Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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1.5.10 Plan not required to offer stretch payout or lump sum A retirement plan is not required to offer all the payout options that the law allows. Reg. § 1.401(a)(9)-3 , A-4(b). While most IRAs permit the life expectancy payout, the situation is just the opposite with QRPs. Most QRPs offer death benefits only in the form of lump sum distributions (or in some cases annuities), and do not offer the life expectancy payout method. A plan is not even required, when the 5-year rule applies, to allow the beneficiary to spread out distributions over the five years. Nor is the plan required to offer a lump sum distribution. The plan can provide a restricted form of payout, such as installment payments or an annuity; as long as the distribution method called for by the plan document is not slower than the minimum distribution rules would require, it’s perfectly legal. What can be done if the participant’s retirement plan does not offer the payout options the participant or beneficiary wants?  If the participant is living, and is entitled to take the money out of the plan, he can roll the benefits over to an IRA that will offer more suitable payout options for his beneficiaries.  If the participant has already died, and the plan wants to distribute a lump sum but the beneficiaries want a life expectancy payout, see ¶ 4.2.04 regarding the ability of a Designated Beneficiary to transfer the distribution by direct rollover to an inherited IRA.  Distribution by the plan of a nontransferable annuity contract is another way to salvage a deferred payout to the beneficiaries while satisfying the plan’s desire to get rid of the money. The contract must call for distributions that comply with the minimum distribution rules. See ¶ 2.1.06 (G), ¶ 1.2.02 (A), and PLRs 2005-48027 and 2005-48028. 1.5.11 Switching between 5-year rule and life expectancy method When a participant dies before his RBD ( ¶ 1.5.02 , Step 3), and his Designated Beneficiary either elects or is defaulted into the 5-year rule or the life expectancy method (see ¶ 1.5.07 ), the Designated Beneficiary generally cannot switch to the other method. The exceptions to this rule are as follows: A. If permitted by the plan, a Designated Beneficiary can change his election prior to the deadline for making the election ( ¶ 1.5.07 (B), (C)). Reg. § 1.401(a)(9)-3 , A-4(c), third sentence. B. If a Designated Beneficiary is using the life expectancy payout method, then, unless the plan prohibits withdrawing more than the RMD (which would be rare), the beneficiary can take out the entire remaining balance at any time, including by the end of the 5-year period if all that is desired is a faster distribution. This has no effect on penalties ( ¶ 1.9.02 ) unless “C” applies.