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Working with the Beneficiary Options In the 2002 RMD Regulations


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Our first article in this 3-part series focused on the importance of plan administrators understanding how to pay the correct beneficiary the correct amount, and the consequences that can result when they don’t. In this second article, we address the regulatory beneficiary options outlined in the April 17, 2002 RMD regulations and their role in paying out beneficiaries.

To know the beneficiary’s options under the regulations, the first question to ask is: Did the decedent die before or
after Required Beginning Date (RBD)? There are two similar, but different, sets of rules – based on whether the death occurred before, or on or after RBD. Keep in mind that RBD in a qualified plan is based on the plan definition and whether the decedent was a non-five-percent owner over 70½ and still employed at the time of death. If so, then the decedent would not have reached RBD and would be under the before-RBD rules. To understand the difference, let’s take a 30,000-feet look at these rules.

Beneficiary Options in the RMD Regulations for Death Before the Required Beginning Date (RBD), and for Death on or After the RBD

A. Beneficiary Options Death Before RBD

  1. Five-year rule
  2. Single life expectancy
  3. Based on beneficiary, reduced by one each year
  4. Must be established by end of year after participant’s death
  5. Non-spouse direct rollover to inherited IRA
  6. Spouse special rules (addressed later)

B. Beneficiary Options Death on or After RBD

  1. No five-year rule
  2. Single life expectancy, reduced by one each year
    1. If beneficiary younger, or
    2. on participant, if participant younger
  3. Establish by end of year after participant’s death
  4. Participant’s RMD for year of death must be distributed
  5. Non-spouse direct rollover to inherited IRA
  6. Spouse special rules (addressed later)

Example: Thomas, a 74-year-old IRA accountholder, names his son, TJ, age 48, as beneficiary. Thomas died during June of 2017. TJ must take his first distribution by December 31, 2018 based on his life expectancy of 35.1 (based on current age 49).

Note: Since Thomas was alive during 2017, an RMD distribution was required to go to him. If no RMD has been made as of the date of death, the distribution may be made to the beneficiary or the estate (but is taxable to Thomas).

However, if the accountholder or participant dies on or after the RBD and the beneficiary is older than the accountholder, the participant’s remaining life expectancy is used to calculate the minimum distributions (thus applying a longer life expectancy resulting in smaller annual distributions).

Example: George, a 75-year-old accountholder, dies. His beneficiary, Georgia, is 77. Georgia’s payouts will be based on George’s life expectancy of 13.4 years.

In the case of a participant who is in pay status, where a beneficiary is not named on a timely basis (by the end of the year following the participant’s death) the remaining balance would be paid out over the participant’s remaining life expectancy. This would be recalculated immediately before death, subtracting 1 from the life expectancy in each subsequent year.

Beneficiary Options 2017 / General Rules
Death BEFORE Participant Reached Required Beginning Date (RBD)
for Taking Minimum Distributions

*Spouse may name a beneficiary. If spouse dies, beneficiary uses factor in year of death, then reduce by one.

**Provided the spouse is the sole beneficiary with unlimited right to withdraw as of September 30 deadline. A spouse beneficiary may roll to an IRA even if not the sole primary beneficiary. Our next article will cover Spouse Beneficiary Options.

Beneficiary Options 2017 / General Rules
Death ON OR AFTER Participant Reached Required Beginning Date (RBD)
for Taking Minimum Distributions

*Spouse may name a beneficiary. If spouse dies, beneficiary uses factor in year of death, then reduce by one.

**Provided the spouse is the sole beneficiary with unlimited right to withdraw as of September 30 deadline. A spouse beneficiary may roll to an IRA even if not the sole primary beneficiary. Our next article will cover Spouse Beneficiary Options.

The plan sponsor chooses from plan design options as to whether the plan will permit a beneficiary to choose the five-year rule (for participants who die before RBD), life expectancy installments payments, both of these options or neither of these options. If the plan sponsor chooses one or neither of these options, the beneficiary may directly roll to an inherited IRA within the appropriate timeframes, and use the life expectancy method, or if the participant died before RBD, the five-year rule as the distribution method from the inherited IRA. Thus, when discussing options with beneficiaries, it is critically important to know your plan document provisions as well as the regulations.

Stay tuned for the third article in this series, which will discuss the special rules available to spouse beneficiaries, non-spouse beneficiary inherited IRAs, and additional rules.

William C. Grossman, ERPA, QPA, APA, MBA is the Managing Member of WCG ERISA CONSULTING, LLC. He assists TPAs and financial institutions in complying with IRS and DOL regulations regarding qualified plans, such as 401ks, as well as 403(b)s and IRAs; and has spoken on a wide variety of retirement plan topics at ASPPA and NIPA national conferences.

As a contributing author to PenChecks Trust, Grossman writes about current retirement plan compliance and implementation issues.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

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