Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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IRA providers regarding their reporting requirements under Reg. § 1.408-8 , A-10, contain no valuation rules. A. Assets without readily available FMV. Despite the lack of rules, indications are that the IRS is starting to place greater scrutiny on IRA valuations, at least with respect to non- publicly-traded investments. The IRS has added boxes and codes to Forms 5498 and 1099- R, for required reporting of whether the IRA holds (or has distributed) assets that do not have a “readily available” fair market value, including what type of assets those are and their values. See IRS Forms 5498 and 1099-R and their instructions (for 2014 and later years). Form 5498 is filed every year for every IRA; Form 1099-R is filed only for years in which there is a distribution from the IRA. The information in these boxes will presumably help the IRS select IRAs for audit in connection with RMD compliance. B. Income accrued but not received. As of any valuation date a portfolio of securities will have accrued income that has not yet been received, such as interest accrued on bonds or dividends that are declared but not yet paid. It would appear that such accrued income should be included in the “FMV” of the account (as is true in the estate tax valuation arena). However, there is no IRS statement on this point. Anecdotal evidence suggests that some IRA provider do and some do not include accrued income in the year-end FMV. C. Special rule for nonannuitized annuity contracts. Here is the special rule governing how to value (for RMD purposes) an annuity contract that is held inside a defined contribution (DC) plan but that has not yet been “annuitized.” Generally, the value of the annuity contract for RMD purposes is (1) its cash value (“the dollar amount credited to the employee or beneficiary under the contract”) plus (2) “the actuarial present value of any additional benefits (such as survivor benefits in excess of the…[cash value]) that will be provided under the contract.” The “actuarial present value” must be “determined using reasonable actuarial assumptions,” but without regard to any individual’s actual health. Reg. § 1.401(a)(9)-6 , A-12(b). There are two exceptions to this special valuation rule. First, if the only additional benefit provided by the contract is a death benefit equal to the total premiums paid (minus prior distributions), such additional benefit may be disregarded in valuing the contract for RMD purposes. Reg. § 1.401(a)(9)-6 , A-12(c)(2). Second, if the contract provides additional death and/or life benefit guarantees beyond the mere return of premiums, it may still be possible to disregard the contract’s additional benefits for RMD purposes—but only if the additional benefits meet the somewhat-complicated tests contained in Reg. § 1.401(a)(9)-6 , A-12(c). For example, as an initial matter, you may be able to “disregard” the value of these additional contract features if the total value of the contract including the extra features is no more than 120% of the cash value of the contract. In order for an annuity- holder to take advantage of this “disregard” provision, it would appear that the insurance company that issued the annuity would have to value every contract held by an individual over age 70 every year. Either that or the participant has to hire his own actuary.