The Wagner Law Group | Est. 1996

Sophisticated Legal Solutions And Boutique-Style Service

Required Minimum Distribution Modifications Applicable to Defined Benefit Plans as Well

by | Jun 14, 2022 |

While most of the attention was on how the IRS’s proposed regulation would address tax-qualified defined contribution plans and IRAs, the IRS also took the opportunity to update the existing regulations for tax-qualified defined benefit plans.  One such issue is the actuarial increase for employees retiring after age 70-1/2.  The proposed regulations reflect that the required actuarial increase does not apply to a five-percent owner whose required beginning date is the calendar year in which he or she attains age 72.  While the actuarial increase is not required for governmental plans or church plans, a plan for the employees of a tax-exempt organization other than a church or a church-controlled organization that is not a church must provide an actuarial increase for an employee who retires in a calendar year after the calendar year in which employee attains age 70-1/2.  As under the current Code Section 401(a)(9) regulations, however, there is no definition of what it means to retire, the triggering event for distributions to plan participants who are not five-percent owners.

The proposed regulations also address the relationship between the limitation on accelerated benefit distributions under Code Section 436 and the minimum distribution requirements of Code Section 401(a)(9).  Depending on a plan’s annual funding target attainment percentage (AFTAP), a tax-qualified defined benefit plan may be prohibited from paying or may be restricted in the amount it may pay.  A prohibited payment is a payment in excess of the monthly amount payable under a single life annuity or a payment for an irrevocable commitment by an insurer to provide benefits.  However, if a plan participant has not designated a beneficiary, or has designated a beneficiary other than an individual, such as an estate or a charitable institution, then the participant’s entire accrued benefit must be distributed from the plan within five years of the participant’s death.  As a result, a conflict could arise between the Code’s required minimum distribution provisions and its limitation on distribution of benefits from underfunded defined benefit plans.  To avoid a possible violation of the five-year rule, the proposed regulations allow a benefit that is required to be distributed under the five-year rule to extend past that deadline if the payments: (i) start by the fifth year after the employee’s death, and (ii) are made in a form that is as accelerated as permitted under Code Section 436(d).

Code Section 401(a)(9)(F) provides that any amount paid to a child is to be treated as a payment to a surviving spouse if it becomes payable to the surviving spouse upon the child’s attaining the age of majority or another designated event permitted under the regulations.  Under the existing regulations, a child attains the age of majority if the child has not completed a specified course of education – an undefined phrase – or attains age 26.  Under the proposed regulations, the age of majority is age 21.  However, the proposed regulations also provide that if a plan’s definition of the age of majority was adopted on or before February 24, 2022 (the date the proposed regulations were issued), and satisfies the existing regulations, there is no requirement that the plan be amended to reflect the new age-21 definition of the age of majority.

Both the current and the proposed regulations provide as a general rule that all payments under a defined benefit plan or annuity contract be non-increasing, while also providing several exceptions.  The proposed regulations add the following circumstances in which benefits are permitted to increase:

  • The resumption of payments suspended under Code Section 411(a)(3)(B) on account of employment after commencement of benefits when the suspension ends;
  • The resumption of benefits suspended under Code Section 418E (insolvent plan) or Code Section 432(e)(9) (plan in critical or declining status), if the suspension of benefits consists of a temporary reduction in benefits or if suspended benefits resume because of a failure to meet the conditions of Code Section 432(e)(9).

The current 401(a)(9) regulations provide a number of exceptions under which payments from annuity contracts purchased from insurance companies may increase, and certain of these exceptions apply only if the total future expected payments under the contract exceed the total value being annuitized.  The proposed regulations provide the following three additional exceptions to the nonincreasing annuity requirement that apply without regard to a comparison of the total future expected payments and the total value being annuitized:

  • An annuity contract may provide a final payment on the death of the employee that does not exceed the excess of the total value being annuitized over the total payments before the death of the employee.
  • The annuity contract may offer a short-term deferral of payments under which up to one year of annuity payments are paid in advance of when payments were scheduled to be made.
  • In order to facilitate compliance, the proposed regulations permit an annuity contract to provide an acceleration of payments that is required to comply with the newly added Code Section 401(a)(9)(H). However, neither the preamble nor the proposed regulations specifically addresses whether it is permissible to offer retirees already in pay status a lump sum distribution option that is being offered to all terminated vested participants.

These proposed modifications are intended to apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2022.  For the 2021 distribution calendar year, taxpayers must apply the existing regulations, but taking into account a reasonable good faith interpretation of the amendments made by the SECURE Act.  The IRS indicated that compliance with the proposed regulations will satisfy that requirement.

Plan amendments to reflect the updated regulations will be required by December 31, 2022 (December 31, 2024 for governmental plans), although some comments have requested that such date be extended.  The last major revision to the Code Section 401(a)(9) regulations was accompanied by a model amendment, but there is no present indication that the IRS will be providing such an amendment.