New Guidance for Retirement Plan Distributions

After two sets of proposed regulations, the IRS has issued final regulations on required minimum distributions (RMDs) from retirement plans, further simplifying the distribution rules. The new regulations also respond to provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that changed the portability rules and uniform life expectancy tables for RMDs. To many, the new final regulations signal an increased interest on the Service's part to encourage taxpayers to save more money toward their retirement.

Background

The final regulations are the end of a long and controversial history of rules related to RMDs and are the final interpretation of the proposed regulations issued in 1987 and 2001. The IRS originally issued proposed regulations in 1987, but they never became final. They were highly complex and required retirement account owners to make irrevocable elections by their required beginning date (RBD), the date by which retirement account owners are required to start withdrawing minimum amounts from their accounts. Generally, this date is April 1 of the year following attainment of age 70¹/2.

After receiving comments and complaints, the Service came out with new proposed regulations in 2001. Having received additional comments, the IRS has issued the final regulations, giving long-awaited closure to many previously unanswered questions. Al-though similar to the 2001 proposed regulations, the new guidelines contain some minor changes and additional items. The final regulations are effective January 2003. For 2002, taxpayers may rely on the final regulations or the proposed regulations of 2001 or 1987.

The regulations also respond to a provision in the EGTRRA that revised the uniform life expectancy tables to reflect current life expectancies more accurately than tables issued in 1987 (see Exhibit 1).

Summary of the Final Regulations

The final regulations have pushed up the deadline for determining a designated beneficiary from December 31 of the year after the retirement plan participant's death to September 30. This will allow for additional time to determine the amount due a beneficiary for his first RMD, which will need to be made before December 31 of the year after the participant's death. The drawback to this provision is that less time is available for post-mortem planning.

The regulations also provide guidance on the treatment of separate accounts with different beneficiaries. These accounts can now be established at any time before or after the RBD. Separate accounts are recognized for purposes of determining RMD in either the year after the employee's death or the year after the separate accounts are established, whichever occurs last. To disregard other beneficiaries, the separate account must be established no later than a year after the participant's death. In addition, the separate accounts must allocate all post-death gains and losses on a pro-rata basis.

The good news for financial institutions and plan providers is that the Service eliminated the reporting requirements from the 2001 proposed regulations. Under those regulations, trustees, custodians or institutions that issued a retirement plan were required to provide RMDs to each individual retirement plan owner. Under the final regulations, the IRA trustee will be required to indicate on Form 5498, IRA Contribution Information, that a minimum distribution is required, but need not indicate the amount. The 2003 Form 5498, which is due in 2004, must indicate if an RMD is required for 2004. The trustee is also required to furnish the plan owner with either the amount of the RMD and the date it needs to be distributed, or notification that a distribution needs to be made and to offer to calculate the amount. The distribution notification needs to be sent by January 31 of the calendar year that a distribution is required.

Note: These rules do not apply to Sec. 403(b) contracts and IRAs of deceased owners. The final regulations also changed the method for determining the distribution period when an employee dies after the RBD and has a designated beneficiary. Regs. Sec. 1.401(a)(9)-5, A-5 now allows the use of the longer of the employee's life expectancy or the beneficiary's life expectancy in determining the distribution period.

EGTRRA Portability

Along with simplifying the rules governing RMDs, the EGTRRA has provided for more portability of retirement assets. As of the beginning of 2002, with proper plan provisions, distributions from a Sec. 403(b) arrangement or 401(a) or 457 plan can be rolled over to another Sec. 403(b) arrangement or 401(a) or 457 plan.

Similarly, distributions from an IRA can be rolled into a qualified plan, Sec. 403(b) arrangement or governmental Sec. 457 plan. The plan receiving the rollovers will need to have plan provisions in place to accept them and these amendments need to be made by the end of the plan year-end. The plan sponsors with the required amendments will need to provide plan participants with special tax notice of plan payments.

On Jan. 13, 2002, the Service issued a revised safe-harbor notice (Notice 2002-3) that can be found at www.irs.gov/pub/irs-irbs/irb02-02.pdf, starting on page 291 of the IRS Bulletin. For employers with Spanish-speaking em-ployees, the special tax notices can be found at http://www.irs.gov/pub/irs-drop/a-02-46.pdf.

New Temporary Regulations for Annuity Payments

The IRS has issued new temporary regulations that substantially change the treatment of pension distributions in the form of annuity payments. Hopefully, the IRS will finalize these regulations after it receives more comments on the temporary annuity payment rules. The effective date of the temporary regulations is Jan. 1, 2003.

Conclusion

The new regulations have simplified a traditionally complex series of regulations governing RMDs, and will hopefully encourage individuals to save more toward retirement and ease the burdens placed on retirement planning professionals.

From Ann P. Rousseau, CPA, Blum Shapiro, West Hartford, CT