Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.
Options for Working Septuagenarians
For the years 1989-1996, Code § 401(a)(9)(C) provided that the payment of every qualified plan participant's benefits had to commence on or before April 1 of the calendar year following the calendar year in which the participant attained age 70 1/2. Section 1404(a) of the Small Business Job Protection Act of 1996 amended § 401(a)(9)(C) to provide that, in the case of an employee who is not a 5% owner of the plan's sponsoring employer, the required beginning date (RBD) for minimum benefit distributions is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70 1/2 or the calendar year in which the employee retires. The amendment to § 401(a)(9) applies to years beginning after December 31, 1996 and affects only qualified plans and tax sheltered annuities. The minimum distribution rules for IRAs (even if funded by employers) remain the same.
As a series of IRA announcements, notices and proposed regulations- issued in 1996 and 1997 attest, the relatively simple prospect of returning to the pre-TRA 1986 benefit commencement rule raises numerous questions for plan sponsors. Sponsors must decide whether to amend existing qualified plans to permit or require the deferral of the commencement of benefits to over age 70 1/2 working participants until retirement. Additional complexities arise if benefits are already being paid. From an estate planning point of view, it is important to know when a participant's RBD occurs. In the case of an over age 70 1/2 working employee, plan provisions are now relevant to this determination.
From a working employee's point of view, the deferral of plan benefits that will otherwise be added to current compensation for income tax purposes is almost certain to be beneficial, particularly in light of the repeal of the additional 15% excess income and estate taxes by TRA 1997. The deferral of the participant's RBD until after retirement will generally be beneficial as well because it defers the "lock in" of the participant's lifetime payment period, defers the time for making an election of whether to recalculate the life expectancy of the participant (and/or spouse) and extends the availability of a possibly longer payment period if death occurs before the deferred RBD.
Required Age 70 1/2 RBD
A qualified plan sponsor appears to have three alternative ways to respond to the new RBD definition. The least expensive response is to do nothing and continue the current plan agreement provision requiring benefit commencement for all employees after age 70 1/2. Because § 401(a)(9)(C) sets forth the outside limits that a sponsor may adopt, the present, less liberal plan provision complies with the amended section.
In its initial guidance (Notice 96-67, 1996-2 CB 235), the IRS noted that an over age 70 1/2 working employee's RBD is, under amended § 401(a)(9)(C), April 1 of the year following retirement. Notice 97-75 (1997-51 IRB 18), Q&A 10, however, states that, if a plan provides for the use of the pre-1997 distribution commencement rule, a participant's RBD will be considered to be April 1 of the year following attainment of age 70 1/2 even if the participant continues employment. At least for working employees who attain age 70 1/2 before 1999 (if not beyond), this "rule of convenience" applies to determine a participant's designated beneficiary, age recalculation election and death benefit treatment.
Income Tax Rules
For income tax purposes, how-ever, Notice 97-75 states that the amended § 401(a)(9)(C) definition of RBD applies to determine the character of any distributions as either "eligible rollover distributions" or as "required minimum distributions" under § 402(c)(4). As a result, distributions made to over age 70 1/2 working participants (being made before the statutory RBD) will be eligible rollover distributions subject to the 20% income tax withholding requirement of ¤ 2405(c) unless
(1) a direct rollover of the distribution- is made or (2) the payments are considered to be a series of substantially equal payments over the life (or life expectancy) of the participant (or participant and spouse). A series of payments equal to the minimum amounts required (for the after age 70 1/2 RBD) will be treated as minimum required distributions, but if a working employee may and does accelerate payments under the plan so as to exceed the minimum amounts, a direct rollover presumably can be made to defer taxation.
Option to Defer RBD
A second employer alternative is to give a working employee the option to begin receiving benefit payments after age 70 1/2 or to defer distribution until after retirement (Ann. 97-70, 1997-29 IRB 14). In such a case, regardless of whether the employee elects to receive benefit payments while continuing employment, the participant's RBD will be April 1 following the calendar year of retirement both for minimum payment and income tax purposes.
Finally, as a third option, a plan sponsor may elect to adopt the provisions of amended § 401(a)(9)(C) on a prospective basis by requiring working employees who attain age 701/2 in 1999 or later years to defer minimum benefit payments until after retirement. In this case, the participant's RBD will not occur until the April 1 after retirement. The delayed application of such a plan amendment is due to Prop. Reg. 1.411(d)(4), Q&A 10. Because participants have the right (under the previously mandated present plan agreement provisions) to receive distributions after age 70 1/2 while working, the elimination of this right is viewed as the cutback of a separate optional form of benefit prohibited under § 411(d)(6).
If a plan that chooses to recognize a deferred RBD for working employees has an over age 70 1/2 employee who was already receiving benefits in 1996, the plan may permit the employee to elect to stop distributions (see Notice 97-75). If such an election is made (with spousal consent, if benefits are being paid in the form of a qualified joint and survivor annuity), the employee's previous after age 70 1/2 RBD is deemed to no longer apply. If death occurs before the new post-retirement RBD, the employee's date of death is the new RBD for method of payment and designated beneficiary elections. Note that Notice 97-75 sets forth the spousal consent requirements that may, depending on the nature of the plan and the choice of plan amendment language, apply to participant elections made at the time of the second post-retirement RBD.
The RBD of a working septuagenarian depends on the plan provisions adopted by the plan sponsor before the end of the remedial amendment period (the period by which amendments must be made, which ends on the last day of the plan year that begins in 1999). If an option to defer benefit commencement or an option to stop
current payments is extended to participants in accordance with IRS preliminary guidance, the plan must be administered according to the plan provisions that will ultimately be adopted. An understanding of the employer plan, as amended or as operated, is needed to determine whether the RBD is April 1 of the calendar year after the participant attains age 70 1/2 (for some but not all purposes), or April 1 following the calendar year of retirement (for all purposes), or may be shifted from one date to another.
Retirement Benefits Planning Editor-Harvey B. Wallace II, Joslyn Keydel & Wallace, 211 West Fort St., Suite 2211, Detroit, MI 48226-3270.
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