Life and Death Planning for Retirement Benefits

52

Life and Death Planning for Retirement Benefits

 A QRP is not required to recognize the “later of retirement or age 70½” RBD. A QRP may choose to require all employees to commence distributions by April 1 of the year following the year in which they reach age 70½, even non-5-percent owners who are not retired. Reg. § 1.401(a)(9)-2 , A-2(e). If the plan forces all employees to commence distributions by April 1 of the calendar year following the year they reach age 70½, things get complicated for the nonretired employee who is not a 5-percent owner: He has one RBD for certain purposes, but some of his “required” distributions from the plan are not considered “required” distributions for other purposes. Specifically, for purposes of determining RMDs from that plan , and determining whether the employee died before or after his RBD for that plan , the employee’s RBD is the RBD set by the plan, not the RBD described in the statute. Reg. § 1.401(a)(9)-2 , A-6(b). However, any distributions the employee receives during the period that is after the employee has passed the plan’s RBD but not his statutory RBD are eligible for rollover: Such distributions are not considered “required distributions” for purposes of the definition of eligible rollover distribution (see ¶ 2.6.03 ) until after the employee’s statutory RBD. Somehow the distribution is an RMD when the check is cut by the plan, but it is not an RMD when the check arrives in the employee’s mailbox! Notice 97-75, 1997-2 CB 337, A-10(c). The RBD for 403(b) plans is generally April 1 of the calendar year following the later of the year the participant reaches age 70½ or the year the participant retires. Reg. § 1.403(b)-6(e)(3) . That is because 403(b) plans are established by religious, government, or charitable employers, where there is no possibility of a different rule for 5-percent owners ( ¶ 1.4.03 ). However, if the employer does somehow have a “5-percent owner” the RBD for that individual is the same as for an IRA. Reg. § 1.403(b)-6(e)(3) , third sentence. In contrast to the rule for qualified plans, there is no apparent permission for the employer to establish an RBD earlier than that in the statute (compare ¶ 1.4.04 ). A “grandfather rule” applies to pre-1987 balances in 403(b) plans if separately identified in the plan’s records. See Reg. § 1.403(b)-6(e)(6) . The Tax Reform Act of 1986 made the minimum distribution rules applicable, for the first time, to all 403(b) plans, but made this rule prospective only by exempting any pre-1987 403(b) plan balance from the new regime, provided such balance is accounted for separately by the plan. The pre-1987 account balance, while not subject to the full panoply of today’s minimum distribution rules, is still subject to the more primitive predecessor of today’s rules, the “incidental death benefits” rule. RBD for 403(b) plans (including “grandfather rule”)

Here are the three advantages of qualifying for this grandfather rule:

 The age for starting lifetime required distributions from the pre-1987 balance is actual retirement or, if later, age 75 (not age 70½). See PLR 9345044.

 Required distributions from the grandfathered balance are computed under the incidental death benefits rule rather than in the manner explained at ¶ 1.3 . Under this rule, any mode