NEWSLETTERS

On January 11, 2001, the Internal Revenue Service proposed regulations to simplify the minimum distribution rules for qualified plans and individual retirement accounts.

The rules would provide the following:

• a uniform table to determine lifetime required minimum distributions,

• allow that figure to be determined regardless of age,

• permit a beneficiary to be determined up to the end of the year following an employee's death,

• allow life expectancy at the time of death to be taken into account in the calculation of post-death minimum distributions.

The rules would be applicable for determining required minimum distributions for calendar years beginning on or after January 1, 2002 but can be effective immediately.

For determining required minimum distributions for calendar year 2001, taxpayers may rely on these proposed regulations, or on the 1987 regulations. Plan sponsors are currently in a remedial amendment period which means they will soon have to restate their plan documents. Plan sponsors who wish to have reliance on these proposed regulations are required to adopt a model amendment. Contact Administrative Retirement Services, Inc. if this is something you would like to implement for 2001.

The simplifications would have the effect of reducing the required minimum distributions for the vast majority of employees. The regulations provide a uniform distribution period for all employees of the same age, calculated by the Minimum Distribution Incidental Benefit (MDIB) divisor table.

The MDIB table is based on the joint life expectancies of an individual and a survivor 10 years younger at each age beginning at 70 and would allow employees to determine their required minimum distribution each year based on nothing more than current age and current account balance.

• Providing a simple, uniform table that all employees can use to determine the minimum distribution required during their lifetime.

• Making it far easier to calculate the required minimum distribution because employees would no longer need to determine their beneficiary by their required beginning date; 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.

The proposed regulations provide that a designated beneficiary is determined as of the end of the year following an employee's death, rather than the employee's required beginning date. If the employee has more than one beneficiary after that time, the designated beneficiary would be the one with the shortest life expectancy.

The proposed regulations would change the default rule in the case of death before the employee's required beginning date for a non-spouse designated beneficiary to provide that the distribution period is generally the remaining life expectancy of the designated beneficiary, absent a five-year rule election or a plan provision to the contrary.

The 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 it is after the required beginning date. The regulations also would extend to all annuity payment streams a previously proposed rule that allows a life annuity with a period not exceeding 20 years to commence on the required beginning date with no makeup for the first distribution's calendar year.

The permitted increase in annuity payments upon the death of a survivor annuitant would be expanded to cover the elimination of the joint and survivor annuity due to a qualified domestic relations order.

The previously proposed rule that allows a surviving spouse of a decedent IRA owner to elect to treat an IRA as the spouse's own has been clarified under the proposed regulations to permit this election only after the distribution of the required minimum amount from the account for the year of the individual's death. If an IRA rollover account is to be established in the spouse’s name, the regulations clarify that a spouse is permitted one year to roll over the post-death required minimum distribution, minus the required distribution for the year of the employee's death.

IRA trustees determining the account balance as of the end of the year would be permitted to calculate the following year's required minimum distribution for each IRA because the regulations simplify the calculation of minimum distributions from IRAs.

The regulations would also permit the required minimum distribution for any given year to be delayed until a later year in certain circumstances, specifically in relation to a qualified domestic relations order.

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