Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

other by the applicable deadline. If the plan provides a default rule, its default rule controls in this situation. Reg. § 1.401(a)(9)-3 , A-4(c), fourth sentence.

 If the plan does not provide a default rule, the applicable default rule is the life expectancy of the Designated Beneficiary. Reg. § 1.401(a)(9)-3 , A-4(c), fifth sentence, A-4(a). If the beneficiary is defaulted into the life expectancy payout, but misses one or more RMDs for any reason (for example, because he was unaware of the existence of the account), the beneficiary can start taking annual RMDs late, but he will need to file Form 5329 to request a waiver of the penalty for missed years ( ¶ 1.9.03 ). See PLR 2008-11028 for an example of this sequence. Another alternative if the beneficiary has missed a few payments under the life expectancy payout method, and it’s still less than 5 years since the participant died, is for the beneficiary to avoid the penalty by complying with the 5-year rule instead; see ¶ 1.5.11 (C). B. Deadline for Designated Beneficiary’s election between life expectancy payout and 5- year rule. Reg. § 1.401(a)(9)-3 , A-4(c), provides that the deadline for making this election is “the earlier of the end of the calendar year in which distribution would be required to commence in order to satisfy the requirements for the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)…or the end of the calendar year which contains the fifth anniversary of the date of death of the employee.” Since (unless the surviving spouse is sole Designated Beneficiary) distributions must commence in the year after the year of the participant’s death, that will always be a shorter period than the 5-year rule, so the deadline for the election is always: The end of the calendar year after the year of the participant’s death—unless the spouse is the sole Designated Beneficiary, in which case see “C.” Gary Example: Gary died in 2010, before his RBD, leaving his 401(k) plan and his IRA to his daughter Betty as beneficiary. Betty does not find out about either plan until 2012, too late to take an RMD for the year (2011) after the year of Gary’s death (2010). The 401(k) plan permits the beneficiary of a participant who dies before his RBD to elect either the life expectancy payout method or the 5-year rule. The plan further provides that if the beneficiary fails to notify the plan of his/her election by the end of the year after the year of the participant’s death, the beneficiary is deemed to have elected the 5-year rule. Under the terms of this plan, Betty is deemed to have elected the 5-year rule since she did not take the RMD in 2011, and this election is irrevocable and controlling for RMD purposes. She must withdraw the entire plan balance on or before December 31, 2015. Gary’s IRA, like his 401(k) plan, also permits the beneficiary of a participant who dies before his RBD to elect either the life expectancy payout method or the 5-year rule. However, the IRA agreement, unlike the 401(k) plan, provides that, if the beneficiary fails to notify the plan of her election by the end of the year after the year of the participant’s death, the beneficiary is deemed to have elected the life expectancy payout . Since Betty did not notify the IRA provider to the contrary, she is deemed to have elected the life expectancy method, even though she missed the first RMD. This election is controlling for RMD purposes. However, because she has already missed one year’s RMD, she will owe a penalty for that missed distribution unless either she either