[4830-01-P] DEPARTMENT OF TREASURY Internal Revenue Service (IRS) 26 CFR Parts 1, 54, and 602 [TD 8987] RIN 1545-AY69, 1545-AY70
[1] AGENCY: Internal Revenue Service (IRS), Treasury.
[2] ACTION: Final and temporary regulations.
[3] SUMMARY: This document contains final and temporary regulations relating to required minimum distributions from qualified plans, individual retirement plans, deferred compensation plans under section 457, and section 403(b) annuity contracts, custodial accounts, and retirement income accounts. These regulations will provide the public with guidance necessary to comply with the law and will affect administrators of, participants in, and beneficiaries of qualified plans; institutions that sponsor and individuals who administer individual retirement plans, individuals who use individual retirement plans for retirement income, and beneficiaries of individual retirement plans; and employees for whom amounts are contributed to section 403(b) annuity contracts, custodial accounts, or retirement income accounts and beneficiaries of such contracts and accounts. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rule making on this subject in the Proposed Rules section of the Federal Register.
[4] EFFECTIVE DATE: These regulations are effective January 1, 2003.
[5] FOR FURTHER INFORMATION CONTACT: Cathy A. Vohs, 202-622-6090 (Not a toll free number).
SUPPLEMENTARY INFORMATION: Paperwork Reduction Act
[6] The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-0996, in conjunction with the notice of proposed rule making published on July 27, 1987, 52 FR 28070, REG-EE-113-82, Required Distributions From Qualified Plans and Individual Retirement Plans, under control number 1545-1466 for Third-Party Disclosure Requirements in IRS Regulations, and control number 1545-1573, in conjunction with the notice of proposed rule making published on December 30, 1997, 62 FR 67780, REG-209463- 82, Required Distributions from Qualified Plans and Individual Retirement Plans. Responses to the collections of information under control numbers 1545-0996 and 1545-1466 are mandatory. Responses to the collection of information under control number 1545-1573 are required to obtain the benefit of a trust being treated as a designated beneficiary under a retirement plan.
[7] An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.
[8] The estimated annual burden per respondent under control number 1545-0996 is 1 hour.
[9] The estimated annual burden per respondent under control number 1545-1466 is 9 minutes.
[10] The estimated annual burden per respondent under control number 1545-1573 is 20 minutes.
[11] Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
[12] Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
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Background
[13] This document contains amendments to the Income Tax Regulations (26 CFR Part 1) and to the Pension Excise Tax Regulations (26 CFR Part 54) under sections 401, 403, 408, and 4974 of the Internal Revenue Code of 1986 (Code). These amendments conform the regulations to section 634 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (115 Stat. 117), section 1404 of the Small Business Job Protection Act of 1996 (SBJPA) (110 Stat. 1791), sections 1121 and 1852 of the Tax Reform Act of 1986 (TRA of 1986) (100 Stat. 2464 and 2864), sections 521 and 713 of the Tax Reform Act of 1984 (TRA of 1984) (98 Stat. 865 and 955), and sections 242 and 243 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (96 Stat. 521). The regulations provide guidance on the minimum distribution requirements under section 401(a)(9) for plans qualified under section 401(a) and for other arrangements that incorporate the section 401(a)(9) rules by reference. The section 401(a)(9) rules are incorporated by reference in section 408(a)(6) and (b)(3) for individual retirement accounts and annuities (IRAs) (including Roth IRAs, except as provided in section 408A(c)(5)), section 403(b)(10) for section 403(b) annuity contracts, and section 457(d) for eligible deferred compensation plans.
[14] For purposes of this discussion of the background of the regulations in this preamble, as well as the explanation of provisions below, whenever the term employee is used, it is intended to include not only an employee but also an IRA owner.
[15] Section 401(a)(9) provides rules for distributions during the life of the employee in section 401(a)(9)(A) and rules for distributions after the death of the employee in section 401(a)(9)(B). Section 401(a)(9)(A)(ii) provides that the entire interest of an employee in a qualified plan must be distributed, beginning not later than the employee's required beginning date, in accordance with regulations, over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).
[16] Section 401(a)(9)(C) defines required beginning date for employees (other than 5-percent owners and IRA owners) as 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. For 5-percent owners and IRA owners, the required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2, even if the employee has not retired.
[17] Section 401(a)(9)(D) provides that (except in the case of a life annuity) the life expectancy of an employee and the employee's spouse that is used to determine the period over which payments must be made may be redetermined, but not more frequently than annually.
[18] Section 401(a)(9)(E) provides that the term designated beneficiary means any individual designated as a beneficiary by the employee.
[19] Section 401(a)(9)(G) provides that any distribution required to satisfy the incidental death benefit requirement of section 401(a) is a required minimum distribution.
[20] Section 401(a)(9)(B)(i) provides that, if the employee dies after distributions have begun, the employee's interest must be distributed at least as rapidly as under the method used by the employee.
[21] Section 401(a)(9)(B)(ii) and (iii) provides that, if the employee dies before required minimum distributions have begun, the employee's interest must be either: distributed (in accordance with regulations) over the life or life expectancy of the designated beneficiary with the distributions beginning no later than 1 year after the date of the employee's death, or distributed within 5 years after the death of the employee. However, under section 401(a)(9)(B)(iv), a surviving spouse may wait until the date the employee would have attained age 70 1/2 to begin taking required minimum distributions.
[22] Comprehensive proposed regulations under section 401(a)(9) were previously published in the Federal Register on January 17, 2001 (REG-130477-00/REG-130481-00; 66 FR 3928) and July 27, 1987 (EE-113-82; 52 FR 28070). The proposed regulations published in 2001 substantially simplified the rules for determining required minimum distributions for separate accounts provided in the 1987 proposed regulations. The public reaction to this simplification was very favorable. Consequently, these final regulations adopt the simplified rules in the 2001 proposed regulations for separate accounts, with the modifications described below in the Explanation of Provisions. These regulations continue to incorporate, with some modifications, applicable previously issued guidance (i.e., Notice 83-23 (1983-2 C.B. 418), Notice 88-38 (1988-1 C.B. 524), Notice 96-67 (1996-2 C. B. 235), and Notice 97-75 (1997-2 C.B. 337)). To the extent not modified or superceded by these regulations, the guidance in Notice 83-23 and Notice 97-75 remains in effect. For example, if an employer uses the same required beginning date for all employees regardless of whether the employee has retired by age 70 1/2, during the period before an employee retires, the employee may determine the portion of any distribution that is eligible for rollover using the statutory definition of required beginning date.
[23] With respect to annuity payments, the 2001 proposed regulations retained the basic structure of the 1987 proposed regulation. The preamble to the 2001 proposed regulations indicated that the IRS and Treasury were continuing to study these rules and specifically requested updated comments on current practices and issues relating to required minimum distributions from annuity contracts. Commentators provided information on the variety of annuity contracts being developed and available as insurance company products for purchase with separate accounts. In response to the comments received, temporary regulations under §1.401(a)(9)-6T significantly expand the situations in which annuity payments under annuity contracts purchased with an employee's benefit may provide for increasing payments. These regulations are being issued in proposed (REG-108697-02) and temporary form rather than final form in order to give taxpayers an opportunity to comment on these changes.
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Explanation of Provisions
Uniform Lifetime Table
[24] These final regulations retain the simplifications to the minimum distribution rules for separate accounts provided in the 2001 proposed regulations, including the calculation of the required minimum distribution during the individual's lifetime using a uniform table. The basic calculation for individual accounts provides that the required minimum distribution is determined by dividing the account balance by the distribution period. For lifetime required minimum distributions, there is a uniform distribution period for almost all employees of the same age. The uniform lifetime distribution period table is based on the joint life and last survivor expectancy of an individual and a hypothetical beneficiary 10 years younger. However, if the employee's sole beneficiary is the employee's spouse and the spouse is more than 10 years younger than the employee, a longer distribution period measured by the joint life and last survivor life expectancy of the employee and spouse is permitted to be used.
[25] For years after the year of the employee's death, the distribution period is generally the remaining life expectancy of the designated beneficiary. The beneficiary's remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the employee's death, reduced by one for each subsequent year. If the employee's spouse is the employee's sole beneficiary, the distribution period during the spouse's life is the spouse's single life expectancy. For years after the year of the spouse's death, the distribution period is the spouse's life expectancy calculated in the year of death, reduced by one for each subsequent year. If there is no designated beneficiary, the distribution period is the employee's life expectancy calculated in the year of death, reduced by one for each subsequent year.
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New Mortality Tables
[26] The 2001 proposed regulations provided that the life expectancies for purposes of section 401(a)(9) would be determined using the expected return multiples set forth in the regulations under section 72 that are used for other purposes under the Code. These tables, based upon the experience reflected in the 1983 individual annuity mortality table (without load), were adopted for purposes of section 72 in 1986 and had been used in both the 1987 proposed regulations and the 2001 proposed regulations under section 401(a)(9).
[27] Section 634 of EGTRRA instructed the Secretary of Treasury to modify the life expectancy tables used for purposes of the minimum distribution rules to reflect current life expectancy. In accordance with that instruction, the final regulations adopt new tables of life expectancies to be used for determining required minimum distributions.
[28] The new tables were derived by starting with the basic 2000 individual annuity mortality table and projecting mortality improvement for the period 2000 through 2003 using the assumed mortality improvement factors that were adopted in developing the Annuity 2000 mortality table. The resulting mortality rates were blended using a fixed 50% male 50% female blend. The uniform lifetime table provided in these final regulations has also been adjusted to reflect these new mortality tables.
[29] These new tables also may be used to determine an employee's (or IRA owner's) life expectancy, or the joint life and last survivor expectancy of an employee (or IRA owner) and designated beneficiary, for purposes of calculating the amount of substantially equal periodic payments under section 72(t)(2)(A)(iv) when applying a method permitted under A-12 of Notice 89-25 (1989-1 C.B. 662, 666). One of these methods allows use of the methodology underlying the minimum distribution calculations for separate accounts in which the account balance in the prior year is divided by life expectancy or joint life and last survivor expectancy. Under this method, the payments are not equal but are treated as substantially equal if the life expectancy is determined in a consistent manner. A series of substantially equal periodic payments under section 72(t)(2)(A)(iv) determined under this methodology will not be considered to have been modified merely because the new tables are used in the future to determine the annual periodic payments rather than the tables in the regulations under section 72.
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Determination of the Designated Beneficiary
[30] The 2001 proposed regulations provided that, generally, the designated beneficiary is determined as of the end of the year following the year of the employee's death. Thus, any beneficiary eliminated by distribution of the beneficiary's benefit or through disclaimer during the period between the employee's death and the end of the year following the year of death is disregarded in determining the employee's designated beneficiary for purposes of calculating required minimum distributions. If, as of the end of the year following the year of the employee's death, the employee has more than one designated beneficiary and the account or benefit has not been divided into separate accounts or shares for each beneficiary, the beneficiary with the shortest life expectancy is the designated beneficiary. Further, if a person other than an individual is a beneficiary as of that date, the employee is treated as not having a beneficiary (except as provided below with respect to trusts).
[31] Commentators applauded the basic principle of the approach in the 2001 proposed regulations but suggested that the designated beneficiary determination should be made before the end of the year following the year of death so that there will be adequate time to calculate and distribute the required minimum amount between the date the beneficiary determination is finalized and the end of the year following the year of the employee's death (i.e., the date that required minimum distributions to non-spouse designated beneficiaries must commence). In response to these comments, the date for determining the designated beneficiary has been changed to September 30 of the year following the year of the employee's death. In response to comments, these final regulations clarify that in order for a beneficiary to disclaim entitlement to a benefit for purposes of section 401(a)(9), the disclaimer must satisfy section 2518. Finally, the final regulations clarify that if a designated beneficiary dies during the period between the employee's date of death and September 30 of the year following the year of the employee's death, the individual continues to be treated as the designated beneficiary for purposes of determining the distribution period rather than the successor beneficiary.
[32] Some commentators requested that final regulations provide that, if the employee's estate was named as the beneficiary in the beneficiary designation or the employee's estate became beneficiary by operation of law, the beneficiary of the estate or the beneficiary of the IRA named under the employee's will could replace the estate as beneficiary by September 30 of the year following the year of death. This change is not being adopted in these final regulations. The period between death and the beneficiary determination date is a period during which beneficiaries can be eliminated but not replaced with a beneficiary not designated under the plan as of the date of death. In order for an individual to be a designated beneficiary, any beneficiary must be designated under the plan or named by the employee as of the date of death.
[33] These regulations retain the rule in the proposed regulations that, in determining an employee's beneficiaries for purposes of applying the multiple beneficiary rule or determining if the employee's spouse is the employee's sole beneficiary, all beneficiaries of the employee's interest in the plan, including contingent beneficiaries, are taken into account. The regulations also retain the exception to this rule under which, if a beneficiary (subsequent beneficiary) is entitled to any portion of an employee's benefit only if another beneficiary dies before the entire benefit to which that other beneficiary is entitled has been distributed by the plan, the subsequent beneficiary will not be considered a beneficiary. However, these regulations clarify that the exception from the multiple beneficiary rules for death contingencies only applies to a person who could be entitled to a portion of the employee's benefit by becoming the successor to the interest of one of the employee's beneficiaries after that beneficiary's death. The regulations provide that this rule does not apply to a person who has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor to the interest of one of the employee's beneficiaries upon that beneficiary's death. Thus, for example, if one beneficiary has a right to any income on an employee's individual account during that beneficiary's life and another beneficiary has a right to the principal but only after the death of the income beneficiary (with any portion of the principal distributed during the life of the income beneficiary to be held in trust until that beneficiary's death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.
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Default Rule for Post-death Distributions
[34] These regulations, as did the 2001 proposed regulations, provide that, if an employee dies before the employee's required beginning date and the employee has a designated beneficiary, then the life expectancy rule in section 401(a)(9)(B)(iii) (rather than the 5-year rule in section 401(a)(9)(B)(ii)) is the default distribution rule. Thus, absent a plan provision or election of the 5-year rule, the life expectancy rule applies in all cases in which the employee has a designated beneficiary, and the 5-year rule applies if the employee does not have a designated beneficiary. This is a change from the position in the 1987 proposed regulations that provided the 5-year rule as the default unless the spouse was the sole beneficiary. Commentators pointed out that, as a result of the default rule under the 1987 regulations, some beneficiaries did not commence distributions under the life expectancy rules. In response to those comments, these final regulations provide a transition rule that permits beneficiaries subject to the 5-year rule under the 1987 proposed regulations to switch to the life expectancy rule, provided that all amounts that would have been required to be distributed under an application of the life expectancy rule are distributed by the earlier of December 31, 2003 or the end of the 5-year period following the year of the employee's death.
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Temporary Rules for Defined Benefit Plans and Annuity Contracts
[35] These temporary regulations provide a number of changes to the annuity rules provided in the 2001 proposed regulations including changes designed to make the rules more consistent with the rules for individual accounts and reflect new product designs. In order to allow taxpayers to comment on these changes, the section of the regulations governing defined benefit plans and annuities is being issued as temporary and proposed regulations rather than final regulations.
[36] In response to comments, the following changes are being made. First, annuity payments are permitted to be provided for a period certain that is as long as the period under the uniform lifetime table for the employee's age in the year in which the annuity starting date occurs, regardless of who is the employee's designated beneficiary. Further, the period does not change upon the death of the employee even if the remaining period certain is longer or shorter than the beneficiary's single life expectancy. The same rule applies if the annuity also includes a life annuity or a joint and survivor annuity. If the employee's sole designated beneficiary is the employee's spouse, if the spouse is more than 10 years younger than the employee, and if the annuity is only for a period certain and does not have a life contingent element, the period certain can be as long as the joint life and last survivor expectancy of the employee and the employee's spouse.
[37] These temporary regulations retain the rules in the 2001 proposed regulations interpreting the minimum distribution incidental benefit requirement. Under these rules, if the survivor of a joint and survivor annuity is not the employee's spouse and if the survivor annuitant is more than 10 years younger than the employee, then the survivor portion must be less than 100% of the employee's benefit. In such a case, the survivor annuity must be reduced so that it does not exceed the employee's benefit multiplied by the percentage provided in the table in the regulations. However, the regulations clarify that if the joint and survivor annuity also has a period certain, the reduction in survivor annuity is only required after expiration of the period certain.
[38] Further, in response to comments, the temporary regulations make a number of changes that expand the situations in which increasing annuity payments are permitted. The additional situations are generally only available to annuities purchased from insurance companies.
[39] Under these temporary regulations, an annuity purchased from an insurance company can increase annually by a constant percentage, provided that the initial payment is sufficiently large that the total expected payments, determined without regard to these increases, exceed the account value being annuitized. This minimum payment requirement, together with the adverse economic interests of the insurer and the annuity purchaser, effectively limits the constant percentage increase under an annuity to the assumed interest rate used in pricing the annuity.
[40] These temporary regulations also provide explicit rules relating to the payments of dividends under participating annuity contracts. Under the temporary regulations, a variation in the amount of the annuity payment (referred to as a dividend or other payment resulting from favorable actuarial experience) can be made provided that: (1) the initial payment meets the minimum threshold described above, (2) actuarial experience is measured at least annually, and (3) the resulting dividend payment or other payment is either paid no later than the year following the year for which the actuarial experience is measured or is payable in the same form as the payment of the annuity over the remaining period of the annuity. These requirements are intended to preclude back loading of the distribution stream through the use of conservative pricing assumptions where actuarial gains with respect to those assumptions are deferred and paid at a later date. The definition of dividend or other payment resulting from actuarial gain is broad enough to encompass the contractual adjustment provided for in a variable annuity. Accordingly, the rules that permitted payments that vary with the investment performance of underlying assets has been replaced with this more general construct.
[41] The temporary regulations allow full and partial withdrawals from purchased annuities in certain circumstances. The restrictions on these withdrawals are intended to preclude the use of a withdrawal or cash-out feature as a mechanism to distribute deferred actuarial gains. In the case of a full withdrawal (including a death benefit), the distribution must not exceed the expected future payments under the contract, taking into account the annuitants who are still alive and any remaining period certain, but without regard to any future increases. In the case of a partial withdrawal, the full withdrawal under the terms of the contract must satisfy the preceding sentence and, after the partial withdrawal, all future annuity payments must be reduced proportionately based on the ratio of the partial withdrawal to the maximum withdrawal under the terms of the contract.
[42] As discussed above, these permitted increases are only available for insurance company products and not a distribution stream provided from a section 401(a) defined benefit trust. In addition, these temporary regulations do not permit annuity payments that vary with the value of the underlying assets of the plan to be provided by a defined benefit plan with a section 401(a) qualified trust. Further, these regulations clarify that an annuity under a defined benefit plan with a section 401(a) qualified trust is permitted to provide that annuity payments may increase with an annual percentage increase that does not exceed the percentage increase in a cost-of-living index that is based on prices of all items and issued by the Bureau of Labor Statistics. Finally, the temporary regulations clarify that increases in these annuity payments to reflect benefit increases must be pursuant to a plan amendment increasing benefits.
[43] The preamble to the 2001 proposed regulations indicated that the IRS and Treasury were continuing to consider whether retention of the rule allowing an employee's minimum required distributions under a defined benefit plan to be determined using the rules for individual accounts was appropriate for defined benefit plans. Few comments specifically requested retention of this rule. As a result, the IRS and Treasury have concluded that this rule has little application outside of being used to determine the portion of a lump sum distribution of an employee's vested accrued benefit that is eligible for rollover. Accordingly, this rule has not been retained in these temporary regulations except for use in determining the amount that is eligible for rollover when a defined benefit plan pays an employee's entire vested accrued benefit in a lump sum. However, in response to comments, these temporary regulations permit a plan to treat the amount of a year of annuity payments that would have been payable under the normal form as the minimum required distribution for a year in the case of a lump sum payment.
[44] Finally, in response to a comment, these temporary regulations clarify that actuarial increases to benefits under a defined benefit plan required under section 401(a)(9)(C)(iii), as added by SBJPA, need not be provided for any period before January 1, 1997.
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Incidental Benefit Requirement
[45] These final and temporary regulations provide rules relating to the interaction of the section 401(a)(9) requirements and the incidental benefit requirement of §1.401-1(b)(1)(i). Under these rules, generally if distributions with respect to an employee's benefit satisfy the minimum distribution incidental benefit requirement under these regulations, the distribution will be deemed to satisfy any requirement for distributions under the incidental benefit requirements of §1.401-1(b)(1)(i). However, if a plan provides for certain post-retirement ancillary death benefits or a section 403(b) contract includes an undistributed pre-1987 account, the employee's benefits must continue to satisfy the distribution requirements of the incidental benefit requirement of §1.401-1(b)(1)(i), determined without regard to these regulations. Existing revenue rulings continue to provide guidance with respect to the application of the incidental benefit requirements to permissible nonretirement benefits such as life, accident, or health benefits.
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Trust as Beneficiary
[46] The final regulations retain the provision in the proposed regulations allowing an underlying beneficiary of a trust to be an employee's designated beneficiary for purposes of determining required minimum distributions when the trust is named as the beneficiary of a retirement plan or IRA, provided that certain requirements are met. One of these requirements is that documentation of the underlying beneficiaries of the trust be provided to the plan administrator or IRA trustee, custodian, or issuer. In the case of individual accounts, unless the lifetime distribution period for an employee is measured by the joint life expectancy of the employee and the employee's spouse, the deadline under these regulations for providing the beneficiary documentation is October 31 of the year following the year of the employee's death, rather than the end of the year following the year of the employee's death as provided under the 2001 proposed regulations.
[47] This deadline for providing the trust documentation is coordinated with the deadline for determining the employee's designated beneficiary. Amendments to the 1987 proposed regulations published in 1997 eliminated the requirement that the trust be irrevocable before death. Commentators indicated that some beneficiaries would have qualified for a longer distribution period as a result of this change except for the fact that they had not provided the required documentation by the deadline provided in the regulations, which, in some cases, was a date before the regulation was published. Consequently, the commentators requested that final regulations provide a transition period for providing this documentation. In response to these comments, these regulations provide that, if the date for providing this documentation is before October 31, 2003, the documentation is permitted to be provided to the plan administrator (or IRA trustee, custodian, or issuer) until October 31, 2003.
[48] Commentators asked for clarification as to whether an election by a revocable trust to be treated as part of an estate under section 645 causes the trust to be treated as an estate for purposes of section 401(a)(9). On this point, the IRS and Treasury intend that a revocable trust will not fail to be a trust for purposes of section 401(a)(9) merely because the trust elects to be treated as an estate under section 645, as long as the trust continues to be a trust under state law.
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Separate Accounts
[49] Several commentators requested clarification concerning when an employee's individual account can be divided into separate accounts that are permitted to satisfy section 401(a)(9) separately and concerning whether separate accounts could also provide for separate investments. In response to these comments, these final regulations provide that separate accounts with different beneficiaries under the plan can be established at any time, either before or after the employee's required beginning date. However, the final regulations provide that the separate accounts are recognized for purposes of determining required minimum distributions only after the later of the year of the employee's death (whether before or after the required beginning date) and the year the separate accounts are established. In addition, the final regulations clarify that, in order to determine the distribution period for the separate account by disregarding the beneficiaries of the other separate account, the separate account must be established no later then the end of the year following the year of the employee's death.
[50] The separate accounting must allocate all post-death investment gains and losses for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent basis among the separate accounts for the different beneficiaries. The separate accounting must also allocate any post- death distribution to the separate account of the beneficiary receiving that distribution. Once the separate accounts are established, the final regulations permit the separate accounting to provide for separate investments for each separate account.
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Elimination of Optional Forms of Benefit
[51] Some commentators requested relief under section 411(d)(6) for the elimination of optional forms of benefit that were needed to satisfy section 401(a)(9) under the 1987 proposed regulations but that are no longer needed to satisfy these final regulations. For defined contribution plans, this relief generally is not needed because paragraph (e) of A-2 of §1.411(d)-4 gives broad authority to employers to amend their defined contribution plan to eliminate installment payout options as long as the right to a lump sum option payable at the same time is preserved. These final regulations also provide that, pursuant to section 411(d)(6)(B), a plan will not fail to satisfy section 411(d)(6) merely because the plan is amended to eliminate the availability of an optional form of benefit to the extent that the optional form does not satisfy section 401(a)(9). However, the IRS and Treasury invite public comment if additional relief under section 411(d)(6) is needed in order for defined benefit plans to satisfy section 401(a)(9).
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Election of Surviving Spouse to Treat an Inherited IRA as Spouse's Own IRA
[52] These final regulations generally retain the clarifications in the 2001 proposed regulations regarding how and when a surviving spouse of a deceased IRA owner can elect to treat an IRA inherited by the surviving spouse from that owner as the spouse's own IRA. The 1987 proposed regulations provided that this election is deemed to have been made if the surviving spouse contributes to the IRA or does not take the required minimum distribution for a year under section 401(a)(9)(B) as a beneficiary of the IRA. Under the 2001 proposed regulations, this deemed election is permitted to be made only after the distribution of the required minimum amount for the account, if any, for the year of the individual's death. These final regulations provide that the election can be made at any time after the IRA owner's date of death, while clarifying that the minimum required distribution for the calendar year of the IRA's owner's death is determined assuming the IRA owner lived throughout the year. These regulations also clarify that the surviving spouse is required to receive a minimum distribution for the year of the IRA owner's death only to the extent that the amount required was not distributed to the owner before death.
[53] Some commentators raised concerns about the other clarifications in the 2001 proposed regulations. The 2001 proposed regulations clarified that a deemed election is permitted only if the spouse is the sole beneficiary of the account and has an unlimited right to withdraw from the account. This requirement is not satisfied if a trust is named as beneficiary of the IRA, even if the spouse is the sole beneficiary of the trust. As explained in the 2001 preamble, these clarifications make the election consistent with the underlying premise that the surviving spouse could have received a distribution of the entire decedent IRA owner's account and rolled it over to an IRA established in the surviving spouse's own name as IRA owner.
[54] If the spouse actually receives a distribution from the IRA, the spouse is permitted to roll that distribution over within 60 days into an IRA in the spouse's own name to the extent that the distribution is not a required distribution, regardless of whether or not the spouse is the sole beneficiary of the IRA owner. Further, if the distribution is received by the spouse before the year that the IRA owner would have been 70 1/2, no portion of the distribution is a required minimum distribution for purposes of determining whether it is eligible to be rolled over by the surviving spouse.
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IRA Reporting of Required Minimum Distributions
[55] The 2001 proposed regulations required the trustee, custodian, or issuer of an IRA to report the amount of the required minimum distribution from the IRA at the time and in the manner provided under additional guidance issued by the IRS and applicable IRS forms and instructions. A significant number of commentators objected to the requirement that the amount of the required minimum distribution for a year be reported because of concerns that the number may be inaccurate in certain cases. After thorough consideration of these comments and consultation with interested parties, the final regulations continue to provide authority to the Service to determine the extent to which the trustee, custodian, or issuer of an IRA must report information with respect to the required minimum distribution from that IRA through guidance of general applicability as well as forms and publications.
[56] In conjunction with these final regulations a notice is being published that specifies the reporting requirements that apply. Beginning in 2004, trustees, custodians, and issuers must identify to the IRS on Form 5498 each IRA for which a minimum distribution is required to be made to an IRA owner. The trustee, custodian or issuer does not need to report the amount of the required distribution to the IRS. However, the trustee, custodian, or issuer of such an IRA, must provide additional information regarding the IRA to the IRA owner required to receive a minimum required distribution, beginning with the minimum required distribution for 2003. The trustee, custodian or issuer of the IRA either must report the amount of the required minimum distribution for the IRA to the IRA owner, or must advise the IRA owner that a minimum distribution with respect to the IRA is required for the year, offer to calculate the amount of the required minimum distribution for the IRA owner upon request, and then, if requested, calculate the amount and provide it to the IRA owner. Although the delegation of authority in the regulations to require reporting would permit reporting to be required with respect to required minimum distributions to beneficiaries, no reporting is required with respect to beneficiaries at this time.
[57] The reporting provisions in the 2001 proposed regulations, these final regulations, and the notice being published are intended to assist taxpayers in complying with the minimum distribution requirement. However, the Treasury and the IRS continue to have concerns about the overall level of compliance in this area and intend to monitor the effect of the new reporting regime on compliance to determine whether it would be appropriate to modify the regime in the future.
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Calculation Simplification
[58] In response to comments that there are too many variables that might change during a distribution calendar year for an accurate calculation of the required minimum distribution for the year by the trustee at the beginning of the year, a number of simplifying changes are included in these final regulations. For lifetime distributions, the marital status of the employee is determined on January 1 each year. Divorce or death after that date is disregarded until the next year. Further, a change in beneficiary due to the spouse's death is not recognized until the following year. Contributions and distributions made after December 31 of a calendar year are disregarded for purposes of determining the minimum distribution for the following year. An employee's account balance for the valuation calendar year that is also the employee's first distribution calendar year is no longer reduced for a distribution on April 1 to satisfy the minimum distribution requirement for the first distribution calendar year. Contributions made after the calendar year that are allocated as of a date in the prior calendar year are no longer required to be added back. The only exceptions are rollover amounts, and recharacterized conversion contributions, that are not in any account on December 31 of a year. These changes are made to the qualified plan rules as well as IRA rules to maintain the parity between the rules.
Other Rules for IRAs
[59] These final regulations retain the general rule that the rules applying section 401(a)(9) to qualified plans apply also to IRAs, unless otherwise provided. In addition to retaining the special rules for IRAs provided in the 2001 proposed regulations, these final regulations provide a special rule for trustee-to-trustee transfers between IRAs to coordinate with the rule that allows aggregation of IRA distributions. Although the IRA to IRA transfer is not treated as a distribution for purposes of section 401(a)(9), in light of the fact that the required minimum distribution with respect to the transferor IRA can be taken from any IRA, the transferor IRA will be able to transfer the entire balance and will not be required to retain the amount of the required minimum distribution for the year.
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Section 403(b) Contracts
[60] These regulations retain the basic rule in the 1987 and 2001 proposed regulations that a section 403(b) contract is treated as an individual retirement plan for purposes of satisfying the required minimum distribution rules. Consequently, the delegation of authority to require reporting with respect to IRAs also applies to section 403(b) contracts. However, the notice being issued in conjunction with these regulations provides that no reporting is required at this time with respect to required minimum distributions from section 403(b) contracts.
[61] As requested in comments to the 1987 and the 2001 proposed regulations, these regulations provide that an annuity provided with respect to a section 403(b)(9) retirement income account will not fail to satisfy the requirements for annuity payment under an annuity contract merely because the annuity is not provided under a contract purchased from an insurance company.
[62] Section 1852(a) of TRA '86 applied section 401(a)(9) to section 403(b) contracts effective for benefits accruing after December 31, 1986. The final regulations retain the rule in the proposed regulations interpreting the effective date of section 1852(a) of TRA '86 that does not apply section 401(a)(9) to the undistributed portion of the employee's account balance in a section 403(b) contract as of December 31, 1986 (the pre-'87 account balance). Further, the final regulations clarify that a contract will not lose the grandfather for a pre-'87 account balance merely because the account balance is transferred from one section 403(b) contract to another, provided the issuer of the transferee contract satisfies the record keeping requirements for the pre-'87 account balance. However, a distribution and rollover (including a direct rollover) of an amount from the pre-'87 account will cause that amount to lose the grandfather treatment.
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Amendment of Qualified Plans
[63] The IRS intends to publish procedures in the near future that will provide guidance on amending qualified plans to reflect these final regulations under section 401(a)(9).
Amendment of IRAs and Effective Date
[64] Rev. Proc. 2002-10 (2002-4 I.R.B. 401), provides guidance on when IRA documents must be updated for these final regulations and for changes made by EGTRRA.
Effective Date
[65] The regulations apply for determining required minimum distributions for calendar years beginning on or after January 1, 2003. For determining required minimum distributions for calendar year 2002, taxpayers may rely on these final regulations, the 2001 proposed regulations, or the 1987 proposed regulations.
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Special Analyses
[66] It has been determined that these regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that the collection of information in these regulations does not have a significant economic impact on a substantial number of small entities. This certification is based on the following. The only provisions requiring collection of information are in A-2 of §1.401(a)(9)-1, A-4 of §1.401(a)(9)-3, A-5 and A-6 of §1.401(a)(9)-4, and A-2 of §1.403(b)-3. The election described in A-4 of §1.401(a)(9)-3 is expected to be an unusual occurrence for small entities because few individuals with benefits in retirement plans maintained by small entities are likely to make these elections. In the case of A-2 of §1.401(a)(9)-1 and A-5 and A-6 of §1.401(a)(9)-4, when determining required minimum distributions in cases where a plan participant wishes to designate a trust as beneficiary of the participant's benefit, the reporting burden is primarily on the plan participant, or trustee of the trust named as beneficiary, to supply information rather than on the entity maintaining the retirement plan and the fact that the number of participants per plan to whom the burden applies is insignificant. In A-2 of 1.403(b)-3, the record keeping burden with respect to section 403(b) contracts under which the pre-1987 account balance must be maintained only applies to issuers and custodians of those contracts, which generally are not small entities. Therefore, a Regulatory Flexibility Analysis (5 U.S.C. chapter 6) is not required for this regulation. Pursuant to section 7805(f) of the Internal Revenue Code, the notices of proposed rule making preceding the final rule were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business and temporary §1.401(a)(9)-6T will be submitted to the Chief Counsel for such comments.
Drafting Information
[67] The principal authors of these regulations are Marjorie Hoffman and Cathy A. Vohs of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in their development.
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List of Subjects
26 CFR Part 1
[68] Income taxes, Reporting and record keeping requirements.
26 CFR Part 54
[69] Excise taxes, Pensions, Reporting and record keeping requirements.
Adoption of Amendments to the Regulations
[70] Accordingly, 26 CFR part 1 is amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.401(a)(9)-1 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-2 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-3 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-4 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-5 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-6T is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-7 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-8 is also issued under 26 U.S.C. 401(a)(9).
§1.401(a)(9)-9 is also issued under 26 U.S.C. 401(a)(9). * * *
§1.403(b)-3 is also issued under 26 U.S.C. 403(b)(10). * * *
§1.408-8 is also issued under 26 U.S.C. 408(a)(6) and (b)(3).* * *
Par. 2. Sections 1.401(a)(9)-0 through 1.401(a)(9)-9 are added to read as follows:
§1.401(a)(9)-0 Required minimum distributions; table of contents.
This table of contents lists the regulations relating to required minimum distributions under section 401(a)(9) of the Internal Revenue Code as follows:
§1.401(a)(9)-0 Required minimum distributions; table of contents.
§1.401(a)(9)-1 Minimum distribution requirement in general.
§1.401(a)(9)-2 Distributions commencing during an employee's lifetime.
§1.401(a)(9)-3 Death before required beginning date.
§1.401(a)(9)-4 Determination of the designated beneficiary.
§1.401(a)(9)-5 Required minimum distributions from defined contribution plans.
§1.401(a)(9)-6T Required minimum distributions for defined benefit plans and annuity contracts (temporary).
§1.401(a)(9)-7 Rollovers and transfers.
§1.401(a)(9)-8 Special rules.
§1.401(a)(9)-9 Life expectancy and distribution period tables.
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Q-1. What plans are subject to the minimum distribution requirement under section 401(a)(9), this section, and §§1.401(a)(9)-2 through 1.401(a)(9)-9?
A-1. Under section 401(a)(9), all stock bonus, pension, and profit-sharing plans qualified under section 401(a) and annuity contracts described in section 403(a) are subject to required minimum distribution rules. See this section and §§1.401(a)(9)-2 through 1.401(a)(9)-9 for the distribution rules applicable to these plans. Under section 403(b)(10), annuity contracts or custodial accounts described in section 403(b) are subject to required minimum distribution rules. See §1.403(b)-3 for the distribution rules applicable to these annuity contracts or custodial accounts. Under section 408(a)(6) and 408(b)(3), individual retirement plans (including, for some purposes, Roth IRAs under section 408A) are subject to required minimum distribution rules. See §1.408-8 for the distribution rules applicable to individual retirement plans and see §1.408A-6 for the distribution rules applicable to Roth IRAs under section 408A. Under section 457(d)(2), certain deferred compensation plans for employees of tax exempt organizations or state and local government employees are subject to required minimum distribution rules.
Q-2. Which employee account balances and benefits held under qualified trusts and plans are subject to the distribution rules of section 401(a)(9), this section, and §§1.401(a)(9)-2 through 1.401(a)(9)-9?
A-2.
(a) In general. The distribution rules of section 401(a)(9) apply to all account balances and benefits in existence on or after January 1, 1985. This section and §§1.401(a)(9)-2 through 1.401(a)(9)-9 apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003.
(b) Beneficiaries.
(1) The distribution rules of this section and §§ 1.401(a)(9)-2 through 1.401(a)(9)-9 apply to account balances and benefits held for the benefit of a beneficiary for calendar years beginning on or after January 1, 2003, even if the employee died prior to January 1, 2003. Thus, in the case of an employee who died prior to January 1, 2003, the designated beneficiary must be redetermined in accordance with the provisions of §1.401(a)(9)-4 and the applicable distribution period (determined under §1.401(a)(9)-5 or 1.401(a)(9)-6T, whichever is applicable) must be reconstructed for purposes of determining the amount required to be distributed for calendar years beginning on or after January 1, 2003.
(2) A designated beneficiary that is receiving payments under the 5-year rule of section 401(a)(9)(B)(ii), either by affirmative election or default provisions, may, if the plan so provides, switch to using the life expectancy rule of section 401(a)(9)(B)(iii) provided any amounts that would have been required to be distributed under the life expectancy rule of section 401(a)(9)(B)(iii) for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5-year period determined under A-2 of §1.401(a)(9)-3.
(c) Trust documentation. If a trust fails to meet the rule of A-5 of §1.401(a)(9)-4 (permitting the beneficiaries of the trust, and not the trust itself, to be treated as the employee's designated beneficiaries) solely because the trust documentation was not provided to the plan administrator by October 31 of the calendar year following the calendar year in which the employee died, and such documentation is provided to the plan administrator by October 31, 2003, the beneficiaries of the trust will be treated as designated beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).
Q-3. What specific provisions must a plan contain in order to satisfy section 401(a)(9)?
A-3.
(a) Required provisions. In order to satisfy section 401(a)(9), the plan must include the provisions described in this paragraph reflecting section 401(a)(9). First, the plan must generally set forth the statutory rules of section 401(a)(9), including the incidental death benefit requirement in section 401(a)(9)(G). Second, the plan must provide that distributions will be made in accordance with this section and §§1.401(a)(9)-2 through 1.401(a)(9)-9. The plan document must also provide that the provisions reflecting section 401(a)(9) override any distribution options in the plan inconsistent with section 401(a)(9). The plan also must include any other provisions reflecting section 401(a)(9) that are prescribed by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter.
(b) Optional provisions. The plan may also include written provisions regarding any optional provisions governing plan distributions that do not conflict with section 401(a)(9) and the regulations thereunder.
(c) Absence of optional provisions. Plan distributions commencing after an employee's death will be required to be made under the default provision set forth in §1.401(a)(9)-3 for distributions unless the plan document contains optional provisions that override such default provisions. Thus, if distributions have not commenced to the employee at the time of the employee's death, distributions after the death of an employee are to be made automatically in accordance with the default provisions in A-4(a) of §1.401(a)(9)-3 unless the plan either specifies in accordance with A-4(b) of §1.401(a)(9)-3 the method under which distributions will be made or provides for elections by the employee (or beneficiary) in accordance with A-4(c) of §1.401(a)(9)-3 and such elections are made by the employee or beneficiary.
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Q-1. In the case of distributions commencing during an employee's lifetime, how must the employee's entire interest be distributed in order to satisfy section 401(a)(9)(A)?
A-1.
(a) In order to satisfy section 401(a)(9)(A), the entire interest of each employee must be distributed to such employee not later than the required beginning date, or must be distributed, beginning not later than the required beginning date, over the life of the employee or joint lives of the employee and a designated beneficiary or over a period not extending beyond the life expectancy of the employee or the joint life and last survivor expectancy of the employee and the designated beneficiary.
(b) Section 401(a)(9)(G) provides that lifetime distributions must satisfy the incidental death benefit requirements.
(c) The amount required to be distributed for each calendar year in order to satisfy section 401(a)(9)(A) and (G) generally depends on whether a distribution is in the form of distributions under a defined contribution plan or annuity payments under a defined benefit plan or under an annuity contract. For the method of determining the required minimum distribution in accordance with section 401(a)(9)(A) and (G) from an individual account under a defined contribution plan, see §1.401(a)(9)-5. For the method of determining the required minimum distribution in accordance with section 401(a)(9)(A) and (G) in the case of annuity payments from a defined benefit plan or an annuity contract, see §1.401(a)(9)-6T.
Q-2. For purposes of section 401(a)(9)(C), what does the term required beginning date mean?
A-2.
(a) Except as provided in paragraph (b) of this A-2 with respect to a 5-percent owner, as defined in paragraph (c) of this A-2, the term required beginning date means 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 from employment with the employer maintaining the plan.
(b) In the case of an employee who is a 5-percent owner, the term required beginning date means April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2.
(c) For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2.
(d) Paragraph (b) of this A-2 does not apply in the case of a governmental plan (within the meaning of section 414(d)) or a church plan. For purposes of this paragraph, the term church plan means a plan maintained by a church for church employees, and the term church means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).
(e) A plan is permitted to provide that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70 1/2 regardless of whether the employee is a 5-percent owner.
Q-3. When does an employee attain age 70 1/2?
A-3. An employee attains age 70 1/2 as of the date six calendar months after the 70th anniversary of the employee's birth. For example, if an employee's date of birth was June 30, 1933, the 70th anniversary of such employee's birth is June 30, 2003. Such employee attains age 70 1/2 on December 30, 2003. Consequently, if the employee is a 5-percent owner or retired, such employee's required beginning date is April 1, 2004. However, if the employee's date of birth was July 1, 1933, the 70th anniversary of such employee's birth would be July 1, 2003. Such employee would then attain age 70 1/2 on January 1, 2004 and such employee's required beginning date would be April 1, 2005.
Q-4. Must distributions made before the employee's required beginning date satisfy section 401(a)(9)?
A-4. Lifetime distributions made before the employee's required beginning date for calendar years before the employee's first distribution calendar year, as defined in A-1(b) of §1.401(a)(9)- 5, need not be made in accordance with section 401(a)(9). However, if distributions commence before the employee's required beginning date under a particular distribution option, such as in the form of an annuity, the distribution option fails to satisfy section 401(a)(9) at the time distributions commence if, under terms of the particular distribution option, distributions to be made for the employee's first distribution calendar year or any subsequent distribution calendar year will fail to satisfy section 401(a)(9).
Q-5. If distributions have begun to an employee during the employee's lifetime (in accordance with section 401(a)(9)(A)(ii)), how must distributions be made after an employee's death?
A-5. Section 401(a)(9)(B)(i) provides that if the distribution of the employee's interest has begun in accordance with section 401(a)(9)(A)(ii) and the employee dies before his entire interest has been distributed to him, the remaining portion of such interest must be distributed at least as rapidly as under the distribution method being used under section 401(a)(9)(A)(ii) as of the date of his death. The amount required to be distributed for each distribution calendar year following the calendar year of death generally depends on whether a distribution is in the form of distributions from an individual account under a defined contribution plan or annuity payments under a defined benefit plan. For the method of determining the required minimum distribution in accordance with section 401(a)(9)(B)(i) from an individual account, see §1.401(a)(9)-5. In the case of annuity payments from a defined benefit plan or an annuity contract, see §1.401(a)(9)-6T. click here for §1.401(a)(9)-6T
Q-6. For purposes of section 401(a)(9)(B), when are distributions considered to have begun to the employee in accordance with section 401(a)(9)(A)(ii)?
A-6.
(a) General rule. Except as otherwise provided in A- 10 of §1.401(a)(9)-6T, distributions are not treated as having begun to the employee in accordance with section 401(a)(9)(A)(ii) until the employee's required beginning date, without regard to whether payments have been made before that date. Thus, section 401(a)(9)(B)(i) only applies if an employee dies on or after the employee's required beginning date. For example, if employee A retires in 2003, the calendar year A attains age 65 1/2, and begins receiving installment distributions from a profit-sharing plan over a period not exceeding the joint life and last survivor expectancy of A and A's spouse, benefits are not treated as having begun in accordance with section 401(a)(9)(A)(ii) until April 1, 2009 (the April 1 following the calendar year in which A attains age 70 1/2). Consequently, if A dies before April 1, 2009 (A's required beginning date), distributions after A's death must be made in accordance with section 401(a)(9)(B)(ii) or (iii) and (iv) and §1.401(a)(9)-3, and not section 401(a)(9)(B)(i). This is the case without regard to whether the plan has distributed the minimum distribution for the first distribution calendar year (as defined in A-1(b) of §1.401(a)(9)-5) before A's death.
(b) If a plan provides, in accordance with A-2(e) of this section, that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70 1/2, an employee who dies on or after the required beginning date determined under the plan terms is treated as dying after the employee's distributions have begun for purposes of this A-6 even though the employee dies before the April 1 following the calendar year in which the employee retires.
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Q-1. If an employee dies before the employee's required beginning date, how must the employee's entire interest be distributed in order to satisfy section 401(a)(9)?
A-1.
(a) Except as otherwise provided in A-10 of §1.401(a)(9)-6T, if an employee dies before the employee's required beginning date (and, thus, before distributions are treated as having begun in accordance with section 401(a)(9)(A)(ii)), distribution of the employee's entire interest must be made in accordance with one of the methods described in section 401(a)(9)(B)(ii) or (iii) and (iv). One method (the 5-year rule in section 401(a)(9)(B)(ii)) requires that the entire interest of the employee be distributed within 5 years of the employee's death regardless of who or what entity receives the distribution. Another method (the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)) requires that any portion of an employee's interest payable to (or for the benefit of) a designated beneficiary be distributed, commencing within one year of the employee's death, over the life of such beneficiary (or over a period not extending beyond the life expectancy of such beneficiary). Section 401(a)(9)(B)(iv) provides special rules where the designated beneficiary is the surviving spouse of the employee, including a special commencement date for distributions under section 401(a)(9)(B)(iii) to the surviving spouse.
(b) See A-4 of this section for the rules for determining which of the methods described in paragraph (a) of this A-1 applies. See A- 3 of this section to determine when distributions under the exception to the 5-year rule in section 401(a)(9)(B)(iii) and (iv) must commence. See A-2 of this section to determine when the 5-year period in section 401(a)(9)(B)(ii) ends. For distributions using the life expectancy rule in section 401(a)(9)(B)(iii) and (iv), see §1.401(a)(9)-4 in order to determine the designated beneficiary under section 401(a)(9)(B)(iii) and (iv), see §1.401(a)(9)-5 for the rules for determining the required minimum distribution under a defined contribution plan, and see §1.401(a)(9)-6T for required minimum distributions under defined benefit plans.
Q-2. By when must the employee's entire interest be distributed in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii)?
A-2. In order to satisfy the 5-year rule in section 401(a)(9)(B)(ii), the employee's entire interest must be distributed by the end of the calendar year which contains the fifth anniversary of the date of the employee's death. For example, if an employee dies on January 1, 2003, the entire interest must be distributed by the end of 2008, in order to satisfy the 5-year rule in section 401(a)(9)(B)(ii).
Q-3. When are distributions required to commence in order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?
A-3.
(a) Non-spouse beneficiary. In order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii), if the designated beneficiary is not the employee's surviving spouse, distributions must commence on or before the end of the calendar year immediately following the calendar year in which the employee died. This rule also applies to the distribution of the entire remaining benefit if another individual is a designated beneficiary in addition to the employee's surviving spouse. See A-2 and A-3 of §1.401(a)(9)-8, however, if the employee's benefit is divided into separate accounts.
(b) Spousal beneficiary. In order to satisfy the rule in section 401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the employee's surviving spouse, distributions must commence on or before the later of --
(1) The end of the calendar year immediately following the calendar year in which the employee died; and
(2) The end of the calendar year in which the employee would have attained age 70 1/2.
Q-4. How is it determined whether the 5-year rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) applies to a distribution?
A-4.
(a) No plan provision. If a plan does not adopt an optional provision described in paragraph (b) or (c) of this A-4 specifying the method of distribution after the death of an employee, distribution must be made as follows:
(1) If the employee has a designated beneficiary, as determined under §1.401(a)(9)-4, distributions are to be made in accordance with the life expectancy rule in section 401(a)(9)(B)(iii) and (iv).
(2) If the employee has no designated beneficiary, distributions are to be made in accordance with the 5-year rule in section 401(a)(9)(B)(ii).
(b) Optional plan provisions. A plan may adopt a provision specifying either that the 5-year rule in section 401(a)(9)(B)(ii) will apply to certain distributions after the death of an employee even if the employee has a designated beneficiary or that distribution in every case will be made in accordance with the 5-year rule in section 401(a)(9)(B)(ii). Further, a plan need not have the same method of distribution for the benefits of all employees in order to satisfy section 401(a)(9).
(c) Elections. A plan may adopt a provision that permits employees (or beneficiaries) to elect on an individual basis whether the 5-year rule in section 401(a)(9)(B)(ii) or the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) applies to distributions after the death of an employee who has a designated beneficiary. Such an election must be made no later than 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) (see A-3 of this section for the determination of such calendar year) or the end of the calendar year which contains the fifth anniversary of the date of death of the employee. As of the last date the election may be made, the election must be irrevocable with respect to the beneficiary (and all subsequent beneficiaries) and must apply to all subsequent calendar years. If a plan provides for the election, the plan may also specify the method of distribution that applies if neither the employee nor the beneficiary makes the election. If neither the employee nor the beneficiary elects a method and the plan does not specify which method applies, distribution must be made in accordance with paragraph (a) of this A-4.
Q-5. If the employee's surviving spouse is the employee's sole designated beneficiary and such spouse dies after the employee, but before distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), how is the employee's interest to be distributed?
A-5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving spouse is the employee's sole designated beneficiary and dies after the employee, but before distributions to such spouse have begun under section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section 401(a)(9)(B)(ii) and the life expectancy rule in section 401(a)(9)(B)(iii) are to be applied as if the surviving spouse were the employee. In applying this rule, the date of death of the surviving spouse shall be substituted for the date of death of the employee. However, in such case, the rules in section 401(a)(9)(B)(iv) are not available to the surviving spouse of the deceased employee's surviving spouse.
Q-6. For purposes of section 401(a)(9)(B)(iv)(II), when are distributions considered to have begun to the surviving spouse?
A-6. Distributions are considered to have begun to the surviving spouse of an employee, for purposes of section 401(a)(9)(B)(iv)(II), on the date, determined in accordance with A-3 of this section, on which distributions are required to commence to the surviving spouse, even though payments have actually been made before that date. See A-11 of §1.401(a)(9)-6T for a special rule for annuities.
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Q-1. Who is a designated beneficiary under section 401(a)(9)(E)?
A-1. A designated beneficiary is an individual who is designated as a beneficiary under the plan. An individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the employee (or the employee's surviving spouse) specifying the beneficiary. A beneficiary designated as such under the plan is an individual who is entitled to a portion of an employee's benefit, contingent on the employee's death or another specified event. For example, if a distribution is in the form of a joint and survivor annuity over the life of the employee and another individual, the plan does not satisfy section 401(a)(9) unless such other individual is a designated beneficiary under the plan. A designated beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan. The members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible, to identify the class member with the shortest life expectancy. The fact that an employee's interest under the plan passes to a certain individual under a will or otherwise under applicable state law does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan. See A-6 of §1.401(a)(9)-8 for rules which apply to qualified domestic relation orders.
Q-2. Must an employee (or the employee's spouse) make an affirmative election specifying a beneficiary for a person to be a designated beneficiary under section 40l(a)(9)(E)?
A-2. No, a designated beneficiary is an individual who is designated as a beneficiary under the plan whether or not the designation under the plan was made by the employee. The choice of beneficiary is subject to the requirements of sections 401(a)(11), 414(p), and 417.
Q-3. May a person other than an individual be considered to be a designated beneficiary for purposes of section 401(a)(9)?
A-3. No, only individuals may be designated beneficiaries for purposes of section 401(a)(9). A person that is not an individual, such as the employee's estate, may not be a designated beneficiary. If a person other than an individual is designated as a beneficiary of an employee's benefit, the employee will be treated as having no designated beneficiary for purposes of section 401(a)(9), even if there are also individuals designated as beneficiaries. However, see A-5 of this section for special rules that apply to trusts and A-2 and A-3 of §1.401(a)(9)-8 for rules that apply to separate accounts.
Q-4. When is the designated beneficiary determined?
A-4.
(a) General rule. In order to be a designated beneficiary, an individual must be a beneficiary as of the date of death. Except as provided in paragraph (b) and §1.401(a)(9)-6T, the employee's designated beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of September 30 of the calendar year following the calendar year of the employee's death. Consequently, except as provided in §1.401(a)(9)-6T, any person who was a beneficiary as of the date of the employee's death, but is not a beneficiary as of that September 30 (e.g., because the person receives the entire benefit to which the person is entitled before that September 30), is not taken into account in determining the employee's designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee's death. Accordingly, if a person disclaims entitlement to the employee's benefit, pursuant to a disclaimer that satisfies section 2518 by that September 30 thereby allowing other beneficiaries to receive the benefit in lieu of that person, the disclaiming person is not taken into account in determining the employee's designated beneficiary.
(b) Surviving spouse. As provided in A-5 of §1.401(a)(9)-3, if the employee's spouse is the sole designated beneficiary as of September 30 of the calendar year following the calendar year of the employee's death, and the surviving spouse dies after the employee and before the date on which distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), the rule in section 401(a)(9)(B)(iv)(II) will apply. Thus, for example, the relevant designated beneficiary for determining the distribution period after the death of the surviving spouse is the designated beneficiary of the surviving spouse. Similarly, such designated beneficiary will be determined based on the beneficiaries designated as of the date of the surviving spouse's death and who remain beneficiaries as of September 30 of the calendar year following the calendar year of the surviving spouse's death. Further, if, as of that September 30, there is no designated beneficiary under the plan with respect to that surviving spouse, distribution must be made in accordance with the 5-year rule in section 401(a)(9)(B)(ii) and A-2 of §1.401(a)(9)-3.
(c) Deceased beneficiary. For purposes of this A-4, an individual who is a beneficiary as of the date of the employee's death and dies prior to September 30 of the calendar year following the calendar year of the employee's death without disclaiming continues to be treated as a beneficiary as of the September 30 of the calendar year following the calendar year of the employee's death in determining the employee's designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee's death, without regard to the identity of the successor beneficiary who is entitled to distributions as the beneficiary of the deceased beneficiary. The same rule applies in the case of distributions to which A-5 of §1.401(a)(9)-3 applies so that, if an individual is designated as a beneficiary of an employee's surviving spouse as of the spouse's date of death and dies prior to September 30 of the year following the year of the surviving spouse's death, that individual will continue to be treated as a designated beneficiary.
Q-5. If a trust is named as a beneficiary of an employee, will the beneficiaries of the trust with respect to the trust's interest in the employee's benefit be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9)?
A-5.
(a) If the requirements of paragraph (b) of this A-5 are met with respect to a trust that is named as the beneficiary of an employee under the plan, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).
(b) The requirements of this paragraph (b) are met if, during any period during which required minimum distributions are being determined by treating the beneficiaries of the trust as designated beneficiaries of the employee, the following requirements are met --
(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
(3) The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of A-1 of this section from the trust instrument.
(4) The documentation described in A-6 of this section has been provided to the plan administrator.
(c) In the case of payments to a trust having more than one beneficiary, see A-7 of §1.401(a)(9)-5 for the rules for determining the designated beneficiary whose life expectancy will be used to determine the distribution period and A-3 of this section for the rules that apply if a person other than an individual is designated as a beneficiary of an employee's benefit. However, the separate account rules under A-2 of §1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust's interest in the employee's benefit.
(d) If the beneficiary of the trust named as beneficiary of the employee's interest is another trust, the beneficiaries of the other trust will be treated as being designated as beneficiaries of the first trust, and thus, having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of this A-5 are satisfied with respect to such other trust in addition to the trust named as beneficiary.
Q-6. If a trust is named as a beneficiary of an employee, what documentation must be provided to the plan administrator?
A-6.
(a) Required minimum distributions before death. If an employee designates a trust as the beneficiary of his or her entire benefit and the employee's spouse is the sole beneficiary of the trust, in order to satisfy the documentation requirements of this A-6 so that the spouse can be treated as the sole designated beneficiary of the employee's benefits (if the other requirements of paragraph (b) of A-5 of this section are satisfied), the employee must either --
(1) Provide to the plan administrator a copy of the trust instrument and agree that if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator a copy of each such amendment; or
(2) Provide to the plan administrator a list of all of the beneficiaries of the trust (including contingent and remaindering beneficiaries with a description of the conditions on their entitlement sufficient to establish that the spouse is the sole beneficiary) for purposes of section 401(a)(9); certify that, to the best of the employee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; agree that, if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator corrected certifications to the extent that the amendment changes any information previously certified; and agree to provide a copy of the trust instrument to the plan administrator upon demand.
(b) Required minimum distributions after death. In order to satisfy the documentation requirement of this A-6 for required minimum distributions after the death of the employee (or spouse in a case to which A-5 of §1.401(a)(9)-3 applies), by October 31 of the calendar year immediately following the calendar year in which the employee died, the trustee of the trust must either --
(1) Provide the plan administrator with a final list of all beneficiaries of the trust (including contingent and remaindering beneficiaries with a description of the conditions on their entitlement) as of September 30 of the calendar year following the calendar year of the employee's death; certify that, to the best of the trustee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; and agree to provide a copy of the trust instrument to the plan administrator upon demand; or
(2) Provide the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the employee under the plan as of the employee's date of death.
(c) Relief for discrepancy between trust instrument and employee certifications or earlier trust instruments.
(1) If required minimum distributions are determined based on the information provided to the plan administrator in certifications or trust instruments described in paragraph (a) or (b) of this A-6, a plan will not fail to satisfy section 401(a)(9) merely because the actual terms of the trust instrument are inconsistent with the information in those certifications or trust instruments previously provided to the plan administrator, but only if the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the calendar year in which the discrepancy is discovered are determined based on the actual terms of the trust instrument.
(2) For purposes of determining the amount of the excise tax under section 4974, the required minimum distribution is determined for any year based on the actual terms of the trust in effect during the year.
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Q-1. If an employee's benefit is in the form of an individual account under a defined contribution plan, what is the amount required to be distributed for each calendar year?
A-1.
(a) General rule. If an employee's accrued benefit is in the form of an individual account under a defined contribution plan, the minimum amount required to be distributed for each distribution calendar year, as defined in paragraph (b) of this A-1, is equal to the quotient obtained by dividing the account (determined under A-3 of this section) by the applicable distribution period (determined under A-4 or A-5 of this section, whichever is applicable). However, the required minimum distribution amount will never exceed the entire account balance on the date of the distribution. See A-8 of this section for rules that apply if a portion of the employee's account is not vested. Further, the minimum distribution required to be distributed on or before an employee's required beginning date is always determined under section 401(a)(9)(A)(ii) and this A-1 and not section 401(a)(9)(A)(i).
(b) Distribution calendar year. A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2, the employee's first distribution calendar year is the year the employee attains age 70 1/2. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee retires, the employee's first distribution calendar year is the calendar year in which the employee retires. In the case of distributions to be made in accordance with the life expectancy rule in §1.401(a)(9)-3 and in section 401(a)(9)(B)(iii) and (iv), the first distribution calendar year is the calendar year containing the date described in A-3(a) or A-3(b) of §1.401(a)(9)-3, whichever is applicable.
(c) Time for distributions. The distribution required to be made on or before the employee's required beginning date shall be treated as the distribution required for the employee's first distribution calendar year (as defined in paragraph (b) of this A-1). The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the employee's required beginning date occurs, must be made on or before the end of that distribution calendar year.
(d) Minimum distribution incidental benefit requirement. If distributions of an employee's account balance under a defined contribution plan are made in accordance with this section, the minimum distribution incidental benefit requirement of section 401(a)(9)(G) is satisfied. Further, with respect to the retirement benefits provided by that account balance, to the extent the incidental benefit requirement of §1.401-1(b)(1)(i) requires a distribution, that requirement is deemed to be satisfied if distributions satisfy the minimum distribution incidental benefit requirement of section 401(a)(9)(G) and this section.
(e) Annuity contracts. Instead of satisfying this A-1, the minimum distribution requirement may be satisfied by the purchase of an annuity contract from an insurance company in accordance with A-4 of §1.401(a)(9)-6T with the employee's entire individual account. If such an annuity is purchased after distributions are required to commence (the required beginning date, in the case of distributions commencing before death, or the date determined under A-3 of §1.401(a)(9)-3, in the case of distributions commencing after death), payments under the annuity contract purchased will satisfy section 401(a)(9) for distribution calendar years after the calendar year of the purchase if payments under the annuity contract are made in accordance with §1.401(a)(9)-6T. In such a case, payments under the annuity contract will be treated as distributions from the individual account for purposes of determining if the individual account satisfies section 401(a)(9) for the calendar year of the purchase. An employee may also purchase an annuity contract with a portion of the employee's account under the rules of A-2(a)(3) of §1.401(a)(9)-8.
Q-2. If an employee's benefit is in the form of an individual account and, in any calendar year, the amount distributed exceeds the minimum required, will credit be given in subsequent calendar years for such excess distribution?
A-2. If, for any distribution calendar year, the amount distributed exceeds the minimum required, no credit will be given in subsequent calendar years for such excess distribution.
Q-3. What is the amount of the account of an employee used for determining the employee's required minimum distribution in the case of an individual account?
A-3.
(a) In the case of an individual account, the benefit used in determining the required minimum distribution for a distribution calendar year is the account balance as of the last valuation date in the calendar year immediately preceding that distribution calendar year (valuation calendar year) adjusted in accordance with paragraphs (b) and (c) of this A-3.
(b) The account balance is increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date. For this purpose, contributions that are allocated to the account balance as of dates in the valuation calendar year after the valuation date, but that are not actually made during the valuation calendar year, are permitted to be excluded.
(c) The account balance is decreased by distributions made in the valuation calendar year after the valuation date.
(d) If an amount is distributed by one plan and rolled over to another plan (receiving plan), A-2 of §1.401(a)(9)-7 provides additional rules for determining the benefit and required minimum distribution under the receiving plan. If an amount is transferred from one plan (transferor plan) to another plan (transferee plan), A- 3 and A-4 of §1.401(a)(9)-7 provide additional rules for determining the amount of the required minimum distribution and the benefit under both the transferor and transferee plans.
Q-4. For required minimum distributions during an employee's lifetime, what is the applicable distribution period?
A-4.
(a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee's date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee's age as of the employee's birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee's death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.
(b) Spouse is sole beneficiary -- (1) General rule. Except as otherwise provided in paragraph (b)(2) of this A-4, if the sole designated beneficiary of an employee is the employee's surviving spouse, for required minimum distributions during the employee's lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with paragraph (a) of this A-4 or the joint life expectancy of the employee and spouse using the employee's and spouse's attained ages as of the employee's and the spouse's birthdays in the distribution calendar year. The spouse is sole designated beneficiary for purposes of determining the applicable distribution period for a distribution calendar year during the employee's lifetime only if the spouse is the sole beneficiary of the employee's entire interest at all times during the distribution calendar year.
(2) Change in marital status. If the employee and the employee's spouse are married on January 1 of a distribution calendar year, but do not remain married throughout that year (i.e., the employee or the employee's spouse die or they become divorced during that year), the employee will not fail to have a spouse as the employee's sole beneficiary for that year merely because they are not married throughout that year. If an employee's spouse predeceases the employee, the spouse will not fail to be the employee's sole beneficiary for the distribution calendar year that includes the date of the spouse's death solely because, for the period remaining in that year after the spouse's death, someone other than the spouse is named as beneficiary. However, the change in beneficiary due to the death or divorce of the spouse will be effective for purposes of determining the applicable distribution period under section 401(a)(9) in the distribution calendar year following the distribution calendar year that includes the date of the spouse's death or divorce.
Q-5. For required minimum distributions after an employee's death, what is the applicable distribution period?
A-5.
(a) Death on or after the employee's required beginning date. If an employee dies after distribution has begun as determined under A-6 of §1.401(a)(9)-2 (generally on or after the employee's required beginning date), in order to satisfy section 401(a)(9)(B)(i), the applicable distribution period for distribution calendar years after the distribution calendar year containing the employee's date of death is either --
(1) If the employee has a designated beneficiary as of the date determined under A-4 of §1.401(a)(9)-4, the longer of --
(i) The remaining life expectancy of the employee's designated beneficiary determined in accordance with paragraph (c)(1) or (2) of this A-5; and
(ii) The remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A-5; or
(2) If the employee does not have a designated beneficiary as of the date determined under A-4 of §1.401(a)(9)-4, the remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A-5.
(b) Death before an employee's required beginning date. If an employee dies before distribution has begun, as determined under A-5 of §1.401(a)(9)-2 (generally before the employee's required beginning date), in order to satisfy section 401(a)(9)(B)(iii) or (iv) and the life expectancy rule described in A-1 of §1.401(a)(9)-3, the applicable distribution period for distribution calendar years after the distribution calendar year containing the employee's date of death is determined in accordance with paragraph (c) of this A-5. See A-4 of §1.401(a)(9)-3 to determine when the 5-year rule of in section 401(a)(9)(B)(ii) applies (e.g., there is no designated beneficiary or the 5-year rule is elected or specified by plan provision).
(c) Life expectancy -- (1) Non-spouse designated beneficiary. Except as otherwise provided in paragraph (c)(2), the applicable distribution period measured by the beneficiary's remaining life expectancy is determined using the beneficiary's age as of the beneficiary's birthday in the calendar year immediately following the calendar year of the employee's death. In subsequent calendar years, the applicable distribution period is reduced by one for each calendar year that has elapsed after the calendar year immediately following the calendar year of the employee's death.
(2) Spouse designated beneficiary. If the surviving spouse of the employee is the employee's sole beneficiary, the applicable distribution period is measured by the surviving spouse's life expectancy using the surviving spouse's birthday for each distribution calendar year after the calendar year of the employee's death up through the calendar year of the spouse's death. For calendar years after the calendar year of the spouse's death, the applicable distribution period is the life expectancy of the spouse using the age of the spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each calendar year that has elapsed after the calendar year of the spouse's death.
(3) No designated beneficiary. If the employee does not have a designated beneficiary, the applicable distribution period measured by the employee's remaining life expectancy is the life expectancy of the employee using the age of the employee as of the employee's birthday in the calendar year of the employee's death. In subsequent calendar years the applicable distribution period is reduced by one for each calendar year that has elapsed after the calendar year of the employee's death.
Q-6. What life expectancies must be used for purposes of determining required minimum distributions under section 401(a)(9)?
A-6. Life expectancies for purposes of determining required minimum distributions under section 401(a)(9) must be computed using the Single Life Table in A-1 of §1.401(a)(9)-9 and the Joint and Last Survivor Table in A-3 of §1.401(a)(9)-9
Q-7. If an employee has more than one designated beneficiary, which designated beneficiary's life expectancy will be used to determine the applicable distribution period?
A-7.
(a) General rule -- (1) Except as otherwise provided in paragraph (c) of this A-7, if more than one individual is designated as a beneficiary with respect to an employee as of the applicable date for determining the designated beneficiary under A-4 of §1.401(a)(9)-4, the designated beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the applicable distribution period.
(2) See A-3 of §1.401(a)(9)-4 for rules that apply if a person other than an individual is designated as a beneficiary and see A-2 and A-3 of §1.401(a)(9)-8 for special rules that apply if an employee's benefit under a plan is divided into separate accounts and the beneficiaries with respect to a separate account differ from the beneficiaries of another separate account.
(b) Contingent beneficiary. Except as provided in paragraph (c)(1) of this A-7, if a beneficiary's entitlement to an employee's benefit after the employee's death is a contingent right, such contingent beneficiary is nevertheless considered to be a beneficiary for purposes of determining whether a person other than an individual is designated as a beneficiary (resulting in the employee being treated as having no designated beneficiary under the rules of A-3 of §1.401(a)(9)-4) and which designated beneficiary has the shortest life expectancy under paragraph (a) of this A-7.
(c) Successor beneficiary -- (1) A person will not be considered a beneficiary for purposes of determining who is the beneficiary with the shortest life expectancy under paragraph (a) of this A-7, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee's beneficiaries after that beneficiary's death. However, the preceding sentence does not apply to a person who has any right (including a contingent right) to an employee's benefit beyond being a mere potential successor to the interest of one of the employee's beneficiaries upon that beneficiary's death. Thus, for example, if the first beneficiary has a right to all income with respect to an employee's individual account during that beneficiary's life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary's death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.
(2) If the individual beneficiary whose life expectancy is being used to calculate the distribution period dies after September 30 of the calendar year following the calendar year of the employee's death, such beneficiary's remaining life expectancy will be used to determine the distribution period without regard to the life expectancy of the subsequent beneficiary.
(3) This paragraph (c) is illustrated by the following examples:
Example 1. (i) Employer M maintains a defined contribution plan, Plan X. Employee A, an employee of M, died in 2005 at the age of 55, survived by spouse, B, who was 50 years old. Prior to A's death, M had established an account balance for A in Plan X. A's account balance is invested only in productive assets. A named a testamentary trust (Trust P) established under A's will as the beneficiary of all amounts payable from A's account in Plan X after A's death. A copy of the Trust P and a list of the trust beneficiaries were provided to the plan administrator of Plan X by October 31 of the calendar year following the calendar year of A's death. As of the date of A's death, the Trust P was irrevocable and was a valid trust under the laws of the state of A's domicile. A's account balance in Plan X was includible in A's gross estate under § 2039.
(ii) Under the terms of Trust P, all trust income is payable annually to B, and no one has the power to appoint Trust P principal to any person other than B. A's children, who are all younger than B, are the sole remainder beneficiaries of the Trust P. No other person has a beneficial interest in Trust P. Under the terms of the Trust P, B has the power, exercisable annually, to compel the trustee to withdraw from A's account balance in Plan X an amount equal to the income earned on the assets held in A's account in Plan X during the calendar year and to distribute that amount through Trust P to B. Plan X contains no prohibition on withdrawal from A's account of amounts in excess of the annual required minimum distributions under section 401(a)(9). In accordance with the terms of Plan X, the trustee of Trust P elects, in order to satisfy section 401(a)(9), to receive annual required minimum distributions using the life expectancy rule in section 401(a)(9)(B)(iii) for distributions over a distribution period equal to B's life expectancy. If B exercises the withdrawal power, the trustee must withdraw from A's account under Plan X the greater of the amount of income earned in the account during the calendar year or the required minimum distribution. However, under the terms of Trust P, and applicable state law, only the portion of the Plan X distribution received by the trustee equal to the income earned by A's account in Plan X is required to be distributed to B (along with any other trust income.)
(iii) Because some amounts distributed from A's account in Plan X to Trust P may be accumulated in Trust P during B's lifetime for the benefit of A's children, as remaindering beneficiaries of Trust P, even though access to those amounts are delayed until after B's death, A's children are beneficiaries of A's account in Plan X in addition to B and B is not the sole designated beneficiary of A's account. Thus the designated beneficiary used to determine the distribution period from A's account in Plan X is the beneficiary with the shortest life expectancy. B's life expectancy is the shortest of all the potential beneficiaries of the testamentary trust's interest in A's account in Plan X (including remainder beneficiaries). Thus, the distribution period for purposes of section 401(a)(9)(B)(iii) is B's life expectancy. Because B is not the sole designated beneficiary of the testamentary trust's interest in A's account in Plan X, the special rule in 401(a)(9)(B)(iv) is not available and the annual required minimum distributions from the account to Trust M must begin no later than the end of the calendar year immediately following the calendar year of A's death.
Example 2. (i) The facts are the same as Example 1 except that the testamentary trust instrument provides that all amounts distributed from A's account in Plan X to the trustee while B is alive will be paid directly to B upon receipt by the trustee of Trust P.
(ii) In this case, B is the sole designated beneficiary of A's account in Plan X for purposes of determining the designated beneficiary under section 401(a)(9)(B)(iii) and (iv). No amounts distributed from A's account in Plan X to Trust P are accumulated in Trust P during B's lifetime for the benefit of any other beneficiary. Therefore, the residuary beneficiaries of Trust P are mere potential successors to B's interest in Plan X. Because B is the sole beneficiary of the testamentary trust's interest in A's account in Plan X, the annual required minimum distributions from A's account to Trust P must begin no later than the end of the calendar year in which A would have attained age 70 1/2, rather than the calendar year immediately following the calendar year of A's death.
Q-8. If a portion of an employee's individual account is not vested as of the employee's required beginning date, how is the determination of the required minimum distribution affected?
A-8. If the employee's benefit is in the form of an individual account, the benefit used to determine the required minimum distribution for any distribution calendar year will be determined in accordance with A-1 of this section without regard to whether or not all of the employee's benefit is vested. If any portion of the employee's benefit is not vested, distributions will be treated as being paid from the vested portion of the benefit first. If, as of the end of a distribution calendar year (or as of the employee's required beginning date, in the case of the employee's first distribution calendar year), the total amount of the employee's vested benefit is less than the required minimum distribution for the calendar year, only the vested portion, if any, of the employee's benefit is required to be distributed by the end of the calendar year (or, if applicable, by the employee's required beginning date). However, the required minimum distribution for the subsequent distribution calendar year must be increased by the sum of amounts not distributed in prior calendar years because the employee's vested benefit was less than the required minimum distribution.
Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?
A-9.
(a) General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.
(b) Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:
(1) Elective deferrals and employee contributions that, pursuant to §1.415-6(b)(6)(iv), are returned (together with the income allocable to these corrective distributions) as a result of the application of the section 415 limitations.
(2) Corrective distributions of excess deferrals as described in §1.402(g)-1(e)(3), together with the income allocable to these distributions.
(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.
(4) Loans that are treated as deemed distributions pursuant to section 72(p).
(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)
(6) The costs of life insurance coverage (P.S. 58 costs).
(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter.
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Q-1. How must distributions under a defined benefit plan be paid in order to satisfy section 401(a)(9)?
A-1.
(a) General rules. In order to satisfy section 401(a)(9), except as otherwise provided in this A-1, distributions under a defined benefit plan must be paid in the form of periodic annuity payments for the employee's life (or the joint lives of the employee and beneficiary) or over a period certain that does not exceed the maximum length of the period certain determined in accordance with A-3 of this section. The interval between payments for the annuity must be uniform over the entire distribution period and must not exceed one year. Once payments have commenced over a period certain, the period certain may not be changed even if the period certain is shorter than the maximum permitted. Life annuity payments must satisfy the minimum distribution incidental benefit requirements of A-2 of this section. Except as otherwise provided in A-4(b) of this section, all payments (life and period certain) also must either be nonincreasing or increase only in accordance with one of more of the following:
(1) With an annual percentage increase that does not exceed the annual percentage increase in a cost-of-living index that is based on prices of all items and issued by the Bureau of Labor Statistics;
(2) To the extent of the reduction in the amount of the employee's payments to provide for a survivor benefit upon death, but only if the beneficiary whose life was being used to determine the period described in section 401(a)(9)(A)(ii) over which payments were being made dies or is no longer the employee's beneficiary pursuant to a qualified domestic relations order within the meaning of section 414(p);
(3) To provide cash refunds of employee contributions upon the employee's death; or
(4) To pay increased benefits that result from a plan amendment.
(b) Life annuity with period certain. The annuity may be a life annuity (or joint and survivor annuity) with a period certain if the life (or lives, if applicable) and period certain each meet the requirements of paragraph (a) of this A-1. For purposes of this section, if distributions are permitted to be made over the lives of the employee and the designated beneficiary, references to a life annuity include a joint and survivor annuity.
(c) Annuity commencement. (1) Annuity payments must commence on or before the employee's required beginning date (within the meaning of A-2 of §1.401(a)(9)-2). The first payment, which must be made on or before the employee's required beginning date, must be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Similarly, in the case of distributions commencing after death in accordance with section 401(a)(9)(B)(iii) and (iv), the first payment, which must be made on or before the date determined under A- 3(a) or (b) (whichever is applicable) of §1.401(a)(9)-3, must be the payment which is required for one payment interval. Payment intervals are the periods for which payments are received, e.g., bimonthly, monthly, semi-annually, or annually. All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of annuity payments for payment intervals ending on or after the employee's required beginning date.
(2) This paragraph (c) is illustrated by the following example:
Example. A defined benefit plan (Plan X) provides monthly annuity payments of $500 for the life of unmarried participants with a 10-year period certain. An unmarried, retired participant (A) in Plan X attains age 70 1/2 in 2005. In order to meet the requirements of this paragraph, the first monthly payment of $500 must be made on behalf of A on or before April 1, 2006, and the payments must continue to be made in monthly payments of $500 thereafter for the life and 10-year period certain.
(d) Lump sum distributions. In the case of a lump sum distribution of an employee's entire accrued benefit during a distribution calendar year, the amount that is the required minimum distribution for the distribution calendar year (and thus not eligible for rollover under section 402(c)) is determined using either the rule in paragraph (d)(1) or (d)(2) of this A-1.
(1) The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account plan and treating the amount of the single sum distribution as the employee's account balance as of the end of the relevant valuation calendar year. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee's first distribution calendar year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the employee's first and second distribution calendar years is not eligible for rollover.
(2) The portion of the single sum distribution that is a required minimum distribution is permitted to be determined by expressing the employee's benefit as an annuity that would satisfy this section with an annuity starting date as of the first day of the distribution calendar year for which the required minimum distribution is being determined, and treating one year of annuity payments as the required minimum distribution for that year, and not eligible for rollover. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee's first distribution calendar year has not been made, the benefit must be expressed as an annuity with an annuity starting date as of the first day of the first distribution calendar year and the payments for the first two calendar years would be treated as required minimum distributions, and not eligible for rollover.
(e) Death benefits. The rules prohibiting increasing payments under an annuity apply to payments made upon the death of the employee. The preceding sentence will not apply to an increase due to an ancillary death benefit described in this paragraph (e). A death benefit with respect to an employee's benefit is an ancillary death benefit for purposes of this A-1 if --
(1) It is not paid as part of the employee's accrued benefit or under any optional form of the employee's benefit, and
(2) The death benefit, together with any other potential payments with respect to the employee's benefit that may be provided to a survivor, satisfy the incidental benefit requirement of §1.401-1(b)(1)(i),
(f) Additional guidance. Additional guidance regarding how distributions under a defined benefit plan must be paid in order to satisfy section 401(a)(9) may be issued by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter.
Q-2. How must distributions in the form of a life (or joint and survivor) annuity be made in order to satisfy the minimum distribution incidental benefit (MDIB) requirement of section 401(a)(9)(G) and the distribution component of the incidental benefit requirement of §1.401-1(b)(1)(i)?
A-2.
(a) Life annuity for employee. If the employee's benefit is payable in the form of a life annuity for the life of the employee satisfying section 401(a)(9) without regard to the MDIB requirement, the MDIB requirement of section 401(a)(9)(G) will be satisfied.
(b) Joint and survivor annuity, spouse beneficiary. If the employee's sole beneficiary, as of the annuity starting date for annuity payments, is the employee's spouse and the distributions satisfy section 401(a)(9) without regard to the MDIB requirement, the distributions to the employee will be deemed to satisfy the MDIB requirement of section 401(a)(9)(G). For example, if an employee's benefit is being distributed in the form of a joint and survivor annuity for the lives of the employee and the employee's spouse and the spouse is the sole beneficiary of the employee, the amount of the periodic payment payable to the spouse is permitted to be 100 percent of the annuity payment payable to the employee regardless of the difference in the ages between the employee and the employee's spouse. The amount of the annuity payments must satisfy A-1 of this section (or A-4 of this section, if applicable).
(c) Joint and survivor annuity, non-spouse beneficiary -- (1) Explanation of rule. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the employee and a beneficiary other than the employee's spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless the distribution option provides that annuity payments to be made to the employee on and after the employee's required beginning date will satisfy the conditions of this paragraph (c). The periodic annuity payment payable to the survivor must not at any time on and after the employee's required beginning date exceed the applicable percentage of the annuity payment payable to the employee using the table in paragraph (c)(2) of this A-2. The applicable percentage is based on the excess of the age of the employee on the employee's birthday in a calendar year over the age of the beneficiary as of the beneficiary's birthday in that calendar year. Additionally, the amount of the annuity payments must satisfy A-1 of this section (or A-4 of this section, if applicable). In the case of an annuity which provides for increasing payments, the requirement of this paragraph (c) will be satisfied if the increase is determined in the same manner for the employee and the beneficiary.
(2) Table. Click here for table
(3) Example. This paragraph (c) is illustrated by the following example:
Example. Distributions commence on January 1, 2003 to an employee (Z), born March 1, 1937, after retirement at age 65. Z's daughter (Y), born February 5, 1967, is Z's beneficiary. The distributions are in the form of a joint and survivor annuity for the lives of Z a
