Simplified Minimum Distribution Rules

The IRS recently issued proposed amendments to 1987 proposed income tax regulations and to pension excise tax regulations under Secs. 401, 403, 408 and 4974 of the 1986 Code. The regulations simplify the required minimum distribution (RMD) rules for qualified retirement plans (QRPs), individual retirement accounts (IRAs) and annuities, Roth IRAs, Sec. 403(b) annuity contracts and Sec. 457 deferred compensation plans. They also provide new rules on related peripheral issues.

Under the RMD rules, distributions from retirement plans must begin on an individual's required beginning date (RBD). The RBD for employees (other than five-percent owners) is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70¹/2, or the calendar year in which the employee retires. For five-percent owners and IRA owners, the RBD is April 1 of the calendar year following the calendar year in which the individual attains age 70¹/2. For most individuals, the new rules will reduce RMDs and therefore provide greater tax-deferred benefits.

Single Uniform Distribution Method

Generally, during the life of an individual, the RMD is determined by reference to the minimum distribution incidental benefit divisor table presently prescribed in Prop. Regs. Sec. 1.401(a)(9)-2. However, if the individual's sole beneficiary is his spouse and the spouse is more than 10 years younger than him, the individual can use a longer distribution period measured by the joint life and last survivor life expectancy of the individual and spouse. This simplifies the entire procedure by eliminating the need for two tables, the consideration of multiple lives and the need to make tax elections. For years after the year of the individual's death, the distribution period is the remaining life expectancy of any designated beneficiary. If no beneficiary has been designated and the account owner dies after his RBD, the balance is paid out over the account owner's remaining life expectancy. Finally, if no beneficiary has been designated and the account owner dies before his RBD, the balance must be paid out within five years after his death.

Determination of a Designated Beneficiary

Generally, a designated beneficiary is determined as of the end of the year following the year of the individual's death, rather than as of the individual's RBD or date of death (as under the 1987 proposed regulations). Under this approach, the identity of the designated beneficiary and calculation of his life expectancy are done at the same time benefits are required to begin.

Default Rule for Post-Death Distributions

The new RMD rules would change the default rule in the case of death before the individual's RBD for a non-spouse-designated beneficiary from the five-year rule to the life expectancy rule explained.

Clarification of Deemed Election Rule

The new RMD rules clarify the deemed election rule in the 1987 proposed regulations that allow a surviving spouse, as the beneficiary of a deceased IRA owner, to elect to treat the IRA as his own IRA. Under the new RMD rules, the deemed election is permitted only (1) after the distribution of the required minimum amount for the account, if any, for the year of the individual's death, (2) if the spouse is the sole beneficiary and has an unlimited right to withdraw from the account and (3) if no trust is named as the beneficiary of the IRA, even if the spouse is the trust's sole beneficiary.

New Reporting Requirements

Effective in 2000, IRA trustees must report the amount of the RMD from an IRA to a beneficiary and to the IRS.

QRP Amendment

The new RMD rules are proposed to be effective for distributions from QRPs for calendar years beginning after 2001. For distributions for calendar years beginning before the final regulation's effective date, plan sponsors can continue to rely on the 1987 proposed regulations or can follow the new RMD rules in the operation of the plans by adopting the model amendment in the regulations.

IRA Amendments Effective Date

For IRAs, the new RMD rules are proposed to be effective for distributions for calendar years beginning after 2001. For distributions for the 2001 calendar year, account owners can follow the new RMD rules, notwithstanding the terms of present documents.

From Andrew Gibson, CPA, J.D., LL.M., and Lara Stanton, CPA, Atlanta, GA