculations - Account Balance Method 1 Balance on December 31 preceding distribution calendar year $90,000 2 Distribution period from Uniform Lifetime Table 3 Line 1 divided by number on line 2 $ 10

11 Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period and over Calculations - Account Balance Method 1 Balance on December 31 preceding distribution calendar year $90,000 First distribution calendar year Distribution by April 1, Distribution period from Uniform Lifetime Table Line 1 divided by number on line 2 $3,396 11

12 Calculations - Account Balance Method 1 Balance on December 31 preceding distribution calendar year $97,000 Second distribution calendar year Distribution by December 31, Distribution period from Uniform Lifetime Table 3 Line 1 divided by number on line 2 $ Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period and over

13 Calculations - Account Balance Method 1 Balance on December 31 preceding distribution calendar year $97,000 Second distribution calendar year Distribution by December 31, Distribution period from Uniform Lifetime Table Line 1 divided by number on line 2 $3,789 Account Balance Method Certain distributions not counted toward required minimum distributions Corrective distributions (excess deferrals, excess contributions, excess aggregate contributions and excess annual additions) Deemed distributions participant loans, PS 58 costs Distribution of dividends on employer securities If valuation date not December 31, adjustments are made for contributions and forfeitures (but not earnings) and distributions allocated after valuation date and by December 31 13

14 Account Balance Method Optional inclusion of contributions made after the close of the valuation year, but allocated as of a date in that year Account balance includes vested and non-vested benefits Designated Roth accounts are included in account balance Rollover and transfer accounts are included in account balance 403(b) plans pre-1987 account balance not subject to minimum distributions rules under Code 401(a)(9) Account balance does NOT include value of qualified longevity annuity contracts (QLACs) Qualified Longevity Annuity Contract QLAC an annuity contract purchased from an insurance company that satisfies: A premium limitation An annuity starting date requirement Minimum payout requirements A restriction on commutability Death benefit restrictions An identification requirement And a contract-type requirement 14

15 Life Expectancy Factor Use Uniform Lifetime Table if: Designated beneficiary is spouse that is older or less than 10 years younger than the participant Spouse is not sole beneficiary, regardless of spouse s age Designated beneficiary is not the spouse Participant has no designated beneficiary Use Joint Life Expectancy Factor if: Sole beneficiary is the participant s spouse and the spouse is more than 10 years younger than the participant Minimum Distributions upon Death Required minimum distributions also must commence upon participant s death Different rules apply depending on whether participant dies before or after his/her RBD If participant dies before RBD, then beneficiary must take distribution under 5-year rule or life expectancy method To use life expectancy method, must begin taking distributions by end of year following death of participant If participant dies after RBD, then required minimum distributions continue to designated beneficiary The Life Expectancy factor may be adjusted based on the life expectancy of the beneficiary 15

16 Death On or After RBD If participant dies on or after RBD, then required minimum distributions continue to designated beneficiary For the year that includes the participant s death, minimum distribution is calculated as if the participant is alive The first post-death distribution made for the calendar year that begins after the date of death is made using the same formula (i.e., value of account balance / Life Expectancy Factor = required minimum distribution) Death On or After RBD Life Expectancy Factor when sole designated beneficiary is spouse is the greater of: Spouse s remaining single life expectancy, or The participant s remaining single life expectancy Life Expectancy Factor when designated beneficiary is not spouse or spouse is not sole beneficiary is the greater of: Designated beneficiary s (oldest if multiple) remaining single life expectancy, or The participant s remaining single life expectancy Life Expectancy Factor when no designated beneficiary is the participant s remaining single life expectancy 16

17 Annuity Distribution Method Annuity Distribution Method is the default method for defined benefit plans Account Balance Method is not available, except for limited circumstances (lump sum distribution ineligible for rollover) No special exception for cash balance plans Plan terms control forms of payment Annuity Distribution Method Generally distribution in form of annuity must commence no later than participant's RBD Periodic annuity at uniform payments intervals no more than one year in length May be life annuity or joint and survivor annuity Period certain permissible Modification of annuity period only under limited circumstances Nonincreasing annuity required May purchase annuity contract that satisfied requirements DC plan must purchase annuity contract 17

18 Annuity Distribution Method May elect lump sum distribution of the present value of the vested accrued benefit before annuity starting date Partial lump sum with remainder paid under Annuity Distribution Method Annuity Distribution Method Annuity payments must satisfy minimum distribution incidental benefit (MDIB) requirement to ensure that participant receives the primary benefit of the required minimum distributions The MDIB requirement focuses on the disparity between the ages of the participant and designated beneficiary and limits amount of survivor benefit that can be paid to the beneficiary MDIB rules do not apply if designated beneficiary is spouse, regardless of age 18

19 MDIB rules Annuity Distribution Method Life annuity and QJSA always satisfy MDIB If spouse is sole beneficiary, survivor annuity percentage may be up to 100% Joint and survivor annuity with non-spouse beneficiary subject to maximum survivor annuity percentage Regulations provide table of maximum survivor percentages 50% survivor annuity always acceptable Special rules for term certain annuities Payment of death benefit must satisfy either: Five-year rule Life expectancy rule Five-year rule Death before RBD Death benefit must be completely distributed no later than December 31 of the 5 th calendar year following participant s date of death Example If participant died in 2015, complete distribution by December 31, 2020 Designated beneficiary irrelevant 19

20 Life expectancy rule Death before RBD Permits distribution over life or life expectancy of designated beneficiary Account Balance Method or Annuity Distribution Method Commencement date Payments must commence no later than December 31 of the calendar year that follows the calendar year in which the participant died, unless special rule for surviving spouse applies If spouse is sole beneficiary, commencement by the later of: December 31 of calendar year that follows the calendar year in which the participant dies, or December 31 of the calendar year in which participant would have reached age 70 ½ Life expectancy rule Death before RBD Designated beneficiary determined as of September 30 of the calendar year following the calendar year of the participant s death If spouse uses rules that payments are delayed until participant would have attained age 70 ½, designated beneficiary determined as of September 30 of the calendar year following the year in which the spouse dies Disclaimers taken into account If no designated beneficiary, the five-year rule applies Plan may permit participant or designated beneficiary to elect payment method 20

21 Special RMD Rules Amounts distributed in a year are ineligible for rollover until minimum distribution requirements are satisfied Rule applies to first distribution calendar year TEFRA (242(b)(2)) elections still may apply Written election required by December 31, 1983 Each 401(a) qualified plan and 457(b) plan must satisfy RMD rules separately Aggregation rules apply for IRAs and 403(b) plans Excise tax Special RMD Rules If required minimum distribution not made on time, the participant or beneficiary is subject to 50% excise tax on the underpayment Use Form 5329 to pay excise tax Possible IRS waiver for reasonable error Using EPCRS to correct a minimum distribution failure 21

22 IRS memo relating to RMD failures (October 2017) No violation of RMD rules if the plan has taken the following steps: searched plan and related plan, sponsor, and publiclyavailable records or directories for alternative contact information used any of the search methods below: a commercial locator service a credit reporting agency Missing Participants a proprietary internet search tool for locating individuals; and attempted contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information Legislation Affecting RMDs Retirement Enhancement and Savings Act of 2018 Affects DC plans and IRAs For aggregate account balances over $450,000, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are required to be distributed by the end of the fifth calendar year following the year of the employee or IRA owner s death. 22

23 General rule: Contributions to a qualified plan are not included in an employee s income until distributed Major tax advantage of qualified plans Same rule applies for elective deferrals Exceptions: Amounts recovered as basis Roth deferrals Plan Distributions Net unrealized appreciation on employer securities Amount of tax will depend on individual s tax rate and adjusted gross income Will vary depending on type of plan Pension plans - money purchase, target benefit, defined benefit plans Non-pension plans - profit sharing, stock bonus, 401(k) plans Plan must state available forms of distribution Lump sum Annuity Installments Forms of Distribution Pension plans must comply with QJSA rules 23

24 Forms of Distribution Lump sum - single sum payment to participant or beneficiary DC plan - value of vested account balance as of latest valuation date DB plan - present value of the vested accrued benefit based on plan s actuarial assumptions Annuity distribution - payments over life of participant or participant and beneficiary May be made over term certain (e.g., guaranteed minimum number of years) DC plan must purchase annuity from insurance company to ensure required payments can be made Forms of Distribution Installment distribution - periodic payments made for a specified period of time (e.g., 10 years or life expectancy) Form and timing of distribution may depend on value of participant s vested account Vested accrued benefit > $5,000 - participant must consent to distribution and must comply with QJSA requirements, if applicable Vested accrued benefit < $5,000 - distribution can be made without consent and is not subject to QJSA requirements Involuntary cash-out limit may be less than $5,000, if provided under plan document 24

25 Penalty on Premature Distributions Distributions prior to age 59½ are subject to a 10% penalty tax Only taxable portion subject to penalty tax Exceptions: Substantially equal payments following separation from service over life or life expectancy of participant (or beneficiary) Distribution on account of termination after age 55 - termination may occur during year turns 55 Disability, deductible medical expenses, death, QDROs, corrective distributions, permissible withdrawal from EACA Qualified Joint and Survivor Annuity Qualified plans must provide survivor benefit for spouse of participant - QJSA Exception for certain non-pension plans (e.g., profit sharing and 401(k) plans) Spouse must be automatic 100% death beneficiary Participant may not elect to receive distribution in form of life annuity Plan may provide for life annuity and QJSA rules only apply if life annuity selected Plan cannot be a transferee plan May apply QJSA to entire plan or only transferred amounts 25

26 Qualified Joint and Survivor Annuity Qualified Joint and Survivor Annuity (QJSA) If participant is unmarried, then life annuity If participant is married, then life annuity for participant and survivor benefit for spouse Survivor annuity must be no greater than 100% and no less than 50% of annuity paid during participant's life Plan document must specify the survivor annuity percentage Qualified Optional Survivor Annuity (QOSA) If normal QJSA is < 75% survivor benefit, then QOSA must provide for 75% survivor benefit If normal QJSA is > 75% survivor benefit, then QOSA must provide for 50% survivor benefit Waiver of QJSA Plans subject to QJSA rules must provide QJSA unless participant (and spouse) waive QJSA benefit Spousal waiver must be in writing and must be witnessed by notary public or plan representative Waiver must specify optional form of benefit unless spouse makes blanket waiver Spousal waiver not applicable if: No spouse, spouse cannot be located, or court order that legally separated or abandoned Distribution is actually made in form of QJSA QJSA rules apply to entire accrued benefit, including rollover contributions 26

27 Notice Requirements Vested Accrued Benefit < $5,000 Plan may provide for involuntary cash-out in lump sum No participant or spousal consent required Plan may use lower threshold for involuntary cash-outs Plan may disregard rollover contributions in determining involuntary cash-out threshold Not subject to QJSA requirements Notice Requirements Vested Accrued Benefit < $5,000 Employer must provide employee with rollover and taxation notice Notice must be given days before the date distribution commences If participant does not respond to direct rollover notice, amounts may be automatically rolled over to IRA 27

28 Notice Requirements Vested Accrued Benefit > $5,000 Explanation of optional forms of payment Relative value of each optional form of benefit More complicated notice if plan is subject to QJSA Right to delay payment until later of age 62 or NRA Plan may permit delay until required to distribute under required minimum distribution rules Consequences of failing to defer distribution Direct rollover and taxation notice Timing of Notice Notice must be given days before the date distribution commences May have to re-notice participants if distribution delayed beyond 180-day period Participant can waive 30-day period, then waiver must acknowledge availability of 30-day period Allows participant to receive immediate distribution If plan is subject to QJSA, then distribution may not be made until 8 days after notice given to participant 28

29 Lifetime Income Initiatives Average life expectancy of male reaching age 65 is 83. Average life expectancy of female reaching age 65 is age 85 Studies have shown that a withdrawal rate of about 4%, inflation adjusted, has a 90% probability of lasting 30 years Few participants understand how much they can withdraw without running a risk of outliving their funds Government very concerned Qualified Lifetime Annuity Contract Any longevity annuity that meets the QLAC requirements will not be in conflict with the RMD rules (IRS regulation) A QLAC must meet following requirements: Only 25% of assets can be invested into a QLAC Cumulative dollar amount invested into ALL QLACs across all retirement accounts may NOT exceed lesser of $125,000 or 25% of assets QLAC must begin payouts by age 85 (or earlier) QLAC must provide fixed payouts 29

30 DOL - Benefit Statements DOL advanced notice of proposed regulations DC plans must include equivalent annuity information with respect to current and projected account balances (lifetime income stream) in addition to dollar amount of account balance Focus on retirement adequacy DOL - Benefit Statements Core requirements Current annuity information Assumptions Assumed commencement age of lifetime income stream Projected account balance Assumptions General principles Safe harbor Married participants 30

31 Retirement policy Legislative Initiatives Retirement Enhancement and Savings Act Portability of lifetime income options Disclosures regarding lifetime income Fiduciary safe harbor for selection of lifetime income provider Thank you! 31