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Remember Beneficiary Options

By John Iekel • November 22, 2017 • 0 Comments
Quick! What are the beneficiary options under the regulations concerning required minimum distributions (RMDs) that were issued on April 17, 2002? A recent blog entry discusses these options and the importance of the distinctions.

In “Working with the Beneficiary Options In the 2002 RMD Regulations,” a recent PenChecks blog entry, William Grossman writes that there are different sets of rules based on whether the participant’s death occurs before, or on or after, the required beginning date (RBD) under the terms of the plan.

The rules contained in TD 8987 — which include provisions concerning 403(b) plans  regarding distributions based on when the participant dies include the following.

Before RBD

Distributions can be made:

  • under the five-year rule, which 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;

  • under the life expectancy rule, which 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 the beneficiary;

  • under special rules that apply when the designated beneficiary is the employee’s surviving spouse, including a special commencement date for distributions to that surviving spouse; and

  • on or before the end of the calendar year immediately following that in which the employee died, if the designated beneficiary is not the employee’s surviving spouse.

On or After RBD

  • If an employee dies after distribution has begun, the applicable distribution period for distribution calendar years after that in which the employee died is one of the following:

1. If the employee has a designated beneficiary, the longer of (a) the remaining life expectancy of the employee’s designated beneficiary; and (b) the remaining life expectancy of the employee; or
2. If the employee does not have a designated beneficiary, the remaining life expectancy of the employee.

  • The applicable distribution period measured by the beneficiary's remaining life expectancy is determined using the beneficiary's age as of the beneficiary's birthday in the calendar year immediately following that in which the employee died. In subsequent calendar years, the applicable distribution period is reduced by one for each calendar year that has elapsed after the calendar year immediately following that in which the employee died.

Grossman notes that the plan sponsor can provide in the plan that a beneficiary can choose the five-year rule, life expectancy installment payments, both, or neither of these options. If the plan sponsor chooses to allow beneficiaries to choose one or neither, he writes, a beneficiary may directly roll funds to an inherited IRA within the appropriate amounts of time, and use the life expectancy method, or the five-year rule as appropriate, as the method by which distributions will be made 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,” Grossman cautions.

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