Life and Death Planning for Retirement Benefits

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Chapter 1: The Minimum Distribution Rules 65
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.
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 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 G), 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 Step 3), and his Designated Beneficiary
either elects or is defaulted into the 5-year rule or the life expectancy method (see , 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 B), (C)). Reg. 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 unless
“C” applies.