Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

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, but it is not an RMD when the check arrives in the

employee’s mailbox! Notice 97-75, 1997-2 C.B. 337, A-10(c). 1.4.05 RBD for 403(b) plans (including “grandfather rule”)

The RBD for all 403(b) plans is April 1 of the calendar year following the later of the year the participant reaches age 70½ or the year the participant retires. There is no possibility of a different rule for 5-percent owners ( ¶ 1.4.03 ) because all 403(b) plans are maintained by tax- exempt charitable organizations that have no “owners.” Reg. § 1.403(b)-6(e)(7) . In contrast to the rule for qualified plans, there is no apparent permission for the plan 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. 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. 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” (see below) of Reg. § 1.401-1(b)(1) . 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 of distribution to the participant qualifies provided that it is projected either to distribute all the benefits over the lifetimes of the participant and his spouse-beneficiary or to distribute at least 50 percent of the benefits during the participant’s life. Reg. § 1.403(b)-6(e)(6)(vi) ; Rev. Rul. 72-240, 1972-1 C.B. 108; Rev. Rul. 72-241, 1972-1 C.B. 108, ninth paragraph.  There are no requirements for how rapidly death benefits must be distributed if the participant dies before commencing distributions. The pre-1987 grandfather amount is a frozen, fixed-dollar amount; investment earnings and gains do not increase the grandfathered balance. Reg. § 1.403(b)-6(e)(6)(i) . With the passage of time, new contributions to the plan and investment growth tend to make the pre-1987 balance an ever-smaller percentage of the overall plan balance, so in most cases it is not a significant planning factor. Also, any distributions taken from the plan that are in excess of the RMDs from the post-1986 balance are deemed to come first out of the pre-1987 balance. For more on the 403(b) grandfather rule, see the Special Report: Ancient History ( Appendix C ). 1.4.06 What does “retires” mean?