New Minimum Distribution Rules: Easier, Cheaper, And Safer

In a surprise move in January, the IRS completely revamped the "required minimum distribution" regulations under section 401(a)(9) that had been used since 1987. The new rules are easier to use, require smaller minimum distributions, and avoid traps that had dire consequences.

Under the old rules, the amount of IRA payments to persons over age 70-1/2, or plan payments at the later of age 70-1/2 or retirement, depended on several critical choices that had to be made by the "required beginning date." The minimum distribution depended on the age and identity of the beneficiary, and which method of calculating life expectancy was used. Some of these choices could have adverse consequences if the owner and/or beneficiary died early.

The new rules sweep away all this complexity and provide a simple table to determine the correct distribution, based solely on the owner's age. (The table is the same as under the old "MDIB" rule for a non-spouse beneficiary.) It does not matter who the beneficiary is, what the beneficiary's age is, or even whether there is a beneficiary. The only exception is that if the beneficiary is a spouse more than 10 years younger, the joint life expectancy can be used as under the old rules. This greatly simplifies the rules and eliminates confusing choices such as whether to "recalculate" life expectancies. For example, to calculate the minimum distribution for 2001, an IRA owner who will turn 75 in 2001 would simply take the IRA balance at the end of 2000 (provided by the IRA trustee) and divide by 21.8.

The best part of the new proposed rules is that they can be used immediately and can be used even by persons already receiving distributions or who turned age 70-1/2 in 2000 and are about to start their distributions. For example, under the old rules, if an IRA owner and spouse elected to recalculate their life expectancy, and the spouse died, the owner was stuck using his single life expectancy, resulting in higher payments. Now he can use the new table instead, which will sharply lower his required payments. Note: Qualified plans need to adopt a simple amendment for their participants and beneficiaries to use the rule in 2001.

The new rules are also beneficial upon the death of the owner. The beneficiary of the account is determined at the end of the year after death. This allows time by means of disclaimers and cash-outs, and segregation of accounts, to arrange the most advantageous beneficiary. Likewise, if a trust is the beneficiary, the trust's beneficiaries are determined after the owner's death. No matter how distributions were being made when the owner died, the beneficiary can spread payments over his or her remaining life expectancy. (A surviving spouse can still elect to defer distributions, roll them over, or treat an inherited IRA as his or her own.) If the beneficiary is an estate or charity, the old rules required immediate distribution of the entire account; the new rules allow payments over the remainder of the owner's life expectancy in the year of death. This allows continued tax-deferred growth in the account.

Is there any down side to the new rules? There is a proposal to require IRA custodians (but not plan administrators) at the end of each year to calculate the minimum distribution for the coming year and report it to the owner and the IRS. But this compliance measure is not in effect yet.

Practice Tip: Stop! Before taking any required distribution in 2001, check the new rules. They will almost always require smaller distributions and be easier to use.

ACTION NEEDED: As noted above, qualified retirement plans need to adopt a simple amendment for their participants and beneficiaries to use the new rule in 2001.

Possible Delay Or Further Changes In New Regulations

The Bush Administration has indicated that, with respect to regulations that have been published but have not taken effect, the effective date thereof is temporarily postponed for 60 days. For example, this temporary delay applies to the new claims procedure regulations, the SPD content regulations, and the new HIPAA regulations. Only time will tell whether the Bush Administration will further delay, or revise, these recent regulations. This delay will not affect the minimum distribution rules, the transportation benefits rules, the cafeteria plan regulations, or the new COBRA regulations.

"GUST" Amendment Deadline Approaching

Qualified pension and profit sharing plans generally must be amended for recent changes in the law (commonly referred to as the "GUST" amendments) by the end of the 2001 plan year. However, plans which use master and prototype plans or volume submitter specimen plans may qualify for a later amendment deadline if applicable requirements are met and certain actions are taken by the end of the 2001 plan year. Additionally, it is generally advisable for a plan sponsor to apply for an IRS determination letter in a timely fashion, in accordance with applicable IRS guidance. Contact a Davis Wright Tremaine LLP employee benefits attorney for further information about amending your plan and filing it with the IRS for a favorable determination letter.