Required Minimum Distributions

Required Minimum Distributions Mary Ann Rocco, EA Huntington Beach, CA 714-393-8845 mar@roccoea.com 2 Abbreviations RMD: Required Minimum Distribution Distribution Calendar Year: DCY Valuation Calendar Year: VCY Annuity Starting Date: ASD Single Life Annuity: SLA Joint & Survivor Annuity: J&S Uniform Life Table: ULT All rounding is for outline purposes only! 3 1

1.401(a)(9)-2: A-2 Required Begin Date (RBD) defined as the April 1 of the calendar year following the later of: (I) year in which employee attains age 70½ (II) the calendar year in which the employee retires from employer maintaining Plan. Sub-clause (II) does not apply for 5% owners. 4 1.401(a)(9)-2: A-2 Plan document can define non-owners with same RBD as 5% owners. 5% owner (as defined in section 416, ie 318 attribution rules) with respect to the plan year ending in the calendar year in which the employee attains age 70½. If 5% owner on any day in the above period the employee will be treated as a 5% owner forever and ever 5 1.401(a)(9)-2: A-2 5% owner attains age 70½ in calendar year 2015. Plan Year End: 6/30 If company sold before ½ 7/1/14 will not be treated as owner for a)9. If Company sold after 6/30/14 will be. 6 2

1.401(a)(9)-2: A-3 An employee turns 70½ six calendar months after 70 th birthday. If born 6/30/45 turns 70 on 6/30/15 and turns 70½ on 12/31/15. If born 7/1/45 turns 70 on 7/1/15 and 70½ on 1/1/16. 7 1.401(a)(9)-6: A-1(a) 1.401(a)(9)-6 - DB plan and annuity contract rules. DB Plans must be paid in the form of periodic annuity payments for life, joint life or period certain not to exceed the maximum period [1.401(a)(9)-9] Plan document must allow form of payment (e.g. cannot take an increasing term certain annuity if document does not allow for it) 8 1.401(a)(9)-6: 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 and vice versa Period may only be changed in accordance with -6 A-13. All payments must be non-increasing with exceptions in -6 A-14. 9 3

1.401(a)(9)-6: A-1(c) Annuities must commence on or before the employee s RBD and be for one payment interval. Second payment need not be made until the end of the next payment interval even it ends in next calendar year. 10 1.401(a)(9)-6: A-1(c) Payment intervals can be bimonthly, monthly, semi-annually, or annually. 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. 11 1.401(a)(9)-6: 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. 12 4

1.401(a)(9)-6: 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 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. 13 DOB/SPOUSE DOB: 1/1/44 DOP: 1/1/13 NRD: 1/1/17 (73) RBD/ASD: 4/1/15 (71.25) Benefit formula = 5% x Hi 3 AEQ: 5% / 1994 GAR 417(e): 2015 AMT / 1.48%; 3.77%; 4.79% 12/31/14 Hi 3 = $12,500, 12/31/14 Accrued Benefit = $1,250 14 Plan APR 73 = 111.2986 Plan APR 71.25 = 118.2954 417(e) APR 71.25 = 134.8277 Age 71 ULT Factor = 26.5 Maximum Term Certain Period: 26 Plan monthly APR (using 11/24 ths approximation) Plan defined QJSA = 50% 15 5

Option #1: SLA annuity at ASD: Plan Lump Sum at ASD: $1,250 x 111.2986 1.05^1.75 = $127,738 SLA at ASD: $127,738 118.2954 = $1,080 Using Annual Payment equal to monthly payment x 12 = $12,960 16 If payment taken annually should calculation reflect that? Annual APR = 10.3613 $127,738 10.3613 = $12,328 vs $12,960 Doesn t appear that using the annual payment as 12 times the monthly payment is going to cause any problems. 17 Assume SLA started and participant dies. What is the death benefit if plan defined death benefit = PVAB? 18 6

Option #2: J&S annuity options at ASD: Plan Lump Sum at ASD: = $127,738 Monthly Annual 50% QJSA APR: 131.4100 $972 $11,664 75% QJSA APR: 137.9673 $926 $11,112 100% QJSA APR: 144.5246 $884 $10,608 19 Assume 50% J&S RMD s begin in the amount of $11,664 annually and participant dies. What is the death benefit? 20 If a participant (or spouse) dies while in RMD annuity status the best method to preserve full lump sum value of the accrued benefit is to use an annuity without life contingencies. Two most common options: Level Term Certain Installment 4.99% Increasing Term Certain Installment 21 7

Option #3 Level Installment - AEQ PVAB on 4/1/15 = $127,738 Level PV Factor 26 : 15.0939* 26yr Term Annuity: $8,463 *Excel Programming: PV(.05,26,-1,,1) 22 Option #3 Level Installment - 417(e) 417(e) PVAB = $1,080 x 134.8277 = $145,614. 417(e) Level PV Factor 26 : 16.7015** 417(e) 26yr Term Annuity: $8,719 23 Option #3 Level Installment - 417(e) **Excel Programming Seg 1: PV(0.0148,5,-1,,1) + Seg 2: PV(0.0377,20,-1,,1) PV(0.0377,5,-1,,1) + Seg 3: PV(0.0479,26,-1,,1) - PV(0.0479,20,-1,,1) 24 8

Option #4 4.99% Increasing - AEQ PVAB = $127,738 Increasing PV Factor 26 : 25.9691* 26yr Increasing annuity: $4,919 *Excel Programming: PV((1.05/1.0499**)-1,26,-1,,1) **or substitute effective rate.00009525 /.009525% 25 Option #4 4.99% Increasing - 417(e) 417(e) PVAB = $145,614. 417(e) Increasing PV Factor 26 : 28.9017*** 417(e) 26yr Increasing Annuity: $5,038 26 Option #4 4.99% Increasing - 417(e) ***Excel Programming Seg 1: PV((1.0148/1.0499-1),5,-1,,1) + Seg 2: PV((1.0377/1.0499-1),20,-1,,1) - PV((1.0377/1.0499-1),5,-1,,1) + Seg 3: PV((1.0479/1.0499-1),26,-1,,1) - PV((1.0479/1.0499-1),20,-1,,1) 27 9

$5,038 RMD payment made 4/1/15. Plan Valuation Date = 12/31/15 12/31/15 Hi 3 = $12,800 12/31/15 AB = 12,800 x.05 x 3 = $1,920 Benefit in Pay Status = $1,250 2015 AB Increase for TNC = $1,920 - $1,250 = $670 28 FT Based on prior year accrued benefit in Pay Status. Next Payment Due on 4/1/16 = $5,038 x 1.0499 = $5,289 2015 430 funding segment rates: 4.72% / 6.11% / 6.81% 25 years left on Installment If using EXACT age/payment date: 29 DiscountPayment DiscountAccumulated Pmt# Period Amount Rate PV FT=$112,999 04/01/16 1 0.25 5,289 4.72% 5,228 04/01/17 2 1.25 5,553 4.72% 10,470 04/01/18 3 2.25 5,830 4.72% 15,726 04/01/19 4 3.25 6,121 4.72% 20,994 04/01/20 5 4.25 6,426 4.72% 26,277 04/01/21 6 5.25 6,747 6.11% 31,219 04/01/22 7 6.25 7,084 6.11% 36,109 04/01/23 8 7.25 7,437 6.11% 40,947 04/01/24 9 8.25 7,808 6.11% 45,734 04/01/25 10 9.25 8,198 6.11% 50,470 04/01/26 11 10.25 8,607 6.11% 55,157 04/01/27 12 11.25 9,037 6.11% 59,794 04/01/28 13 12.25 9,487 6.11% 64,382 04/01/29 14 13.25 9,961 6.11% 68,922 04/01/30 15 14.25 10,458 6.11% 73,413 04/01/31 16 15.25 10,980 6.11% 77,858 04/01/32 17 16.25 11,528 6.11% 82,255 04/01/33 18 17.25 12,103 6.11% 86,606 04/01/34 19 18.25 12,707 6.11% 90,911 04/01/35 20 19.25 13,341 6.11% 95,171 04/01/36 21 20.25 14,007 6.81% 98,860 04/01/37 22 21.25 14,706 6.81% 102,487 04/01/38 23 22.25 15,439 6.81% 106,051 04/01/39 24 23.25 16,210 6.81% 109,555 04/01/40 25 24.25 17,019 6.81% 112,999 30 10

Alternatively calculate whole year factor or payment due 12/31/15: Seg 1: PV((1.0472/1.0499-1),5,-1,,1) + Seg 2: PV((1.0611/1.0499-1),20,-1,,1) - PV((1.0611/1.0499-1),5,-1,,1) + Seg 3: PV((1.0681/1.0499-1),25,-1,,1) - PV((1.0681/1.0499-1),20,-1,,1) = 21.6731 31 $5,289 x 21.6731 = $114,629 vs $112,999 About 1.44% difference 32 For 404 FT do same thing with 404 segment rates. The remaining PV calculations will be based on whole year discount factors like shown above. 33 11

PVAB is greater of Plan AEQ vs 417(e) interest/mortality for the calculation year. 4/1/16 RMD, 25 years remaining. Plan Factor: 24.9714 417(e) Factor: 27.8529 12/31/15 PVAB = $5,289 x 27,8529 = $147,314 34 May need to enter employee twice in system to get correct values: 35 In the system I use, enter the next payment as monthly (5,289 12 = $440.75), the cola and the original ASD and term certain years 36 12

TNC based on 2015 AB increase 37 1.401(a)(9)-6: A-6 Benefits that are not vested are treated as not having accrued. 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 but the as soon as practical rule applies. 38 Example 1 2016 Plan Year Valuation Year: 2016 417(e): 2016 AMT / 1.82%; 4.12%; 5.01% 2015 AB increase = $670 4/1/16 Age = 72.25 Plan APR 73 = 111.2986 Plan APR 72.25 = 114.3419 417(e) APR 72.25 = 127.3824 Maximum Term Certain Period: 25 39 13

Example 1 2016 Plan Year Plan Lump Sum at ASD = $670 x 111.2986 73 1.05^.75 = $71,891 Increasing PV Factor 25 : 24.9714 25yr Increasing Annuity: $2,879 40 Example 1 2016 Plan Year AEQ benefit on ASD = $71,891 114.3419 = $628.74 417(e) PVAB= $628.74 x 127.3824 = $80,090 417(e) Increasing Term Factor: 26.8861 417(e) 25yr Increasing annuity: $2,979 4/1/16 RMD = $5,289 + $2,979 = $8,268. 41 Example 1 2016 Plan Year $8,268 RMD payment made 4/1/16 Plan Valuation Date = 12/31/16 12/31/16 Hi 3 = $13,100 12/31/16 AB = 13,100 x.05 x 4 = $2,620 Benefit in Pay Status = $1,920 2016 AB Increase for TNC = $700 42 14

Example 1 2016 Plan Year 4/1/17 RMD, 24 years remaining Payment = $8,268 x 1.0499 = $8,681 430 rates: 4.43%; 5.91%; 6.65%; 430 24yr Increasing Factor: 21.4278 430 FT = 21.4278 x $8,681 = $186,015. 43 Example 1 2016 Plan Year 4/1/17 payment= $8,681 12 =$723.42 44 Example 1 2016 Plan Year PVAB is greater of Plan vs 417(e) interest/mortality for the calculation year. 4/1/17 RMD, 24 years remaining. Plan Factor: 23.9737 417(e) Factor: 25.8907 12/31/16 PVAB = $8,681 x 27,8529 = $224,757 Override PVAB into system if necessary 45 15

Example 1 2017 Plan Year Valuation Year: 2017 417(e): 2017 AMT: 1.50%; 3.60%; 4.62% 2016 AB increase = $700 ASD 4/1/17, age = 73.25 Plan APR 73 = 111.2986 Plan APR 73.25 = 110.3449 417(e) APR 73.25 = 126.9362 Maximum Term Certain Period: 24 * Estimated - actual rates unknown 46 Example 1 2017 Plan Year Plan PVAB = $700 x 111.2986 73 x 1.05^.25 = $78,865 Increasing PV Factor 24 : 23.9737 24yr Increasing Annuity: $3,290 47 Example 1 2017 Plan Year AEQ benefit on ASD = $78,865 110.3449 = $714.71 417(e) PVAB = $714.71 x 126.9362 = $90,723 417(e) Increasing Term Factor 24 : 27.302 417(e) 24yr Increasing annuity: $3,323 4/1/17 RMD = $8,681 + $3,323 = $12,004. 48 16

Example 1 2017 Plan Year Assume RMD paid on 4/1/17. Plan subsequently terminates 10/1/17 ad distributes all assets before 12/31/17. Has (401)(a)(9) been satisfied with 73 $12,004 payment allowing the full distribution from termination eligible for rollover? 49 Example 1 2017 Plan Year 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: 73 50 1.401(a)(9)-6: A-1(d) In the case of a single sum distribution of an employee's entire AB during a DCY the amount that is the RMD for the 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. 51 17

1.401(a)(9)-6: A-1(d) (d)(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. 52 1.401(a)(9)-6: A-1(d) (d)(1) (con t) If the single sum distribution is being made in the calendar year containing the RBD date and the RMD for the employee's first DCY 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 53 Example 1 2017 Termination Using (d)(1) Account Balance method on total Single Sum distribution in Distribution Calendar Year. Age 73, ULT factor = 24.7 Assume Single Sum distribution equals PVAB. 54 18

Example 1 2017 Termination Single Sum equals the PVAB on 4/1/17: PVAB 1 from prior slide: $90,723 2017 417(e) installment factor: 27.302 PVAB 2 $8,681 x 27.302 = $237,009 Total PVAB: $90,723 + $237,009 = $327,732 RMD using DC Method: $327,732 24.7 = $13,268 55 Example 1 2017 Termination Single Sum distribution includes $100,000 excess asset allocation: $427,732 24.7 = $17,317 Single Sum distribution recognizes an election to forfeit $100,000 in benefits: $227,732 24.7 = $9,220 56 1.401(a)(9)-6: A-1(d) (d)(2) 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 1 st 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. 57 19

1.401(a)(9)-6: A-1(d) (d)(2) con t: If the single sum distribution is being made in the calendar year containing the RBD and the RMD for the employee's first DCY 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. 58 Example 1 2017 Termination Single Sum equals the PVAB on 4/1/17 Single Sum Annuity method using 24 year Increasing Term Certain: $327,732 27.302 = $12,004»Same as amount if plan had not terminated Single Sum distribution includes $100,000 excess asset allocation: $427,732 27.302 = $15,667. 59 Example 1 2017 Termination Single Sum equal PVAB: DC Method Annuity Method $13,268 $12,004 Single Sum equal PVAB + $100,000 DC Method Annuity Method $17,317 $12,004 or $15,666? 60 20

Example 2 Cash Balance Plan DOB 1/1/44; Spouse DOB: 1/1/59 NRD: 12/31/16 RBD: 4/1/15 Pay Credit = $50,000 per year. AEQ & ICR interest =5%; 94 GAR J&S Table Factor (71/56) 30.1 Maximum Term Certain Period: 30 61 Example 2 Cash Balance Plan 1/1/15 HAB: $102,500 3 months Interest to 4/1/15: x.0125 = $1,281 HAB at ASD $102,500 + $1,281 = $103,781 30yr Increasing Term Factor: 29.9586 (PV(((1.05)/(1.0499))-1,30,-1,,1) 4/1/15 RMD: $103,781 29.9586= $3,464 62 Example 2 Cash Balance Plan 4/1/15 RMD = $3,464 Adjusted HAB = $102,500 - $3,464 = $99,036 9 months interest: x.0375 = $3,714 2015 total interest = $1,281 + $3,714 = $4,995. 63 21

Example 2 Cash Balance Plan CB plan benefits that are exempt from 417(e) remain exempt when RMD benefit is paid as an annuity. The easiest way to handle in a system is to treat like any other current year distribution. 64 Example 2 Cash Balance Plan December 31, 2015 Account Balance Statement Begin Interest Pay Ending Name Balance Credit Credit Wihdrawal Balance Owner $102,500 $4,995 $50,000 -$3,464 $154,031 If NRD entered as 12/31/15 the FT would = $104,031 and TNC $50,000 If you want your assumed NRA for the TNC benefit to be 12/31/16 (NRA) the TNC should be $50,000 x 1.05 1.0472 = $50,134 65 Example 2 Cash Balance Plan Alternatively, If participant entered into val system once with NRD of 12/31/16 the FT will be slightly off (same reason) You may decide to enter the CB participant separately for pay status and non-pay status benefits if the NRD is later than the RMD-ASD 66 22

Example 3 Plan Term 2 nd DCY Same facts as Example 1. Plan terminating in 2015. Distribution occurs on 4/1/15 1 st DCY = 2014 (age 70) 2 nd DCY = 2015 (age 71) Distribution = 4/1/15 PVAB: $145,614 67 Example 3 Plan Term 2 nd DCY #1 (d)(1) - Treat Single Sum as Account Balance with payments for both 1 st and 2 nd DCY not eligible for rollover Payment 1 age 70, ULT factor = 27.4 Payment 1: $145,614 27.4 = $5,314 Payment 2 age 71, ULT factor = 26.5 Payment 2: $145,614 26.5 = $5,495 TOTAL: $5,314 + $5,495 = $10,809 68 Example 3 Plan Term 2 nd DCY Alternatively can subtract payment for 1 st DCY before calculating the payment for the 2 nd DCY. ($145,614 - $5,314) 26.5 = $5,294 TOTAL: $5,314 + $5,294 = $10,608 69 23

Example 3 Plan Term 2 nd DCY #2 Express benefit as an annuity with ASD on 1 st day of 1 st DCY and treating payments for both 1 st and 2 nd DCY not eligible for rollover. 4.99% Increasing Installment. Maximum Installment period = 27 yrs Plan Accrued Benefit at NRA = $1,250 70 Example 3 Plan Term 2 nd DCY Plan PVAB: $1,250 x 111.2986 73 1.05^3 = $120,180 27yr Increasing PV Factor: 26.9666 27yr Increasing Annuity: = $4,457 AB on ASD = $120,180 123.1065 70 = $976.23 417(e): 2014 AMT / 1.25%; 4.57%; 5.60% 71 Example 3 Plan Term 2 nd DCY 417(e) LS = $976.23 x 133.3339 70 = $130,165 27yr Increasing PV Factor: 27.252 27yr Increasing Annuity: = $4,776 Payment for 2 nd DCY: $4,776 x 1.0499 = $5,014. Amount not eligible for rollover: $9,790 What if plan not ready to distribute by 4/1/15? 72 24

Example 4 Payment after RBD Same facts as Example 1. RBD was 4/1/15. Distribution calculated as of 4/1/15 but money leaves trust on 7/1/15. Are there any tax consequence? 73 Example 4 Payment after RBD 54.4974 2 Excise tax on accumulations: Q 1. Is any tax imposed on a payee to whom an amount is required to be distributed for a taxable year if the amount distributed during the taxable year is less than the required minimum? A-1 Only if amount missed for calendar year in which it s due, so no excise tax consequence 74 Example 4 Payment after RBD Would you go back and require an interest adjustment if paid late? Does how late impact your decision? 75 25

Example 5 ASD Owner age 72 starts a company after age 70 ½ (RBD established). No vesting until the 3 rd year with the vested accruals payable in year 4. Falls under -6 A-5 (admin delay). 1st RMD is calculated and paid 7/1/16. Does keeping the annual ASD at 7/1 instead of 4/1 for future payments violate the rules under 401(a)(9). 76 1.401(a)(9)-6: 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. 77 1.401(a)(9)-6: 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); 78 26

1.401(a)(9)-6: 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. 79 1.401(a)(9)-6: A-14 Some of the permitted increases to annuity payments found in A-14: COLA increases that comply with regs. Increase due to removal of survivor benefit due to death or QDRO Survivor benefit converted to single sum Fixed increases, but only if rate of increase is < 5%, ie 4.99% Benefit increases due to a plan amendment. 80 IRS Notice 2015-49 Use of Lump Sum to Replace Lifetime Income for Retiree s. Effective July 9, 2015 1.401(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. 81 27

IRS Notice 2015-49 2015-49 addresses risk-transfer or derisking Called that because a Lump sum transfers the risk of outliving life expectancy from plan to participant. This practice more common post PPA. Plans will amend to allow limited period for retirees to convert to lump sum using the exception in to A-14 (increases from plan amendment). Prior PL rulings support interpretation. 2015-49 warns of forthcoming amendment to A-14 to eliminate this approach. 82 IRS Notice 2015-49 2015-29 makes mentions of A-13 as intended to be amended. What impact, if any, will this mean for A- 13 allowable modification to lump sum at Plan termination. It doesn t appear IRS intends to change the ability to use the condition on A-13 to convert a plan paid annuity to a lump sum at Plan Termination. (Judy?) 83 28