NEW IRA DISTRIBUTION RULES
On January 12, 2001, the
Internal Revenue Service issued a proposed Treasury regulation relating
to distribution of IRAs and other ERISA related funds. These proposed regulations superseded
the proposed regulations issued in 1987. The eternal question appears to be, will the IRS ever issue
permanent regulations? That question
cannot and will not be answered in this article.
Without pre-empting what the
proposed regulation states, let me mention the following:
This brief introduction is entirely inadequate, and for this reason, you, too, need to enjoy all 44 pages of text in this new regulation.
Citation(s): REG-130477-00;
REG-130481-00
DEPARTMENT OF TREASURY
Internal Revenue Service (IRS)
Background
This document contains proposed 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. It is contemplated that proposed rules similar to
those in these proposed regulations applicable to section 401 will be published
in the near future for purposes of applying the distribution requirements of
section 457(d). These amendments are proposed to conform the regulations to
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 required minimum distribution requirements
under section 401(a)(9) for plans qualified under section 401(a). The rules are
incorporated by reference in section 408(a)(6) and (b)(3) for individual
retirement accounts and annuities (IRAs), section 408A(c)(5) for Roth IRAs,
section 403(b)(10) for section 403(b)annuity contracts, and section 457(d) for
eligible deferred compensation plans.
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.
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).
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.
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.
Section 401(a)(9)(E) provides that the term
designated beneficiary means any individual designated as a beneficiary by the
employee.
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.
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.
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.
Comprehensive proposed regulations under section
401(a)(9) were previously published in the Federal Register on July 27, 1987,
52 FR 28070. Many of the comments on the 1987 proposed regulations expressed
concerns that the required minimum distribution must be satisfied separately
for each IRA owned by an individual by taking distributions from each IRA. In
response, Notice 88-38 (1988-1 C.B. 524) provided that the amount of the
required minimum distribution must be calculated for each IRA, but permitted
that amount to be taken from any IRA. Amendments to the 1987 proposed
regulations
published in the Federal Register on December 30,
1997, 62 FR 67780, responded to comments on the use of trusts as beneficiaries.
Notice 96-67 (1996-2 C.B. 235) and Notice 97-75 (1997-2 C.B. 337) provided
guidance on the changes made to section 401(a)(9) by the SBJPA. The guidance in
Notice 88-38, Notice 96-67, and Notice 97-75 is incorporated in these proposed
regulations with some modifications.
Even though the distribution requirements added
by TEFRA were retroactively repealed by TRA of 1984, the transition election
rule in section 242(b) of TEFRA was preserved. Notice 83-23 (1983-2 C.B. 418)
continues to provide guidance for distributions permitted by this transition
election rule. These proposed regulations retain the additional guidance on the
transition rule provided in the 1987 proposed regulations.
As discussed below, in response to extensive
comments, the rules for calculating required minimum distributions from
individual accounts under the 1987 proposed regulations have been substantially
simplified. Certain other 1987 rules have also been simplified and modified,
although many of the 1987 rules remain unchanged. In particular, due to the
relatively small number of comments on practices with respect to annuity
contracts, and the effect of the 1987 proposed regulations on these practices,
the basic structure of the 1987 proposed regulation provisions with respect to
annuity payments is retained in these proposed regulations. The IRS and
Treasury are continuing to study these rules and specifically request
updated comments on current practices and issues
relating to required minimum distributions from annuity contracts.
Explanation of Provisions
Overview
Many of the comments on the 1987 proposed
regulations addressed the rules for required minimum distributions during an
employee's life, including calculation of life expectancy and determination of
designated beneficiary. In particular, comments raised concerns about the
default provisions, election requirements, and plan language requirements. In
general, the need to make decisions at age 70 1/2, which under the 1987
proposed regulations would bind the employee in future years during which
financial circumstances could change significantly, was perceived as
unreasonably restrictive. In addition, the determination of life expectancy and
designated beneficiary and the resulting required minimum distribution
calculation for individual accounts were viewed as too complex.
To respond to these concerns, these proposed
regulations would make it much easier for individuals -- both plan participants
and IRA owners -- and plan administrators to understand and apply the minimum
distribution rules. The new proposed regulations would make major
simplifications to the rules, including the calculation of the required minimum
distribution during the individual's lifetime and the determination of a
designated beneficiary for distributions after death. The new proposed
regulations simplify the rules by providing a simple, uniform table that all
employees can use to determine the minimum distribution required during their
lifetime. This makes it far easier to calculate the required minimum
distribution because employees would no longer need to determine their
beneficiary by their required beginning date, or no longer need to decide whether or not to
recalculate their life expectancy each year in determining required minimum
distributions, and no longer need to satisfy a separate incidental death
benefit rule. Permitting the required minimum distribution during the
employee's lifetime to be calculated without regard to the beneficiary's age
(except when required distributions can be reduced by taking into account the
age of a beneficiary who is a spouse more than 10 years younger than the employee). Permitting the beneficiary to be determined
as late as the end of the year following the year of the employee's death. This
allows the employee to change designated beneficiaries after the required
beginning date without increasing the required minimum distribution and the beneficiary to be changed after the
employee's death, such as by one or more beneficiaries disclaiming or being
cashed out. Permitting the calculation
of post-death minimum distributions to take into account an employee's remaining
life expectancy at the time of death, thus allowing distributions in all
cases to be spread over a number of
years after death. These simplifications would also have the effect of reducing
the required minimum distributions for the vast majority of employees.
The uniform distribution period
Under these proposed regulations and the 1987
proposed regulations, for distributions from an individual account, the
required minimum distribution is determined by dividing the account balance by
the distribution period. For lifetime required minimum distributions, these
proposed regulations provide a uniform distribution period for all employees of
the same age. The uniform distribution period table is the required minimum
distribution incidental benefit (MDIB) divisor table originally prescribed in
section 1.401(a)(9)-2 of the 1987 proposed regulations and now included in A-4
of section 1.401(a)-5 of the new proposed regulations. An exception applies if
the employee's sole beneficiary is the employee's spouse and the spouse is more
than 10 years younger than the employee. In that case, the employee is
permitted to use the longer distribution period measured by the joint life and
last survivor life expectancy of the employee and spouse.
These changes provide a simple administrable
rule for plans and individuals. Using the MDIB table, most employees will be
able to determine their required minimum distribution for each year based on
nothing more than their current age and their account balance as of the end of
the prior year (which IRA trustees report annually to IRA owners). Under the
1987 proposed regulations, some employees already use the MDIB table to
determine required minimum distributions. Under the new proposed regulations,
they would continue to do so. For the majority of other employees, required
minimum distributions would be reduced as a result of the changes.
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 at the end of the year
following the year of death, 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 as of the end of the year after the employee's death,
the distribution period is the employee's life expectancy calculated in the
year of death, reduced by one for each subsequent year.
The MDIB table is based on the joint life
expectancies of an individual and a survivor 10 years younger at each age
beginning at age 70. Allowing the use of this table reflects the fact that an
employee's beneficiary is subject to change until the death of the employee and
ultimately may be a beneficiary more than 10 years younger than the employee.
The proposed regulations would allow lifetime distributions at a rate
consistent with this possibility. Consistent with the requirements of section
401(a)(9)(A)(ii), the distribution period after death is measured by the life
expectancy of the employee's designated beneficiary in the year following
death, or the employee's remaining life expectancy if there is no designated
beneficiary. This ensures that the employee's entire benefit is distributed
over a period described in section 401(a)(9)(A)(ii), i.e., the life expectancy
of the employee or the joint life expectancy of the employee and a designated
beneficiary.
The approach in these proposed regulations
allowing the use of a uniform lifetime distribution period addresses concerns
raised in comments on the 1987 proposed regulations that the rules are too
complex. It eliminates the use of two tables and the interaction of the
multiple beneficiary and change in beneficiary rules. Finally, it generally
eliminates the need to fix the amount of the distribution during the employee's
lifetime based on the beneficiary designated on the required beginning date and
eliminates the need to elect recalculation or no recalculation of life
expectancies at the required beginning date.
Suggestions have been received that the life
expectancy table used to calculate required minimum distributions should be
revised to reflect recent increases in longevity. These proposed regulations
instead provide authority for the Commissioner to issue guidance of general
applicability revising the life expectancy tables and the uniform distribution
table in the future if it becomes appropriate. While life expectancy has
increased in the 14 years since the issuance of the section 72 life expectancy
tables, those tables may already overstate the average life expectancy of the
class of individuals who are subject to these required minimum distribution
rules (qualified plan participants, IRA owners, et al.). That is because those
existing section 72 tables were derived from the particular mortality
experience of the select population of individuals who purchase individual
annuities, as opposed to the population who are subject to the required minimum
distribution rules. In any event, as noted earlier, the new proposed uniform
distribution period -- equal to the joint life expectancy of an individual and
a survivor 10 years younger at each age – would lengthen the lifetime
distribution period for most employees and beneficiaries. In fact, the new
proposed regulations would lengthen that period more for many individuals than
would an update to reflect recent increases in longevity. The IRS and Treasury
believe that this lengthening of the distribution period for most employees
provides further justification for retaining the existing life expectancy
tables at this time.
Some commentators suggested that the calculation
of required minimum distributions include credit for any distribution in a
prior year that exceeded that year's required minimum distribution. However, such a "credit"
carryforward would require significant additional data retention and would add
substantial complexity to the calculation of required minimum distributions. By
using the prior year's ending account balance for calculating required minimum
distributions, distribution of amounts in excess of the required minimum
distribution has the effect of reducing future required minimum distributions
over the remaining distribution period to some extent. Accordingly, these
proposed regulations do not provide for a credit carryforward.
Determination of the designated beneficiary
These proposed regulations provide that,
generally, the designated beneficiary is determined as of the end of the year
following the year of the employee's death rather than as of the employee's
required beginning date or date of death, as under the 1987 proposed
regulations. Thus, any beneficiary eliminated by distribution of the benefit or
through disclaimer (or otherwise) 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, consistent with the approach in the
1987 proposed regulations.
This approach for determining the designated
beneficiary following the death of an employee after the employee's required
beginning date is simpler in several respects than the approach in the 1987
proposed regulations and responds to concerns raised with respect to the
effects of beneficiary designation at the required beginning date. Under this
approach, the determination of the designated beneficiary and the calculation
of the beneficiary's life expectancy generally are contemporaneous with
commencement of required distributions to the beneficiary. Any prior
beneficiary designation is irrelevant for distributions from individual
accounts, unless the employee takes advantage of a lifetime distribution period
measured by the joint life expectancy of the employee and a spouse more than 10
years younger than the employee. Further, for an employee with a designated
beneficiary, this approach provides the same rules for distributions after the
employee's death, regardless of whether death occurs before or after an
employee's required beginning date. Finally, in the case of an employee who
elects or defaults into recalculation of life expectancy and who dies without a
designated beneficiary, the requirement that the employee's entire remaining
account balance be distributed in the year after an employee's death has been
eliminated and replaced with a distribution period equal to the employee's
remaining life expectancy recalculated immediately before death.
Default rule for post-death distributions
As requested by some commentators, these
proposed regulations would change the default rule in the case of death before
the employee's required beginning date for a nonspouse designated beneficiary
from the 5-year rule in section 401(a)(9)(B)(ii) to the life expectancy rule in
section 401(a)(9)(B)(iii). Thus, absent a plan provision or election of the
5-year rule, the life expectancy rule would apply in all cases in which the
employee has a designated beneficiary. As in the case of death on or after the
employee's required beginning date, the designated beneficiary whose life
expectancy is used to determine the distribution period would be determined as
of the end of the year following the year of the employee's death, rather than
as of the employee's date of death (as would have been required under the 1987
proposed regulations). The 5-year rule would apply automatically only if the
employee did not have a designated beneficiary as of the end of the year
following the year of the employee's death. Finally, in the case of death
before the employee's required beginning date, these proposed regulations allow
a waiver, unless the Commissioner determines otherwise, of any excise tax
resulting from the life expectancy rule during the first five years after the
year of the employee's death if the employee's entire benefit is distributed by
the end of the fifth year following the year of the employee's death.
Annuity payments
These proposed regulations make several changes
to the rules for determining whether annuity payments satisfy section
401(a)(9). The changes are designed to make these rules more administrable without
adverse effects on the basic structure and application of the rules. The IRS
and Treasury are continuing to study and evaluate whether additional changes
would be appropriate for determining whether annuity payments satisfy section
401(a)(9). Some comments were received
on the annuity rules in 1987, but updated comments that include a discussion of
current industry practices, products, and concerns would be helpful.
These proposed regulations provide that the
designated beneficiary for determining the distribution period for annuity
payments generally is the beneficiary as of the annuity starting date, even if
that date is after the required beginning date. Thus, if annuity payments
commence after the required beginning date, the determination of the designated
beneficiary is contemporaneous with the annuity starting date and any
intervening changes in the beneficiary designation since the required beginning
date are ignored. Second, as requested in comments, these regulations extend to
all annuity payment streams the rule in the 1987 proposed regulations that
allows a life annuity with a period certain not exceeding 20 years to commence
on the required beginning date with no makeup for the first distribution
calendar year. For this purpose, the regulations clarify that only accruals as
of the end of the prior calendar year must be taken into account in calculating
the amount of an annuity commencing on the required beginning date. Subsequent
accruals are treated as additional accruals that must be taken into account in
the next calendar year. Also as requested in comments, the regulations provide
that, although additional accruals need to be taken into account in the first
payment in the calendar year following the year of the accrual, actual payment in
the form of a make-up payment need only be completed by the end of that
calendar year.
The permitted increase in annuity payments to an
employee upon the death of the survivor annuitant has been expanded to cover
the elimination of the survivor portion of a joint and survivor annuity due to
a qualified domestic relations order. Further, in response to comments, in the
case of an annuity contract purchased from an insurance company, an exception
to the nonincreasing-payment requirement in these proposed regulations has been
added to accommodate a cash refund upon the employee's death of the amount of
the premiums paid for the contract.
One of the rules in the 1987 proposed
regulations that the IRS and Treasury are continuing to study and evaluate is
the rule providing that if the distributions from a defined benefit plan are
not in the form of an annuity, the employee's benefit will be treated as an
individual account for purposes of determining required minimum distributions.
The IRS and Treasury are continuing to consider whether retention of this rule
is appropriate for defined benefit
plans. Similarly, the IRS and Treasury are continuing to consider
whether the rule permitting the benefit under a defined benefit plan to be
divided into segregated shares for purposes of section 401(a)(9) is useful and
appropriate for defined benefit plans.
Trust as beneficiary
These proposed regulations retain the provision
in the proposed regulations, as amended in 1997, 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 timely to the plan administrator. 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 proposed regulations for providing
the beneficiary documentation would be the end of the year following year of
the employee's death. This is consistent with the deadline for determining the
employee's designated beneficiary.
Because the designated beneficiary during an employee's lifetime is not
relevant for determining lifetime required minimum distributions in most cases
under these proposed regulations, the burden of lifetime documentation requirements
contained in the previous proposed regulations is significantly reduced.
A significant number of commentators on the 1997
amendment to the proposed regulations requested clarification that a
testamentary trust named as an employee's beneficiary is a trust that qualifies
for the look-through rule to the underlying beneficiaries, as permitted in the
1997 proposed regulations. These proposed regulations provide examples in which
a testamentary trust is named as an employee's beneficiary and the look-through
trust rules apply. As previously illustrated in the facts of Rev. Rul. 2000-2,
2000-3 I.R.B. 305, the examples also
clarify that remaindermen of a "QTIP" trust must be taken into
account as beneficiaries in determining the distribution period for required
minimum distributions if amounts are accumulated for their benefit during the
life of the income beneficiary under the trust.
Rules for qualified domestic relations order.
These proposed regulations retain the basic
rules in the 1987 proposed regulation for a qualified domestic relations order
(QDRO). Thus, for example, the proposed regulations continue to provide that a
former spouse to whom all or a portion of the employee's benefit is payable
pursuant to a QDRO will be treated as a spouse (including a surviving spouse)
of the employee for purposes of section 401(a)(9), including the minimum
distribution incidental benefit requirement, regardless of whether the QDRO
specifically provides that the former spouse is treated as the spouse for purposes
of sections 401(a)(11) and 417. This rule applies regardless of the number of
former spouses an employee has who are alternate payees with respect to the
employee's retirement benefits. Further, for example, if a QDRO divides the
individual account of an employee in a defined contribution plan into a
separate account for the employee and a separate account for the alternate
payee, the required minimum distribution to the alternate payee during the
lifetime of the employee must nevertheless be determined using the same rules
that apply to distribution to the employee. Thus, required minimum
distributions to the alternate payee must commence by the employee's required
beginning date. However, the required minimum distribution for the alternate
payee will be separately determined. The required minimum distributions for the
alternate payee during the lifetime of the employee may be determined either
using the uniform distribution period discussed above based on the age of the
employee in the distribution calendar year, or, if the alternate payee is the
employee's former spouse and is more than 10 years younger than the employee,
using the joint life expectancy of the employee and the
alternate payee.
Election of surviving spouse to treat an inherited
IRA as spouse's own IRA
These proposed regulations clarify the rule in
the 1987 proposed regulations that allows the surviving spouse of a decedent
IRA owner to elect to treat an IRA inherited by the surviving spouse from that
owner as the spouse's own IRA. The 1987 proposed regulations provide 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. These new proposed regulations
clarify that 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. Further these new proposed regulations clarify
that this deemed election is permitted only if the spouse is the sole
beneficiary of the account and has an unlimited right to withdrawal 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. 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.
These new proposed regulations also clarify
that, except for the required minimum distribution for the year of the
individual's death, the spouse is permitted to roll over the post-death
required minimum distribution under section 401(a)(9)(B) for a year if the
spouse is establishing the IRA rollover account in the name of the spouse as
IRA owner. However, if the surviving spouse is age 70 1/2 or older, the minimum
lifetime distribution required under section 401(a)(9)(A) must be made for the
year and, because it is a required minimum distribution, that amount may not be
rolled over. These proposed regulations
provide that this election by a surviving spouse eligible to treat an IRA as
the spouse's own may also be
accomplished by redesignating the IRA with the name
of the surviving spouse as owner rather than beneficiary.
IRA reporting of required minimum distributions
Because these regulations substantially simplify
the calculation of required minimum distributions from IRAs, IRA trustees
determining the account balance as of the end of the year can also calculate
the following year's required minimum distribution for each IRA. To improve
compliance and further reduce the burden imposed on IRA owners and
beneficiaries, under the authority provided in section 408(i), these proposed
regulations would require the trustee of each IRA to report the amount of the
required minimum distribution from the IRA to the IRA owner or beneficiary and
to the IRS at the time and in the manner provided under IRS forms and
instructions. This reporting would be required regardless of whether the IRA
owner is planning to take the required minimum distribution from that IRA or
from another IRA, and would indicate that the IRA owner is permitted to take
the required minimum distribution from any other IRA of the owner. During year
2001, the IRS will be receiving public comments and consulting with interested
parties to assist the IRS in evaluating what form best accommodates this
reporting requirement, what timing is appropriate (e.g., the beginning of the
calendar year for which the required amount is being calculated), and what
effective date would be most appropriate for the reporting
requirement. In this context, after thorough
consideration of comments and consultation with interested parties, the IRS
intends to develop procedures and a schedule for reporting that provides
adequate lead time, and minimizes the reporting burden, for IRA trustees,
issuers, and custodians in complying with this new reporting requirement while
providing the most useful information to the IRA owners and beneficiaries.
The IRS and Treasury are also considering
whether similar reporting would be appropriate for section 403(b) contracts.
Permitted Delays Relative to QDROs and State Insurer
Delinquency Proceedings
The regulations permit the required minimum
distribution for a year to be delayed
to a later year in certain circumstances.
Specifically, commentators requested a delay during a period of up to 18
months during which an amount is segregated in connection with the review of a
domestic relations order pursuant to section 414(p)(7). Commentators also
requested that a delay be permitted while annuity payments under an annuity contract
issued by a life insurance company in state insurer delinquency proceedings
have been reduced or suspended by reason of state proceedings. These proposed
regulations allow delay in these circumstances.
Correction of failures under section 401(a)(9)
The proposed regulations do not set forth the
special rule relieving a plan from disqualification for isolated instances of
failure to satisfy section 401(a)(9) because all failures for qualified plans
and section 403(b) accounts under section 401(a)(9) are now permitted to be
corrected through the Employee Plans
Compliance Resolution System (EPCRS). See Rev. Proc.
2000-16 (2000-6 I.R.B. 518).
Amendment of Qualified Plans
These regulations are proposed to be effective
for distributions for calendar years beginning on or after January 1, 2002. For
distributions for calendar years beginning before the effective date of final
regulations, plan sponsors can continue to rely on the 1987 proposed
regulations, to the extent those proposed regulations are not inconsistent with
the changes to section 401(a)(9) made by the Small Business Job Protection Act
of 1996 (SBJPA) and guidance related to those changes. Alternatively, for
distributions for the 2001 and subsequent calendar
years beginning before the effective date of final regulations, plan sponsors
are permitted, but not required, to follow these proposed regulations in the
operation of their plans by adopting the model amendment set forth below.
The Treasury Department and the IRS are making
the model amendment set forth below available to plan sponsors to permit them
to apply these proposed regulations in the operation of their plans without
violating the requirement that a plan be operated in accordance with its terms.
Plan sponsors who adopt the model amendment will have reliance that, during the
term of the amendment, operation of their plans in a manner that satisfies the
minimum distribution requirements in these proposed regulations will not cause
their plans to fail to be qualified. In addition, distributes will have
reliance that distributions that are made during the term of the amendment that
satisfy the minimum distribution requirements in these proposed regulations.
The model amendment may be adopted by plan sponsors, practitioners who sponsor
volume submitter specimen plans and sponsors of master and prototype (M&P)
plans.
These proposed regulations permit plans to make
distributions under either default provisions or under permissible optional
provisions. A plan that has been amended by adoption of the model amendment
will be treated as operating in conformance with a requirement of the proposed
regulations that permits the use of either default or optional provisions if
the plan is operated consistently in accordance with either the default rule or
a specific permitted alternative, notwithstanding the plan's terms.
The Service will not issue determination,
opinion or advisory letters on the basis of the changes in these proposed
regulations until the publication of final regulations. Until such time, the
IRS will continue to issue such letters on the basis of the 1987 proposed
regulations and SBJPA. Although the IRS will not issue determination, opinion
or advisory letters with respect to the model amendment, the adoption of the
model amendment will not affect a determination letter issued for a plan whose
terms otherwise satisfy the 1987 proposed regulations and SBJPA. Plan sponsors
should not adopt other amendments to attempt to conform their plans to the
changes in these proposed regulations before the publication of final
Qualified plans are required to be amended for
changes in the plan qualification requirements made by GUST by the end of the
GUST remedial amendment period under section 401(b), which is generally the end
of the first plan year beginning on or after January 1, 2001, or, if
applicable, a later date determined under the provisions of section 19 of Rev.
Proc. 2000-20 (2000-6 I.R.B. 553). Many
plans have been operated in a manner that reflects the changes to section
401(a)(9) made by SBJPA and will have to be amended for these changes by the
end of the GUST remedial amendment period. The IRS intends that its procedures
for amending qualified plans for the final regulations under section 401(a)(9)
will generally avoid the need for plan sponsors, volume submitter practitioners
and M&P plan sponsors to request another determination, opinion or advisory
letter subsequent to their application for a GUST letter. In addition, to the
extent such a subsequent letter is needed or desired, the IRS intends that its
procedures will provide that the application for the letter will not have to be
submitted prior to the next time the plan is otherwise amended or required to
be amended.
The model amendment described above is set forth
below:
"With respect to distributions under the Plan made in calendar
years beginning on or after January 1, 2000 (ALTERNATIVELY, SPECIFY A LATER
CALENDAR YEAR FOR WHICH THE AMENDMENT IS TO BE INITIALLY EFFECTIVE), the Plan
will apply the minimum distribution requirements of section 401(a)(9) of the Internal
Revenue Code in accordance with the regulations under section 401(a)(9) that
were proposed in January 2001, notwithstanding any provision of the Plan to the
contrary. This amendment shall
continue in effect until the end of the last calendar year beginning
before the effective date of final regulations under section 401(a)(9) or such other date specified in guidance
published by the Internal Revenue Service."
Amendment of IRAs and Effective Date
These regulations are proposed to be effective
for distributions for calendar years beginning on or after January 1, 2002. For
distributions for the 2001 calendar year, IRA owners are permitted, but not
required, to follow these proposed regulations in operation, notwithstanding
the terms of the IRA documents. IRA owners may therefore rely on these proposed
regulations for distributions for the 2001 calendar year. However, IRA sponsors
should not amend their IRA documents to conform their IRAs to the changes in
these proposed regulations before the publication of final regulations. The IRS
will not issue model IRAs on the basis of the changes in these proposed
regulations until the publication of final regulations. Until such time, IRA owners can continue to
use the current model IRAs which are based on the 1987 proposed regulations
under section 401(a)(9). The IRS will publish procedures at a later date that
will allow IRAs to be amended to reflect final regulations under section
401(a)(9).
Proposed Effective Date
The regulations are proposed to be applicable
for determining required minimum distributions for calendar years beginning on
or after January 1, 2002. For determining required minimum distributions for
calendar year 2001, taxpayers may rely on these proposed regulations or on the
1987 proposed regulations. If, and to the extent, future guidance is more
restrictive than the guidance in these proposed regulations, the future
guidance will be issued without retroactive effect.
Special Analyses
It has been determined that this notice of proposed
rulemaking is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to
Comments and Public Hearing
Before these proposed regulations are adopted as
final regulations, consideration will be given to any electronic or written
comments (preferably a signed original and eight (8) copies) that are submitted
timely to the IRS. In addition to the other requests for comments set forth in
this document, the IRS and Treasury also request comments on the clarity of the
proposed rule and how it may be made easier to understand. All comments will be
available for public inspection and copying.
A public hearing has been scheduled for June 1,
2001, at 10 a.m. in the IRS Auditorium (7th Floor),Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC. Due to building
security procedures, visitors must enter at the 10th street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all visitors
must present photo identification to enter the building. Because of access
restrictions, visitors will not be admitted beyond the immediate entrance area
more than 15 minutes before the hearing starts. For information about having
your name placed on the building access list to attend the hearing, see the
"FOR FURTHER INFORMATION CONTACT" section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the
hearing.
Persons who wish to present oral comments at the
hearing must submit written comments and an outline of the topics to be
discussed and the time to be devoted to each topic (signed original and eight
(8) copies) by May 11, 2001.
A period of 10 minutes will be allotted to each
person for making comments.
An agenda showing the scheduling of the speakers
will be prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
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.
List of Subjects 26 CFR Part 1
Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and
recordkeeping requirements.
Adoption of Amendments of the Regulations
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 * * *
Section 1.401(a)(9)-1 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-2 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-3 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-4 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-5 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-6 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-7 is also issued under 26 U.S.C.
401(a)(9).
Section 1.401(a)(9)-8 is also issued under 26 U.S.C.
401(a)(9). * * *
Section 1.403(b)-2 is also issued under 26 U.S.C.
403(b)(10). * * *
Section 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)-8
are added to read as follows:
Section
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:
Section
1.401(a)(9)-0 Required minimum distributions; table of contents.
Section
1.401(a)(9)-1 Required minimum distribution requirement inbgeneral.
Section
1.401(a)(9)-2 Distributions commencing before an employee's death.
Section
1.401(a)(9)-3 Death before required beginning date.
Section
1.401(a)(9)-4 Determination of the designated beneficiary.
Section
1.401(a)(9)-5 Required minimum distributions from defined contribution plans.
Section
1.401(a)(9)-6 Required minimum distributions from defined benefit plans.
Section
1.401(a)(9)-7 Rollovers and transfers.
Section 1.401(a)(9)-8 Special rules.
Section 1.401(a)(9)-1 Required minimum
distribution requirement in general.
Q-1. What
plans are subject to the required minimum distribution requirement under
section 401(a)(9) and sections 1.401(a)(9)-1 through 1.401(a)(9)-8?
A-1. All
stock bonus, pension, and profit-sharing plans qualified under section 401(a)
and annuity contracts described in section 403(a) are subject to the required
minimum distribution rules in section 401(a)(9) and sections 1.401(a)(9)-1
through 1.401(a)(9)-8. See section 1.403(b)-2 for the distribution rules
applicable to annuity contracts or custodial accounts described in section
403(b), see section 1.408-8 for the distribution rules applicable to individual
retirement plans, see section 1.408A-6 described for the
distribution rules applicable to Roth IRAs under
section 408A, and see section 457(d)(2)(A) for distribution rules applicable to
certain deferred compensation plans for employees of tax exempt organizations
or state and local government employees.
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) and sections
1.401(a)(9)-1 through 1.401(a)(9)-8?
A-2. The
distribution rules of section 401(a)(9) apply to all account balances and
benefits in existence on or after January 1, 1985. Sections 1.401(a)(9)-1
through 1.401(a)(9)-8 apply for purposes of determining required minimum
distributions for calendar years beginning on or after January 1, 2002.
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 several written provisions 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 sections 1.401(a)(9)-1 through 1.401(a)(9)-8. 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) as are prescribed by
the Commissioner in revenue rulings, notices, and other guidance published in
the Internal Revenue Bulletin. See section 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 section 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 section 1.401(a)(9)-3 unless the plan either specifies in
accordance with A-4(b) of section 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 section 1.401(a)(9)-3 and such
elections are made by the employee or beneficiary.
Section 1.401(a)(9)-2 Distributions commencing before
an employee's death.
Q-1. In
the case of distributions commencing before an employee's death, 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. 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 section 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 section 1.401(a)(9)-6.
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), 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 the employee attained
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, 1932, the 70th anniversary of such employee's
birth is June 30, 2002. Such employee attains age 70 1/2 on December 30, 2002.
Consequently, if the employee is a 5-percent owner or retired, such employee's
required beginning date is April 1, 2003. However, if the employee's date of
birth was July 1, 1932, the 70th anniversary of such employee's birth would be
July 1, 2002. Such employee would then attain age 70 1/2 on January 1, 2003 and
such employee's required beginning date would be April 1, 2004.
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 section 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 before the employee's death (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 A-5(a) of section
1.401(a)(9)-5 for the calculation of the distribution period that applies when
an employee dies after the employee's required beginning date. In the case of
annuity payments from a defined benefit plan or an annuity contract, see
section 1.401(a)(9)-6.
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 section 1.401(a)(9)-6,
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. For example, if
employee A upon retirement in 2002, the calendar year A attains age 65 1/2,
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
beneficiary, benefits are not treated as having begun in accordance with
section 401(a)(9)(A)(ii) until April 1, 2008 (the April 1 following the
calendar year in which A attains age 70 1/2/). Consequently, if such employee
dies before April 1, 2008 (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 section 1.401(a)(9)-4, 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
section 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 the employee attains age 70 1/2, an employee who dies
after the required beginning date determined under the plan terms is treated as
dying after the employee's required beginning date for purposes of A-5(a) of
this section even though the employee dies before the April 1 following the
calendar year in which the employee retires.
Section 1.401(a)(9)-3 Death before required
beginning date.
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 section 1.401(a)(9)-6, if an employee
dies before the employee's required beginning date (and, thus, generally 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). One method (the five-year rule in section
401(a)(9)(B)(ii)) requires that the entire interest of the employee be
distributed within five 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)) 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) applies. See A-3 of
this section to determine when distributions under the exception to the
five-year rule in section 401(a)(9)(B)(iii) and (iv) must commence. See A-2 of
this section to determine when the five-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 section 1.401(a)(9)-4 in order to determine the
designated beneficiary under
section 401(a)(9)(B)(iii) and (iv), see section
1.401(a)(9)-5 for the rules for determining the required minimum distribution
under a defined contribution plan, and see section 1.401(a)(9)-6 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
five-year rule in section 401(a)(9)(B)(ii)?
A-2. In
order to satisfy the five-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, 2002, the entire interest must be
distributed by the end of 2007, in order to satisfy the five-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)
Nonspouse 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 section 1.401(a)(9)-8, however,
if the employee's benefit is divided into separate accounts (or segregated shares,
in the case of a defined benefit plan).
(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 five-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 section 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 five-year rule in section
401(a)(9)(B)(ii).
(b) Optional plan provisions. The plan may adopt a
provision specifying either that the five-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 five-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.
(c) Elections. A plan may adopt a provision that
permits employees (or beneficiaries) to elect on an individual basis whether
the five-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 date determined under the life expectancy rule, 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).
Q-5. If
the employee's surviving spouse is the employee's 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 dies after
the employee, but before distributions to such spouse have begun under section
401(a)(9)(B)(iii) and (iv), the five-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 section 1.401(a)(9)-6 for a special rule for
annuities.
Section 1.401(a)(9)-4 Determination of the
designated beneficiary.
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 as of the date the beneficiary is
determined under A-4 of this section. The members of a class of beneficiaries
capable of expansion or contraction will be treated as being identifiable if it
is possible, as of the date the beneficiary is determined, 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 applicable state
law does not make that individual a designated beneficiary unless the
individual is designated as a beneficiary under the plan.
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. (a)
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, and, 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).
However, see A-5 of this section for special rules which apply to trusts.
(b) If an employee is treated as having no designated
beneficiary, for distributions under a defined contribution plan, the
distribution period under section 401(a)(9)(A)(ii) after the death of the
employee is limited to the period described in A-5(a)(2) of section
1.401(a)(9)-5 (the remaining life expectancy of the employee determined in
accordance with A-5(c)(3) of section 1.401(a)(9)-5). Further, in such case, except as provided in A-10 of section 1.401(a)(9)-6, if the employee dies before
the employee's required
beginning date, distribution must be made in
accordance with the 5-year rule in section 401(a)(9)(B)(ii).
Q-4. When
is the designated beneficiary determined?
A-4. (a)
General rule. Except as provided in paragraph (b) and section 1.401(a)(9)-6,
the employee's designated beneficiary will be determined based on the
beneficiaries designated as of the last day of the calendar year following the
calendar year of the employee's death. Consequently, except as provided in
section 1.401(a)(9)-6, any person who was a beneficiary as of the date of the employee's
death, but is not a beneficiary as of that later date (e.g., because the person
disclaims entitlement to the benefit in favor of another beneficiary or because
the person receives the entire benefit to which the person is entitled before
that date), 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.
(b) Surviving spouse. As provided in A-5 of section
1.401(a)(9)-3, in the case in which the employee's spouse is the designated
beneficiary as of the date described in paragraph (a) of this A-5, and the
surviving spouse dies after the employee and before the date on which
distributions have begun to the spouse under section 401(a)(9)(B)(iii) and
(iv), the rule in section 40l(a)(9)(B)(iv)(II) will apply. Thus, the relevant
designated beneficiary for determining the distribution period is the
designated beneficiary of the
surviving spouse. Such designated beneficiary will be
determined as of the last day of the calendar year following the calendar year
of surviving spouse's death. If, as of such last day, 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 section 1.401(a)(9)-3.
(c) Multiple beneficiaries. Notwithstanding anything
in this A-4 to the contrary, the rules in A-7 of section 1.401(a)(9)-5 apply if
more than one beneficiary is designated with respect to an employee as of the
date on which the designated beneficiary is to be determined in accordance with
paragraphs (a) and (b) of this A-4.
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)
Only an individual may be a designated beneficiary for purposes of determining
the distribution period under section 401(a)(9). Consequently, a trust is not a
designated beneficiary even though the trust is named as a beneficiary.
However, if the requirements of paragraph (b) of this A-5 are met, the
beneficiaries of the trust 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 from the trust instrument within the meaning of A-1 of this
section.
(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 section 1.401(a)(9)-5 for the rules for
determining the designated beneficiary whose life expectancy will be used to
determine the distribution period. If the beneficiary of the trust named as beneficiary
is another trust, the beneficiaries of the other trust 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)(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. In order to satisfy the
documentation requirement of this A-6 for required minimum distributions under
section 401(a)(9) to commence before the death of an employee, the employee
must comply with either paragraph
(a)(1) or (2) of this A-6:
(1) The employee provides to the plan administrator a
copy of the trust instrument and agrees 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.
(2) The employee –