Cracking the Code on DB Plan RMDs. Mary Ann Rocco, EA, MSPA Owner and Third-Party Consulting Actuary Mary Ann Rocco

Transcription

1 Cracking the Code on DB Plan RMDs Mary Ann Rocco, EA, MSPA Owner and Third-Party Consulting Actuary Mary Ann Rocco

2 Abbreviations RMD: Required Minimum Distribution DCY: Distribution Calendar Year ASD: Annuity Starting Date SLA: Single Life Annuity J&S: Joint & Survivor Annuity Uniform Life Table: ULT APR: Annuity Purchase Rate AEQ: Actuarial Equivalent AMT: Applicable Mortality Table NRD/ERD: Normal & Early Retirement Date NOTE: All rounding is for outline purposes only! 1

3 1.401(a)(9)-2: Q&A-2 Required Begin Date (RBD) defined as the April 1 of the calendar year following the later of: (I) year in which attains age 70½ (II) calendar year in which the employee retires from plan sponsor Sub-clause (II) does not apply for five-percent owners 2

4 1.401(a)(9)-2: Q&A-2 Plan can define non-owners same as five-percent owners Five-percent owner* based on plan year ending in the calendar year in which the employee attains age 70½ If five-percent owner on any day in the above period, the employee will always be treated as a five-percent owner What if company established after 70½? *As defined in IRC 415 IRC 318 attribution rules 3

5 1.401(a)(9)-2: Q&A-2 Five-percent owner attains age 70½ in 2017 Plan Year End: 6/30/17 If company sold before 7/1/16 will not be treated as five-percent owner for 401(a)(9) If company sold on or after 7/01/16, will be treated as such 4

6 1.401(a)(9)-2: Q&A-3 An employee turns 70½ six calendar months after 70 th birthday If born 6/30/46 turns 70 on 6/30/16 and turns 70½ on 12/30/16 If born 7/1/46 turns 70 on 7/1/16 and 70½ on 1/1/17 5

7 1.401(a)(9)-6: Q&A-1(a) Employee s entire interest in DB Plan must be paid in the form of periodic annuity payments for the life, joint lives, or period certain not to exceed the maximum period [1.401(a)(9)-9] Plan document must allow form of payment Section -6 of the 401(a)(9) Regulations covers DB plans and annuity contracts 6

8 1.401(a)(9)-6: Q&A-1(a) The interval between payments for the annuity must be uniform over the entire distribution period and must not exceed one year Cannot take monthly then convert to annual or vice versa Period may only be changed in accordance with (a)(9)-6 A-13 All payments must be non-increasing with exceptions in (a)(9)- 6 A-14 7

9 1.401(a)(9)-6: Q&A-1(c) Annuities must commence on or before RBD and equal one payment interval Payment intervals can be bimonthly, monthly, semi-annually, or annually Second payment need not be made until the end of the next payment interval, even it ends in next calendar year No doubling up in DB plans, with exceptions 8

10 1.401(a)(9)-6: Q&A-1(c) All benefit accruals as of the last day of the first Distribution Calendar Year must be included in the annuity payment for payment intervals ending on or after RBD NOTE: first DCY defined in 1.401(a)(9)-5, which covers DC plan rules 9

11 Example Plan Year Owner DOB/SPOUSE DOB: 1/1/44 DOP: 1/1/13 NRD: 1/1/17 (Age 73) Benefit formula = five percent x high three-year average salary AEQ: five percent/1994 GAR 417(e): one-year stability period/one-month lookback Normal Form: Single Life Annuity Plan defined QJSA = 50 percent 10

12 Example Plan Year Owner turned 70½ on 7/1/14 RBD/ASD: 4/1/15 Age /31/14 accrued benefit (entire interest) going into pay status = $12,500 x five percent x two = $1,250 NRA Plan APR 73 = ASD Plan APR =

13 Example Plan Year Option #1: SLA annuity at ASD: AEQ of 2014 accrued benefit at ASD : $1,250 x ^1.75 = $127,738 $127, = $1,080 $1,080 SLA annuity payable on 4/1/15 12

14 Example Plan Year A challenge in getting a small plan sponsor to pay a specific amount on a set day of the month Many prefer paying as ANNUAL annuity Document should allow for it If paying annually, is it 12 times the monthly payment ($12,960)? 13

15 Example Plan Year Unless plan has language that allows the annual benefit = 12 x monthly benefit, an actuarial adjustment should be made to reflect the difference in value between monthly versus annually Annual APR = $127, = $12,382 Versus $12,960 Doesn t appear the IRS is targeting the issue 14

16 Example Plan Year Owner elects a single life annuity Payments start on 4/1/15 and the participant dies soon after first payment What is the death benefit if plan defined death benefit = PVAB or QJSA? 15

17 Example Plan Year 16

18 Example Plan Year Option #2: J&S annuity options at ASD: PVAB at ASD : = $127,738 Annual Annual APR RMD 50% J&S $11,196 75% J&S $10, % J&S $10,217 17

19 Example Plan Year Owner elects a 50 percent J&S annuity Payments start on 4/1/15 and the participant s spouse dies soon after first payment What is the death benefit if plan defined death benefit = PVAB or QJSA? 18

20 Example Plan Year $11,196 x 50 percent = $5,598 payable as a SLA The PVAB for this benefit is less than half from where we started Could the plan be amended to include an incidental death benefit? Yes, but there s an easier way! 19

21 Example Plan Year Best practice to preserve the full accrued benefit/lump sum value is to use an annuity without life contingencies Three most common options: Single-sum payment not always possible Level term certain installment Increasing term certain installment 20

22 1.401(a)(9)-6: Q&A-3(a) The period certain for any annuity distributions commencing during the life of the employee with an annuity starting date on or after the employee's required beginning date generally is not permitted to exceed the applicable distribution period for the employee (determined in accordance with the Uniform Lifetime Table in A-2 of 1.401(a)(9)-9) for the calendar year that contains the annuity starting date 21

23 Example Plan Year Owner s DOB is 1/1/44 Attained Age in 2015 = 71 No rounding nor age nearest Age 71 maximum period from ULT table (spouse age 61 or older) = 26.5 maximum term period 26.5 * 12 = 318 monthly payments May use anything less 22

24 Example Plan Year Option #3 Level Term Certain Greater of benefit under Plan AEQ versus 417e Plan AEQ Assumptions: PVAB at ASD = $127,738 Level PV Factor 26 : * 26-year Term Annuity: $8,463 *Simple excel Programming: PV(.05,26,-1,,1) 23

25 Example Plan Year 417(e)(3) applies at the Annuity Starting Date to benefits that decrease during an employee s lifetime Includes term certain, lump sum Annuitize the accrued benefit using the 417(e) segment rates and compare to plan AEQ benefit Brings up an issue that applies to this particular example where NRD is after RMD ASD 24

26 Example Plan Year Is 417e applied to the NRA deferred annuity or the immediate annuity? Some will say to the deferred annuity In my practice I value it as the greater of the immediate benefit versus the deferred benefit at NRA Treating in the same way as if this was an early retirement benefit» 2006 Gray book Q 33» e Final Regulations 25

27 Example Plan Year 417(e) Assumptions valuing deferred annuity SLA at NRD 73 = $1, (e) LS Factor = (e) AEQ = 2015 AMT/1.48 percent; 3.77 percent; 4.79 percent Lump Sum = $1,250 x = $142, (e) Level PV Factor 26 : ** 417(e) 26-year Term Annuity: $8,558 26

28 Example Plan Year 417(e) Assumptions valuing immediate annuity AEQ SLA at ASD = $1, (e) LS ASD = (e) AEQ = 2015 AMT/1.48 percent; 3.77 percent; 4.79 percent Lump Sum = $1,080 x = $145, (e) Level PV Factor 26 : ** 417(e) 26-year Term Annuity: $8,719 27

29 Example Plan Year 417(e) 26-year Level Installment Factor **Excel Programming (simple version) Segment 1: PV(0.0148,5,-1,,1) + Segment 2: PV(0.0377,20,-1,,1) PV(0.0377,5,-1,,1) + Segment 3: PV(0.0479,26,-1,,1) PV(0.0479,20,-1,,1) 28

30 1.401(a)(9)-6: Q&A-14(d)(1) (d) Additional permitted increases for annuity payments from a qualified trust. In the case of annuity payments paid under a defined benefit plan qualified under section 401(a) (other than annuity payments under an annuity contract purchased from an insurance company that satisfy paragraph (c) of this section), the payments under the annuity will not fail to satisfy the nonincreasing payment requirement in A-1(a) of this section merely because the payments are increased in accordance with one of the following: (1) By a constant percentage, applied not less frequently than annually, at a rate that is less than five percent per year; 29

31 Example Plan Year Option # percent Increasing Term Certain Greater of benefit under Plan AEQ versus 417e Plan AEQ Assumptions: PVAB on ASD = $127,738 Increasing Term Factor 26 : * 26-year Increasing Annuity: $4,919 *Excel Programming: PV((1.05/1.0499)-1,26,-1,,1) 30

32 Example Plan Year Option # percent Increasing Term Certain 417(e) Assumptions 417(e) Lump Sum = $145, (e) Increasing Term Factor 26 : *** 417(e) 26-year Increasing Annuity: $5,038 31

33 Example Plan Year Option # percent Increasing - 417(e) ***Excel Programming (simple version) Seg 1: PV((1.0148/ ),5,-1,,1) + Seg 2: PV((1.0377/ ),20,-1,,1) - PV((1.0377/ ),5,-1,,1) + Seg 3: PV((1.0479/ ),26,-1,,1) - PV((1.0479/ ),20,-1,,1) 32

34 Example Plan Year 4/1/15 Annual Annuity Options Single Life Annuity $12,382 50% J&S Annuity $11,196 75% J&S Annuity $10, % J&S Annuity $10,217 Term Certain $8,719 Increasing Term Certain $5,038 33

35 Example Plan Year Participant elects the increasing term certain annuity which includes spousal waiver Payment of $5,038 is made on 4/1/15 12/31/15 valuation needs to incorporate participant s Funding Target as annuity in pay status and Target Normal Cost as the increase in the current year accrued benefit (if applicable) 34

36 Example Plan Year Plan Valuation Date = 12/31/15 12/31/15 Accrued Benefit = $12,800 x.05 x 3 = $1,920 Benefit in Pay Status = $1, AB Increase for TNC = $1,920 - $1,250 = $670 35

37 Example Plan Year 12/31/15 Funding Target (12/31/14 AB) based on annuity benefit in pay status Next payment due on 4/1/16 = $5,038 x = $5, funding segment rates: 4.72 percent/6.11 percent/6.81 percent 25 years left on original 26-year installment If using EXACT age/payment date: 36

38 Example Plan Year Discount Payment Discount Accumulated Pmt# Period Amount Rate PV , % 5, , % 10, , % 15, , % 20, , % 26, , % 31, , % 36, , % 40, , % 45, , % 50, , % 55, , % 59, , % 64, , % 68, , % 73, , % 77, , % 82, , % 86, , % 90, , % 95, , % 98, , % 102, , % 106, , % 109, , % $112,996 FT = $112,996 37

39 Example Plan Year Valuation software may use rounded ages/years Value the same as your software normally does to avoid any issue of a change in funding method. My software typically has rounded years, so no discount between EOY valuation date and 4/1 payment date 38

40 Example Plan Year 430 Funding Target factor: Seg 1: PV((1.0472/ ),5,-1,,1) + Seg 2: PV((1.0611/ ),20,-1,,1) - PV((1.0611/ ),5,-1,,1) + Seg 3: PV((1.0681/ ),25,-1,,1) - PV((1.0681/ ),20,-1,,1) = x $5,289 = $114,629 Versus $112,996 exact rounding 39

41 Example Plan Year Same for 404 FT with 404 segment rates: Seg 1: PV((1.0132/ ),5,-1,,1) + Seg 2: PV((1.0406/ ),20,-1,,1) - PV((1.0406/ ),5,-1,,1) + Seg 3: PV((1.0509/ ),25,-1,,1) - PV((1.0509/ ),20,-1,,1) = x $5,289 = $142,668 40

42 Example Plan Year May need to enter employee twice in system to get correct values: 41

43 Example Plan Year In my software will enter the original ASD (fixed), term years (fixed), and the next payment as monthly (variable - 5, = $440.75) on the employee level service screen 42

44 Example Plan Year TNC = 2015 AB increase FT = 12/31/14 AB 43

45 Example Plan Year PVAB = greater of annuity under Plan versus 417(e) calculation year interest 25 years remaining on term certain annuity 12/31/15 Plan PVAB Factor: $5,289 x = $132,074 12/31/15 417(e) PVAB Factor: $5,289 x = $147,314 44

46 Example Plan Year 45

47 Example Plan Year Next RMD payment due 4/1/16 Will include the 12/31/15 $670 accrual increase 46

48 1.401(a)(9)-6: Q&A-5 Benefits that accrue after the first Distribution Calendar Year must commence beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues 47

49 1.401(a)(9)-6: Q&A-5 A plan will not fail to satisfy 401(a)(9) if there s an administrative delay in the distribution of the additional benefits accrued in the prior year, provided it commences as soon as practicable No later than the end of the first calendar year following the calendar year in which the additional benefit accrues, and Total amount paid during the year must be no less than the total amount that was required for the calendar year 48

50 Example Plan Year 4/1/16 ASD Age = AB increase = $ (e): 2016 AMT/1.82 percent; 4.12 percent; 5.01 percent NRA Plan APR 73 = ASD Plan APR = (e) Immediate LS Factor = Maximum Term Certain Period:

51 Example Plan Year Participant again elects 4.99 percent increasing term certain for the 2015 accrued benefit increase or piece New distribution election forms for the new annuity starting date including spousal consent to waive the QJSA 50

52 Example Plan Year Plan AEQ Assumptions: 2015 AB increase PVAB at ASD = $670 x ^.75 = $71,891 Increasing Term Factor 25 : year Increasing Annuity: $2,879 AEQ ben on ASD = $71, = $629 51

53 Example Plan Year 417(e) - immediate annuity 417(e) Lump Sum = $629 x = $80, (e) Increasing Term Factor: (e) 25-year Increasing annuity: $2,980 4/1/16 RMD = $5,289 + $2,980 = $8,269 Includes benefits accrued through 12/31/15 52

54 Example Plan Year $8,269 annuity payment made 4/1/16 Plan Valuation Date = 12/31/16 12/31/16 AB = $13,100 x 5 percent x 4 = $2,620 Benefit in Pay Status = $1, AB Increase for TNC = (2,620 1,920) = $700 53

55 Example Plan Year 12/31/ Funding Target for annuity: Next payment for benefits in pay status during 2016 = $8,269 x = $8, years remaining on term certain period 430 rates: 4.43 percent; 5.91 percent; 6.65 percent; year Increasing Term Factor: FT = x $8,682 = $186,036 54

56 $8, =$ Example Plan Year 55

57 Example Plan Year 12/31/16 PVAB based on greater of Plan versus 417(e) using calculation year interest 12/31/16 Plan PVAB Factor: $8,682 x = $208,140 12/31/16 417(e) PVAB Factor: $8,682 x = $224,783 56

58 Example Plan Year 57

59 Example Plan Year Next RMD payment due 4/1/17 Will include 12/31/16 $700 accrual increase Participant again elects 4.99 percent Increasing Term Certain with spousal waiver included 58

60 Example Plan Year 4/1/17 ASD age = AB increase = $ (e): 2017 AMT/2.04 percent; 4.03 percent; 4.82 percent NRA Plan APR 73 = ASD Plan APR = (e) LS Factor = Maximum Term Certain Period:

61 Example Plan Year Plan AEQ Assumptions: 2016 AB increase PVAB at ASD = $700 x x 1.05^.25 = $78,865 Increasing Term Factor 24 : year Increasing Annuity: $3,290 AEQ benefit on ASD = $78, = $715 60

62 Example Plan Year 417(e) assumptions 417(e) Lump Sum = $715 x = $88, (e) Increasing Term Factor 24 : (e) 24-year Increasing annuity: $3,372 4/1/17 RMD = $8,682 + $3,372 = $12,054 Includes benefits accrued through 12/31/16 61

63 Example Plan Termination $12,054 paid on 4/1/17 Plan terminates on 11/1/17 and will be distributing all assets by 12/31/17 62

64 1.401(a)(9)-6: Q&A-13 Annuity payment period modification allowed if one of the following satisfied: Occurs at time employee retires or in connection with a plan termination; Prior period was period certain without life contingencies; or Modified to a J&S in connection with the employee becoming married 63

65 1.401(a)(9)-6: Q&A-13 Must satisfy the following conditions to modify a payment: (1) The future payments under the modified stream satisfy section 401(a)(9) and this section (determined by treating the date of the change as a new annuity starting date and the actuarial present value of the remaining payments prior to modification as the entire interest of the participant); 64

66 1.401(a)(9)-6: Q&A-13 (2) Treat as new ASD for 415 and 417 (3) Satisfies 415 determined at the original ASD using interest rates and mortality tables applicable to such date, and (4) The end point of the period certain is not later than the end point available at the original ASD 65

67 Example Plan Termination Does the RMD payment made on 4/1/17 satisfy 401(a)(9) allowing the full termination distribution as eligible for rollover? 1.401(a)(9)-6: A-1(d) covers the rules when a benefit is being distributed as a single sum distribution in a distribution calendar year: 66

68 1.401(a)(9)-6: Q&A-1(d) In the case of a single sum distribution of an employee's entire AB during a Distribution Calendar Year, the amount that is the RMD for that distribution calendar year (not eligible for rollover) is determined using either the rule in paragraph (d)(1) or the rule in paragraph (d)(2) of this A-1 67

69 1.401(a)(9)-6: Q&A-1(d)(1) (d)(1) (para. 1) The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account plan* and treating the amount of the single sum distribution as the employee's account balance as of the end of the relevant valuation calendar year *DC Account Method 68

70 Example Plan Termination 12/31/17 Accrued Benefit (not yet in pay status) = $13,100 x.05 x 5 = $3,275 - $2,620 = $ (e) LS Factor = PVAB for 2017 AB = $655 x = $78,588 69

71 Example Plan Termination Value term certain annuity in pay status, next payment on 4/1/18 for 23 years: $12,054 x = $12, year Term Certain 417(e): Based on EXACT AGE/DISCOUNT PVAB = $12,655 x = $315,551 TOTAL PVAB = $78,588 + $315,551 = $394,139 70

72 Example Plan Termination Regulations not clear on modifying prior annuity stream to a lump sum and RMD payment already made in current year Would be reasonable under (d)(1) to calculate the total single sum paid in the Distribution Calendar year, apply the DC Account Method, then reduce the result by the payment that has already been taken 71

73 Example Plan Termination Plan termination distribution exactly = PVAB Total Single Sum paid in DCY = $394,139 + $12,054 = $406,193 Age in DCY = 73; ULT Factor = 24.7 (d)(1) Account Balance Method = $406, = $16,445 - $12,054 = $4,391 not eligible for rollover 72

74 1.401(a)(9)-6: Q&A-1(d)(2) (d)(2) (para. 1) The portion of the single sum distribution that is a RMD is permitted to be determined by expressing the employee's benefit as an annuity that would satisfy this section with an ASD as of the first day of the distribution calendar year for which the RMD is being determined, and treating one year of annuity payments* as the required minimum distribution for that year, and not eligible for rollover *Annuity Method 73

75 Example Plan Termination 4.99 percent Increasing Term Cert to calculate under (d)(2) Annuity Method Part 1: will treat that $12,054 paid on 4/1/17 as the annuity portion of the benefit already in pay status without adjustment for later ASD Part 2: value remaining single sum (in this example equals the 2017 AB) as an annuity with ASD on the first day of the DCY: 74

76 Example Plan Termination 12/31/17 PVAB: $78,588 AEQ benefit on 1/1/17 ASD = $ (e) LS factor 73 = $601 x = $74, (e) Increasing Term Factor 24 : $74, = $2,860 not eligible for rollover 75

77 Example Plan Termination Excess assets would be treated similar as shown for 2017 accrued benefit increase Account Balance Method include in single sum Annuity Method, annuitize the excess» Will result in higher RMD not eligible for rollover Election to Forgo on termination could result in no additional RMD due, all eligible for rollover 76

78 Example 2 Plan Term in RBD Year Owner DOB 1/1/47 Turns 70½ in 2017 NRD = Required Begin Date = 4/1/ Plan will be terminating in 2018, the year that contains the RBD 77

79 1.401(a)(9)-6: Q&A-1(d)(1) (d)(1) (para. 2): If the single sum distribution is being made in the calendar year containing the RBD date and the RMD for the employee's first Distribution Calendar Year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the employee's first and second distribution calendar years is not eligible for rollover 78

80 1.401(a)(9)-6: Q&A-1(d)(2) (d)(2) (para. 2): If the single sum distribution is being made in the calendar year containing the RBD and the RMD for the employee's first Distribution Calendar Year has not been made, the benefit must be expressed as an annuity with an ASD as of the first day of the first DCY and the payments for the first two DCYs would be treated as RMDs, and not eligible for rollover 79

81 Example 2 Plan Term in RBD Year First Distribution Calendar Year not defined in 401(a)(9)-6 (DB rules), is defined in 401(a)(9)-5 (DC plan rules) as the year attains 70½ If the plan terminates and distributes in 2018 with no RMD payments to date will include two payment calculations. Similar in concept to the DC plan doubling up rules when first RMD delayed to year that contains RBD 80

82 1.401(a)(9)-6: Q&A-10(a) If distributions commence to an employee on a date before the employee's required beginning date over a period permitted under section 401(a)(9)(A)(ii) and the distribution form is an annuity under which distributions are made in accordance with the provisions of A-1 of this section, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of this section and 1.401(a)(9)-2 81

83 Example 2 Plan Term in RBD Year Could start RMD payments in 2017 to avoid doubling up in 2018 Follow the regulations; treat age at ASD as if RBD; per Q&A-1(c) include all benefits through the ASD Calculate 2017 RMD under annuity options Calculate 2018 RMD under single sum rules, either Account Balance or Annuity method 82

84 Example 2 Plan Term in RBD Year Alternatively calculate two payments under single sum rules in 2018 Plan terminates and distributes on 4/1/18 (NRA) Benefit on 4/1/ = $1, (e): 2018 AMT/ 2.05 percent; 3.61 percent; 4.27 percent $1,000 x = $143,688 Plan Term single sum distribution = PVAB 83

85 Example 2 Plan Term in RBD Year #1 (d)(1) Single Sum DC Account Method 2017 Age 70 ULT factor = Age 71 ULT factor = 26.5 First DCY = $143, = $5,244 Second DCY = ($143,688 - $5,244) 26.5 = $5,224 Not eligible for rollover = $10,468 84

86 Example 2 Plan Term in RBD Year #2 (d)(2) Single Sum Annuity Method 4/1/18 NRA Benefit = $1, (e) deferred LS factor 70 = (e) AMT/rates, maybe should be 2017? 417(e) 27-year Increasing Term Factor: First DCY = $134, = $4,336 Second DCY = $4,336 x = $4,552 Not eligible for rollover = $8,888 85

87 Example 3 - Cash Balance Plan DOB 1/1/45; Spouse DOB: 1/1/60 DOP: 1/1/10 NRD: 1/1/15 RBD: 4/1/16 Pay Credit = $50,000 per year Valuation Date: 12/31 AEQ and ICR interest = five percent; 94 GAR, interest pro-rated monthly J&S Table Maximum Factor (71/56)

88 Single Sum Method - HAB/PVAB A plan can use the single sum rules found in 1.401(a)(9)-6: Q&A- 1(d) as the elected form of distribution on any plan Must comply with: 436 rules, certified AFTAP 80 percent or more, and Pre-termination rules under 1.401(a)(4)-5, which require plan assets >= 110 percent of the plan s liabilities after the distribution 87

89 Example 3 - Cash Balance Plan 12/31/15 Owner HAB: $340,095 12/31/15 Owner FT = $340,095 12/31/15 FT for other participants = $10,000 Total FT: $350,095 12/31/15 Assets: $350, AFTAP over 80 percent Is paying single sum method available in 2016? 88

90 Example 3 - Cash Balance Plan No Substituting FT for CL (must be defined in plan document) Assets after single sum payment= $10,000 Liabilities after single sum payment: $10,000 Need assets to be 110 percent/$11,000 Instead elects a 4.99 percent Increasing Term annuity 89

91 Example 3 - Cash Balance Plan 12/31/15 HAB: $340,095 Three month s Interest to 4/1/16 = (five percent * 3/12) = 1.25 percent x $340,095 = $4,251 HAB on 4/1/16 ASD = $340,095 + $4,251 = $344, year Increasing Term Factor: (PV(((1.05)/(1.0499))-1,30,-1,,1) 4/1/16 RMD Payment = $344, = $11,494 90

92 Example 3 - Cash Balance Plan What is HAB on 12/31/16? Interest to 4/1/16 = $4,251 Interest from 4/1/16 through 12/31/16 = 3.75 percent $340,095 - $11,494 x 3.75 percent = $12, interest = $4,251 + $12,323 = $16,574 $340,095 - $11,494 + $16,574 = $345,175 91

93 Example 3 - Cash Balance Plan December 31, 2016 Account Balance Statement Begin Interest Pay Ending Name Balance Credit Credit Wihdrawal Balance Owner $340,095 $16,574 $50,000 -$11,494 $395,175 CB plan benefits are exempt from 417(e) and remain exempt, even when benefit paid as Term Certain and converted back to lump sum Method different if AEQ and ICR not the same 92

94 Example 3 - Cash Balance Plan Year 2 4/1/17 = $11,494 x = $12, /31/16 accrued benefit increase PYB: 01/01/17 Payment Date 04/01/17 29yr Inc. Term Certain /31/17 Payment Interest mid-yr RMD/ Interest mid-yr Total Current EOY Balance Date Months Int Payment Months Int Interest Accrual Balance In pay Status 1/1/17 345,175 4/1/ ,315-12, ,492 16, , Starting Pmt 4/1/17 50,000 4/1/ , ,809 2,434 50, Current Year Accrual $50,000 50, TOTALS: 395,175 4,940-13,816 14,301 19,241 50, ,600 93

95 Example 4 - New DB Plan Owner DOB: 1/1/44 DOH: 1/1/00 Plan Effective Date: 1/1/16 Vesting defined as three-year cliff vesting excluding service prior to effective date of plan Owner age 70½ in 2014 before plan installed RBD of 4/1/15 (before plan installed) 94

96 1.401(a)(9)-6: Q&A-6 Benefits that are not vested are treated as not having accrued 4/1/17 RMD = 12/31/16 VAB = -0-4/1/18 RMD = 12/31/17 VAB = -0-4/1/19 RMD - 12/31/18 VAB = 100 percent of whatever is 12/31/18 accrued benefit 95

97 1.401(a)(9)-6: Q&A-6 When additonal portion becomes vested, such portion will be treated as an additonal accrual under the rules of Q&A-5 Due by RMD ASD with the as soon as practical rule under Q&A-5 applied 4/1/19 RMD - must be distributed by 12/31/19 96

98 Example 5 Non-Calendar Plan Year Same situation as prior example with three-year cliff vesting excluding service prior to effective date Zero percent vested in first two years, 100 percent vested in year three Owner past RBD when plan installed Plan Effective Date: 7/1/15 PYE = June 30 th Flat dollar formula $1,000/month Owner works over 2,080 hours per year 97

99 Example 5 Non-Calendar Plan Year 6/30/16: Vested Accrued Benefit = -0-6/30/17: Vested Accrued Benefit = -0- Revisiting 1.401(a)(9)-6: Q&A-5(a) Benefits that accrue after the first Distribution Calendar Year must commence beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues 98

100 Example 5 Non-Calendar Plan Year By 12/31/17 has worked hours 12/31/17 Vested Accrued Benefit = $3,000, will go into pay status 4/1/18 no later than 12/31/18 If formula is pay-related and current year compensation impacts the prior calendar year accrued benefit, you will need to get partial-year data to determine the vested accrued benefit on the last day of the prior calendar year 99

101 Example 4 and 5 Plan Term If either example 4 or 5 were to terminate in the year that the first RMD payment is required to be made, is there a need to double up? 1.401(a)(9)-6: Q&A-1(d)(1) and d(2) reference single sum distribution being made in the calendar year containing the RBD date In both examples the year of termination does not contain the RBD 100

102 Required Actuarial Increases 1.401(a)(9)-6: Q&A-7: If an employee (other than a fivepercent owner) retires after the calendar year in which the employee attains age 70½, the employee's accrued benefit under a defined benefit plan must be actuarially increased to take into account any period after age 70½ in which the employee was not receiving any benefits under the plan. The actuarial increase must be provided for the period starting on the April 1 following the calendar year in which the employee attains age 70½. 101

103 IRS Notice Use of Lump Sum to Replace Lifetime Income for Retirees Effective July 9, (a)(9)-6 A-14(a)(4) allows benefit increases in connection with amendment 1.401(a)(9)-6 A-13(b)(1) allows modification to occur at retirement or in connection with plan termination 102

104 IRS Notice addresses risk-transfer or de-risking Called that because a lump sum transfers the risk of outliving life expectancy from the plan to the participant Plans will amend to allow limited period for retirees to convert to lump sum using the exception in to 1.401(a)(9)-6 Q&A-14 (increases from plan amendment) Prior PL rulings support interpretation warns of forthcoming amendment to Q&A-14 to eliminate this approach 103

105 IRS Notice makes mentions of A-13 as intended to be amended IRS/Treasury have stated this was not intended to preclude the ability to offer lump sums to retirees and beneficiaries upon plan termination or, for individuals receiving in-service distributions, upon termination of employment 104

106 DB Plan History IRC 401(a)(9) Effective 1/1/ proposed regulations First guidance Allowed Account Balance Method for Defined Benefit Plans 2001 proposed regulations Added the Uniform Life Table (more generous) Effective 1/1/2002 but may be applied to 2001 distributions 105

107 DB Plan History 2002 final and temporary regulations Finalized Defined Contribution Plans Significant changes for DB plans (temporary regulations):» Removed Account Balance Method for DB plans Could ignore and continue to rely on the 1987 proposed regulations and use the Account Balance Method Effective 1/1/03 but may be applied to 2002 Notice says compliance for DB plans is not required until final regulations issued. 106

108 DB Plan History 2004 final regulations issued for DB plans Finalized removal of Account Balance Method Permitted fixed increase for payments less than five percent Allowed change in form under certain circumstances Effective 1/1/03 but can rely on any of the following regulations for :» 2002 final and temporary regulations,» 2001 proposed regulations, or» 1987 proposed regulations 107

109 DB Plan History 1.401(a)(9)-6 - DB plan and annuity contract rules 108

110 Questions? 109