IRS Codifies Minimum Distribution Rules

>The final guidance applies to defined benefit plans and annuity products purchased with account balances in other types of qualified retirement plans and Individual Retirement Accounts (IRAs).   The IRS released its final version of the significantly simpler rules governing money that retirement savers are required to withdraw from their plans as RMD in April of 2002(See  IRS Releases Final RMD Revisions ).  

“This is great news for participants, employers and annuity providers because they now have final rules regarding required distributions from their retirement programs,” said Gregory Jenner, Acting Assistant Secretary for Tax Policy.  “There is adequate flexibility in the rules to permit annuities that meet the different needs of retirees.  The final rules reflect many of the comments we received from the public during the finalization process.”

>For the most part the final regulations retain the basic rules of the temporary regulations issued in 2002.   In particular, the IRS left intact the requirement that distributions from qualified retirement plans begin on April 1 of the year following the later of the year during which the employee either turns age 70.5 or retires.  Those payments must be made in the amount(s) based on the life of the employee or, in some cases, the life of the employee plus a designated beneficiary.

>Yet, there were still numerous modifications made in response to comments received by the IRS about the initial proposals.   For example, if an employee’s annuity start date is at an age younger than 70, an adjustment is made to the employee/beneficiary difference.   This was done to permit a higher percentage after an employee’s death for those that begin receiving benefits at an earlier age.

>Additionally, the final regulations provide clarification on allowable annual increases in RMD amounts, which may not exceed the increase in an eligible cost-of-living index for a 12-month period.    Adding to this, the IRS also provided for carry-overs of unused cost-of-living increases for plans that cap their annual increase amounts.  

>The regulations also generally grandfather governmental plan provisions that were in effect when the temporary regulations were published.  These regulations also include a modification to the defined contribution plan rules that will provide more flexibility in the establishment of separate accounts for beneficiaries following the death of a plan participant or IRA holder.

>The final regulations are effective January 1, 2003, the same date used for the regulations applicable to defined contribution plans.   However, until 2006, plans are only required to show that they exercised good faith in complying with a reasonable interpretation of section 401(a)(9).

The text of the final regulations is availabe at http://www.treas.gov/press/releases/reports/js1721td9130.doc .