Back to Qualification

Required Minimum Distributions

  • 3891. What is the latest date that benefits under a qualified plan can be paid?

    • A qualified plan must meet two separate sets of rules with regard to commencement of benefits: (i) The plan cannot delay the payment of benefits to a date beyond that which is set by statute, and (ii) the plan must meet the minimum distribution requirements of the Code. (See Q 3892 to Q 3908.) As to the first element of this rule, a plan must provide that, unless a participant elects otherwise, payments of benefits to the participant will begin within sixty days after the close of the latest of (1) the plan year in which the participant attains the earlier of age sixty five or the normal retirement age specified under the plan, (2) the plan year in which the tenth anniversary of the participant’s plan participation occurs, or (3) the plan year in which the participant terminates his or her service with the employer.1

      A qualified plan also must meet the minimum distribution requirements set forth at IRC Section 401(a)(9). The SECURE Act, enacted December 20, 2019, changed the beginning date for required minimum distributions (RMDs) from age 70½ to age 72 for distributions for 2020 and thereafter.2 It also made other major changes to the RMD requirements, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs), replacing the distribution period with a 10-year fixed period, unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants who die after December 31, 20193 (Q 3892 to Q 3908). In light of the COVID-19 pandemic, the CARES Act4 waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMD distributions made in early 2020 that were otherwise not required because of the waitver.

      TEFRA 242(b)(2) Election

      Notwithstanding the general requirements above, the plan may be subject to a grandfathered TEFRA Section 242(b)(2) election. This election was permitted at the time the minimum distribution requirements of Section 401(a)(9) were enacted. Basically, a participant is not subject to the minimum distribution requirements if the participant designated, before January 1, 1984, a method of distribution that would have been permissible under pre-TEFRA law.5 The final regulations stated that the transitional election rule in TEFRA Section 242(b)(2) was preserved and that a plan will not be disqualified merely because it pays benefits in accordance with this election. The plan must provide for the continuation of the election when it is restated or the election is lost.


      1. IRC Sec. 401(a)(14).

      2.See generally PL 116-94, Sec 114.  Note that it did not set back the Section 401(a)(9)(C)(iii) actuarial adjustment rule to age 72.

      3.See generally PL 116-94, Sec. 401.

      4.PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs in 2020.

      5. TEFRA, Sec. 242(b)(2); TRA ’84, Sec. 521(d)(3).

  • 3892. What are the minimum distribution requirements for qualified plans?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It did so by the addition of a new subsection (H) to 26 USC 401(a)(9) that provides for a change of the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 to individuals who attain age 70½  after that date. It also eliminates for defined contribution plans (including IRAs) so-called “stretch” distributions upon the participant’s death, based upon the life expectancy of the designated beneficiary. It generally replaces life expectancy with a 10-year fixed period, including for IRAs, unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules apply only to plan participants who die after December 31, 2019[2]  (see Q 3893 to Q 3908).

      To be qualified, a plan must meet all the statutory rules of IRC Section 401(a)(9), including the incidental death benefit requirement in IRC Section 401(a)(9)(G), and now IRC Section 409(a)(9)(H). The plan must also provide that distributions will be made in accordance with the IRS RMD rules, as amended and modified by the SECURE Act, as well as available in regulations and other guidance. This compliance is required except to the extent of grandfathering for certain pre-2020 distributions under existing plans for participants who died prior to 2020. In addition, a qualified plan must provide that the minimum distribution rules override any distribution options offered under the plan that are inconsistent with these requirements.[3]


      Planning Point: Although the plan participant is subject to significant 50 percent penalty for failure to properly take RMDs on a timely basis, the employer and plan sponsor itself must also ensure that RMDs are properly calculated and distributed. Failure to do so can result in an operational error that could result in disqualification. The plan document itself must provide that the RMD rules contained in the IRC will control, and that they will override any inconsistent terms in the plan document. Importantly, the enactment of the SECURE Act.[4] The changes, plus the grandfathering, makes compliance more complicated. Because of the SECURE Act (and CARES Act), amendments to plans will be necessary to plan documents as well, although the IRS has provided two sample amendments in Notice 2020-51, addressing 2020 waiver of mandatory RMDs.


      For tax years before 2020, 409(A)(9) regulations made governmental plans subject only to a “reasonable, good faith interpretation” of the minimum distribution requirements.[5] This does not appear to have changed by the SECURE Act.

      Unless otherwise noted, the questions that follow explain the rules set forth in 409(a)(9), as modified and amended by the SECURE Act, the pre 2020 final regulations and any new guidance, to the extent it exits, considering SECURE Act changes. The pre-2020 regulations themselves were complex, and the changes made by the SECURE Act have only magnified this complexity. Therefore, all current authority should be reviewed carefully with respect to any specific case, including the required beginning date (Q 3895), the minimum distribution requirements from individual accounts during the employee’s lifetime (Q 3897), annuity payouts from defined benefit plans (Q 3896), after-death distribution requirements (Q 3900), designated beneficiaries (Q 3904), and the effect of a qualified domestic relations order on required distributions (Q 3908). All of these questions, consider the impact of the SECURE Act to the extent it is understood as of the date of publication.

      _____________________

      [1]   See generally PL 116-94, Sec.114.

      [2]   See generally PL 116-94, Sec. 401

      [3].     IRC Sec. 401(a)(9); Treas. Reg. §1.401(a)(9)-1, A-3(a).

      [4]   See PL 116-94, Sec. 114.

      [5].     Treas. Reg. §1.401(a)(9)-1, A-2(d).

  • 3893. What penalties are imposed on a qualified plan that fails to satisfy the minimum distribution requirements?

    • Editor’s Note:  The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans.  It did so by the addition of a new subsection (H) to 26 USC 401(a)(9) that provides for a change of the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 to individuals who attain age 70½ after that date.  It also eliminates so-called “stretch” distributions for defined contribution plans, including IRAs, upon the participant’s death, based upon the life expectancy of the designated beneficiary.  It generally replaces it with a 10-year fixed period, including for IRAs, unless the beneficiary is an “eligible designated beneficiary”.1 The change in the stretch distribution rules apply only to plan participants who die after December 31, 20192 (see Q 3893 to Q 3908 ).

      Failure to make minimum distributions. Although a plan that fails to meet the minimum distribution requirements with respect to all required distributions is technically subject to disqualification, Rev. Proc. 2016-51 states such failures can be corrected through the Employee Plans Compliance Resolution System (“EPCRS”).3

      For a defined contribution plan, the correction prescribed is to distribute the required minimum distributions, including earnings from the date of the failure to the date of distribution. The amount that must be distributed for each year a required minimum distribution was not made is determined by dividing the adjusted account balance on the applicable valuation date by the application distribution period. The adjusted account balance is the actual account balance on the applicable valuation date, reduced by the total missed distributions for prior years.

      For a defined benefit plan, the correction prescribed is to distribute the required minimum distribution plus an interest payment based on the plan’s actuarial equivalence factors in effect on the date the distribution should have been made.

      If the plan is subject to a restriction on single-sum payments under section 436(d), the plan sponsor must contribute an amount to the plan determined according to the rules set out in Rev. Proc. 2016-51.4

      Planning Point: Plan sponsors and administrators should establish a system to monitor the ages of all participants. As a result of the SECURE Act, the employment status of participants who are approaching both age 70 and 72 will need to be reviewed to determine if the exception for participants who are less than 5 percent owners are still working for the plan sponsor applies.5 Those who do not qualify for the exception or who no longer qualify should be notified that they are nearing their required beginning date and when their required minimum distributions must begin.


      1. See generally PL 116-94, Sec.114.

      2. See generally PL 116-94, Sec. 401.

      3. 2016-42 IRB 465.
      4. Rev. Proc. 2016-51, Appendix A, section .06.

      5. PL 116-94, Sec. 114(b).

  • 3894. What penalties are imposed on an individual who fails to satisfy the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies to individuals who attain age 70½ after that date). It also eliminates so-called “stretch” distributions for defined contribution plans (including IRAs) upon the participant’s death. Under prior law, those distributions were typically based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed period applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019.[2]

      In response to the COVID-19 pandemic, all RMDs were waived for 2020 under the CARES Act. In 2020, the IRS released transition guidance permitting recontribution of RMDs taken in early 2020 (excluding defined benefit plans) by August 31, 2020 for any individual who would have had to take a distribution by April 1, 2020 absent the CARES Act waiver. In that same guidance, the IRS provided relief to beneficiaries or IRA owners who received a distribution if the RMD was repaid by August 31, 2020. The IRS Notice also provided two sample amendments for defined contribution plan documents that employers may adopt to give participants and beneficiaries, whose RMDs were waived, a choice as to whether or not to receive the waived RMD. [3]

      In addition to the qualification implications, if an amount distributed from a plan is less than the RMD, an excise tax equal to 50 percent of the shortfall generally is levied against the individual (Q 3909).[4] The tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall is due to reasonable error and that reasonable steps are being taken to remedy the shortfall.[5] The excise tax will be waived automatically if the beneficiary is an individual whose minimum distribution amount is determined under the life expectancy rule for after-death distributions, and the entire benefit to which that beneficiary is entitled is distributed under the five year rule.[6] Many hope that this automatic waiver will continue for the five categories of eligible designated beneficiaries whose distributions may still be taken under the life expectancy rule as provided in the SECURE Act.[7]


      Historical Note: WRERA 2008 waived the RMD requirement from defined contribution plans and IRAs for calendar year 2009. Also, the five year rule was determined without regard to 2009. A person who received an RMD for 2009, including a distribution for 2009 made as late as April 1, 2010, had until the later of sixty days of receiving the RMD or November 30, 2009, to roll over the RMD to an IRA or other retirement plan (assuming the rollover would otherwise qualify).[8]


      The minimum distribution requirements will also not be treated as violated and, thus, the 50 percent excise tax will not apply where a shortfall occurs because assets are invested in a contract issued by an insurance company that is in state insurer delinquency proceedings. To the extent that a distribution otherwise required under IRC Section 401(a)(9) is not made during the state insurer delinquency proceedings, this amount and any additional amount accrued during this period will be treated as though it is not vested.[9]

      [1].      See generally PL 116-94, Sec.114.

      [2].      See generally PL 116-94, Sec. 401.

      [3].      Notice 2020-51

      [4].     IRC Sec. 4974.

      [5].     Treas. Reg. §54.4974-2, A-7(a).

      [6].     Treas. Reg. §54.4974-2, A-7(b).

      [7].      See 409A(a)(9)(H)(ii) as added by PL 116-94, Sec. 401.

      [8].     Notice 2009-82, 2009-41 IRB 491.

      [9].     Treas. Reg. §1.401(a)(9)-8, A-8.

  • 3895. What is the beginning date for required minimum distributions from a qualified plan?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies only to individuals who attain age 70½ after that date). It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019.[2]

      In order to be qualified, a plan must provide that the entire interest of each employee will be distributed not later than his required beginning date, or will be distributed beginning not later than the required beginning date over certain prescribed time periods.[3]

      For purposes of the minimum distribution rules (Q 3893 to  Q 3908) and the minimum distribution incidental benefit rule (Q 3909), the term “required beginning date” means April 1 of the calendar year following the later of (1) the year in which the employee attains age 72 or (2) the year in which the employee (other than a 5 percent owner) retires from the employer maintaining the plan.[4]

      In the case of a 5 percent owner, there is only one required beginning date: April 1 of the calendar year following the year in which the employee attains age 72.[5] Under pre-SECURE Act law, the IRS determined that where a 5 percent owner rolls the account balance over to the plan of another employer in which the 5 percent owner was not a 5 percent owner (after receiving the required distribution for the year in question), the individual could delay distributions from the new plan until retiring after age 70½.[6]

      Under pre-SECURE Act regulations, a plan was permitted to provide that the required beginning date for all employees was April 1 of the calendar year following the calendar year in which the employee attained age 70½ regardless of whether the employee is a 5 percent owner.[7]  Presumably, this ability to mandate distribution will be available even though the SECURE Act has changed the attained age from 70½ to 72.

      If distributions began irrevocably (except for acceleration) prior to the required beginning date in the form of an annuity that meets the minimum distribution rules, the annuity starting date will be treated as the required beginning date for purposes of calculating lifetime and after death minimum distribution requirements (Q 3896).[8]

      Pre-SECURE Act, if, for example, an employee’s date of birth is June 30, 1939, the employee would reach age 70 on June 30, 2009, and would reach age 70½ on December 30, 2009. Consequently, assuming the employee is retired or a 5 percent owner, the employee’s required beginning date would be April 1, 2010. Because distributions from a defined contribution plan were waived for 2009, a distribution from a defined contribution plan would not be required until December 31, 2010. (See Q 3891.) If the same employee’s birthday were July 1, 1948, the employee would reach age 70½ on January 1, 2019, and the employee’s required beginning date would be April 1, 2020.[9] Post-2019, if for example, the employee’s date of birth is July 1, 1949, the employee would reach age 70½ on January 1, 2020. Pre-SECURE Act (under prior law), the calendar year for the first required distribution for the employee would be 2020. But, because the employee will have reached age 70½ after December 31, 2019, the new law will apply, and the first calendar year of distribution to the employee will be 2022.  Unfortunately, any employee born a day earlier (June 30, 1949) or more is stuck with the first distribution in calendar year 2020 (although RMDs were waived for 2020, See Q 3891).

      [1].      See generally PL 116-94, Sec.114.

      [2].      See generally PL 116-94, Sec. 401

      [3].     IRC Sec. 401(a)(9)(A).

      [4].     IRC Sec. 401(a)(9)(C).

      [5].     IRC Sec. 401(a)(9)(C)(ii)(I).

      [6].     Let. Rul. 200453015.

      [7].     Treas. Reg. §1.401(a)(9)-2, A-2(e).

      [8].     Treas. Reg. §1.401(a)(9)-6, A-10.

      [9].     Treas. Reg. §1.401(a)(9)-2, A-3; Notice 2009-82; 2009-2 CB 491.

  • 3896. What minimum distribution requirements apply to annuity payouts from a defined benefit plan?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies only to individuals who attain age 70½ after that date). It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019[2] (see Q 3891 to Q 3907).

      In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs taken in early 2020 that otherwise were not required under the CARES Act waiver.

      Annuity distributions from a defined benefit plan must be paid in periodic payments at least annually for the employee’s life (or for the joint lives of an employee and beneficiary), or over a period certain that is not longer than the life expectancy (or joint and survivor life expectancy) of the employee (or the employee and a beneficiary), as set forth in the IRC’s provisions for lifetime and after death distributions.[4] The annuity also may be a life annuity (or joint and survivor annuity) with a period certain, as long as the life (or lives) and period certain each meet the foregoing requirements.[5]

      Regulations state that qualifying longevity annuity distributions from defined benefit plans must meet new requirements in Treasury Regulation Sections 1.401(a)(9)-6, A-17(b) and (d)(1) rather than the rules in Sections 1.408-8, A-12(b) and (c).[6]

      Regulations set forth requirements that annuity distributions under a defined benefit plan must meet to satisfy IRC Section 401(a)(9)(A).[7] Although the regulations do not address annuity distributions from defined contribution plans, the IRS has ruled privately that a fixed or variable annuity could be used to satisfy the minimum distribution requirements from a profit sharing or money purchase plan.[8]

      Distributions from an annuity contract must commence on or before the employee’s required beginning date. The first payment must be the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval, even if the interval ends in the next calendar year.[9] Examples of payment intervals include monthly, bimonthly, semi-annually, and annually. All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of the life annuity payments for payment intervals ending on or after the employee’s required beginning date.[10]

      Period Certain Limits

      The period certain for annuity distributions commencing during the life of an employee, with an annuity starting date on or after the required beginning date, may not exceed the amount set forth in the Uniform Lifetime Table in Appendix F. If an employee’s spouse is the sole beneficiary as of the annuity starting date and the annuity provides only a period certain and no life annuity, the period certain may be as long as the joint and survivor life expectancy of the employee and spouse based on their ages as of their birthdays in the calendar year that contains the annuity starting date.[11]

      Employee Not Fully Vested

      If any portion of an employee’s benefit is not fully vested as of his or her required beginning date, the employee’s required minimum distribution will be calculated as though the portion that is not vested has not yet accrued. As additional vesting occurs, the amounts will be treated as additional accruals.[12] If additional benefits accrue after the participant’s required beginning date, the amounts will be treated separately for purposes of the minimum distribution rules.[13]

      Changes in Form of Distribution

      In addition to the permitted increases discussed in Q 3898, the final regulations permit the employee or beneficiary to change the form of distributions in response to various changes in circumstances. The annuity stream must otherwise satisfy the regulations, and certain other requirements must be met (e.g., the new payout must satisfy IRC Section 401(a)(9)) and the modification must be treated as a new annuity starting date under Sections 415 and 417.[14]

      If these conditions are met, the annuity payment period may be changed and the payments may be modified if: (1) the modification occurs at the time the employee retires, or in connection with a plan termination, (2) the annuity payments prior to modification are annuity payments paid over a period certain without life contingencies, or (3) the employee marries and the annuity payments after modification are paid under a qualified joint and survivor annuity over the joint lives of the employee and spouse.[15]

      Special Rules

      The distribution of an annuity contract is not a distribution for purposes of meeting the required minimum distribution requirements of IRC Section 401(a)(9).[16] If the employee’s entire accrued benefit is paid in the form of a lump sum distribution, the portion that is a required minimum distribution will be determined by treating the distribution either as if it were from an individual account plan (Q 3895) or as if it were an annuity that would satisfy the regulations with an annuity starting date on the first day of the distribution calendar year for which the required minimum distribution is being determined, and one year of annuity payments constitutes the required minimum distribution.[17]

      In the case of an annuity contract under an individual account plan that has not yet been annuitized, the required minimum distribution for the period prior to the date annuity payments commence is determined by treating the value of an employee’s entire interest under an annuity contract as an individual account. Thus, the required minimum distribution would be determined under Treasury Regulation Section 1.401(a)(9)-5; for the rules for individual account plans, see Q 3895.

      Regulations making governmental plans subject to only a “reasonable, good faith interpretation” of the minimum distribution requirements under Section 401(a)(9) have been adopted.[18]

      [1].      See generally PL 116-94, Sec.114.

      [2].      See generally PL 116-94, Sec. 401

      [3].      PL 116-136; also see Notice 2020-51 for transition relief for certain non-COVID RMDs.

      [4].     Treas. Reg. §§1.401(a)(9)-6, A-1(a); 1.401(a)(9)-6, A-3; see IRC Sec. 401(a)(9)(A).

      [5].     Treas. Reg. §1.401(a)(9)-6, A-1(b).

      [6].      79 FR 37633.

      [7].     TD 9130, 2004-26 IRB 1082.

      [8].     Let. Rul. 200635013.

      [9].     Treas. Reg. §1.401(a)(9)-6, A-1(c).

      [10].   Treas. Reg. §1.401(a)(9)-6, A-1(c)(1).

      [11].   Treas. Reg. §1.401(a)(9)-6, A-3(a).

      [12].   Treas. Reg. §1.401(a)(9)-6, A-6.

      [13].   Treas. Reg. §1.401(a)(9)-6, A-5.

      [14].   Treas. Reg. §1.401(a)(9)-6, A-13(c).

      [15].   Treas. Reg. §1.401(a)(9)-6, A-13(b).

      [16].   Treas. Reg. §1.401(a)(9)-8, A-10.

      [17].   Treas. Reg. §1.401(a)(9)-6, A-1(d).

      [18].   Treas. Reg. §§1.401(a)(9)-1, A-2(d),

  • 3897. What minimum distribution requirements apply to individual account plans during the lifetime of the employee?

    • Editor’s Note: Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans.  It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies only to individuals who attain age 70½ after that date).  It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019.[2]

      IRS Notice 2020-51 provides certain transition relief for 2020 since the new rule applies to distributions made after December 31, 2019 for individuals who attain age 70½ after that date.

      To satisfy IRC Section 401(a)(9)(A), the entire interest of each employee either must be distributed to the employee in its entirety not later than the required beginning date or must be distributed starting not later than the required beginning date over the life (or life expectancy) of the employee (or the employee and a beneficiary).[3]

      Uniform Lifetime Table. Required minimum distributions from an individual account under a defined contribution plan during the owner’s lifetime are calculated by dividing the employee’s account balance by the applicable distribution period determined from the RMD Uniform Lifetime Table found in Appendix F.[4] See Q 3686 for an example showing the calculation under this rule. Recently, the IRS issued proposed updated life expectancy tables reflecting longer life spans.[5] For example, the table divisor for a 72-year-old in the proposed regulations is 27.3, while the divisor in the current regulations for that age is 25.6. The updated tables are effective in 2021. The amount of an individual’s lifetime required distribution is calculated without respect to the beneficiary’s age, except in the case of a spouse beneficiary who is more than ten years younger than the employee.[6]

      If the sole designated beneficiary is the employee’s spouse, the distribution period during the employee’s lifetime is the longer of the uniform lifetime table or the joint and survivor life expectancy of the employee and spouse using their attained ages in the distribution calendar year.[7] As a practical matter, the joint and survivor life expectancy table will produce a longer (and thus, lower) payout only if the spouse beneficiary is more than ten years younger than the employee.

      Account balance. For purposes of calculating minimum distributions, the account balance is determined as of the last valuation date in the immediately preceding calendar year (i.e., the valuation calendar year).[8] The account balance is increased by the amount of any contributions or forfeitures allocated to the employee’s account as of dates in the valuation calendar year after the valuation date. Contributions include contributions made after the close of the valuation calendar year that are allocated as of a date in the valuation calendar year.[9] The account balance is decreased by any distributions made during the valuation calendar year, after the valuation date.[10] The account balance does not include the value of a qualifying longevity annuity contract purchased after July 2, 2014.[11]

      Employee not fully vested. If a portion of an employee’s individual account is not vested as of the employee’s required beginning date, the benefit used to calculate the required minimum distribution for any year is determined without regard to whether all of the benefit is vested, and distributions will be treated as being paid from the vested portion of the benefit first. If the required minimum distribution amount is greater than the vested benefit, only the vested portion is required to be distributed.[12] In any event, the required minimum distribution amount will never exceed the entire vested account balance on the date of distribution.[13] The required minimum distribution for subsequent years, however, must be increased by the sum of amounts not distributed in prior calendar years because the employee’s vested benefit was less than the required minimum distribution amount.[14]

      Distributions made prior to an individual’s required beginning date are not subject to these rules. If distributions begin under a distribution option (such as an annuity) that provides for payments after the individual’s required beginning date, distributions that will be made under the option on and after that date must satisfy these rules or the entire option fails from the beginning.[15]

      Distributions in excess of the amounts required under these rules do not reduce the amount required in subsequent years.[16] Rollovers and transfers among plans during years in which distributions are required under these rules can have a significant effect on the application of the minimum distribution rules.[17] For rules that apply to distributions when a QDRO is in effect, see Q 3908. Rules pertaining to separate accounts or segregated shares under a single plan, to employees participating in more than one plan, and other special rules affecting the application of the minimum distribution requirements are set forth in Treasury Regulation Section 1.401(a)(9)-8.

      Distributions made in accordance with the provisions set forth in Treasury Regulation Section 1.401(a)(9)-5, as explained above, will satisfy the minimum distribution incidental benefit requirement (Q 3909).[18]

      ________________________

      [1]   See generally PL 116-94, Sec.114.

      [2]   See generally PL 116-94, Sec. 401

      [3].     IRC Sec. 401(a)(9)(A).

      [4].     Treas. Reg. §1.401(a)(9)-9, A-2.

      [5]   See Prop Reg. 132210-18, Nov.7, 2019.

      [6].     Treas. Reg. §1.401(a)(9)-5, A-4.

      [7].     Treas. Reg. §1.401(a)(9)-5, A-4(b).

      [8].     Treas. Reg. §1.401(a)(9)-5, A-3(a).

      [9].     Treas. Reg. §1.401(a)(9)-5, A-3(b).

      [10].   Treas. Reg. §1.401(a)(9)-5, A-3(c)(1).

      [11].    Treas. Reg. §1.401(a)(9)-5, A-3(d). See Treas. Reg. §1.401(a)(9)-6, A-17 for definition of QLAC.

      [12].   Treas. Reg. §1.401(a)(9)-5, A-8.

      [13].   Treas. Reg. §1.401(a)(9)-5, A-1(a).

      [14].   Treas. Reg. §1.401(a)(9)-5, A-8.

      [15].   Treas. Reg. §1.401(a)(9)-2, A-4.

      [16].   Treas. Reg. §1.401(a)(9)-5, A-2.

      [17].   Treas. Reg. §1.401(a)(9)-7.

      [18].   Treas. Reg. §1.401(a)(9)-5, A-1(d). Under the proposed rules, (d) becomes (e).

  • 3898. How are defined benefit plan annuity payments to children treated for purposes of the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies only to individuals who attain age 70½ after that date). It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019[2] (see Q 3893 to Q 3908).

      In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs taken in early 2020 that otherwise were not required under the CARES Act waiver.

      Payments under a defined benefit plan or annuity contract that are made to an employee’s surviving child[4] until the child reaches the age of majority may be treated (for required minimum distribution purposes) as having been paid to the surviving spouse, provided that they are payable to the surviving spouse once the child reaches the age of majority. For this purpose, a child under age twenty-six who has not completed “a specified course of education” may be treated as not having reached the age of majority.

      Furthermore, a child who is disabled may be treated as not having reached the age of majority as long as the child continues to be disabled. The child will not be taken into consideration for purposes of the Minimum Distribution Incidental Benefit (MDIB) requirement and the increase in payments to the surviving spouse that results when the child recovers or reaches the age of majority will not be considered an increase for purposes of the non-increasing annuity requirement.[5]

      [1].      See generally PL 116-94, Sec.114.

      [2].      See generally PL 116-94, Sec. 401

      [3].      PL 116-136; also see Notice 2020-51 for transition relief for certain non-COVID RMDs.

      [4].     Pursuant to IRC Sec. 401(a)(9)(F).

      [5].     Treas. Reg. §1.401(a)(9)-6, A-15.

  • 3899. Are there any situations in which a defined benefit plan participant’s benefit must, or may, be increased?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, amended IRC Sections 401(a)(9)(C)(i) and (ii) to change the “required beginning date” from age 70½ to age 72. These changes are effective for those turning age 70½ in 2020. However, the SECURE Act did not change Section 401(a)(9)(C)(iii) requiring an actuarial increase for a pension benefit under a defined benefit plan starting later than age 70½. Since subsections (i) and (ii) in the same subparagraph were amended to age 72, this failure to change the required actuarial increase provision to age 72 does not appear to be an accidental legislative oversight. However, practitioners dealing with a required actuarial increase should check for the most current status of this rule. If the failure to change the age is a legislative error, a change would likely occur in a technical corrections act to the SECURE Act.[1]

      Actuarial Increase Requirement

      Per the Editor’s Note above, if an employee (other than a 5 percent owner) retires after the calendar year in which the employee reaches age 70½, a defined benefit plan must actuarially increase the employee’s accrued benefit to take into account any period after age 70½ during which the employee was not receiving benefits under the plan.[2] The increase must be provided starting on April 1 of the year after the employee reaches age 70½ and ending on the date when required minimum distributions commence in an amount sufficient to satisfy IRC requirements.[3] This actuarial increase requirement does not apply to (1) plans that provide the same required beginning date (i.e., April 1 of the year after the employee reaches age 70½) for all employees, regardless of whether they are 5 percent owners and make distributions accordingly, and (2) governmental or church plans.[4]

      Non-increasing Annuity Requirement

      Except as otherwise provided below, annuity payments must be non-increasing, or must increase only:

      (1) in accordance with an annual percentage not exceeding that of an eligible cost-of-living index (e.g., one issued by the Bureau of Labor Statistics or certain others defined in the regulations);

      (2) in accordance with a percentage increase that occurs at specified times (e.g., at specified ages) and does not exceed the cumulative total of annual percentage increases in an eligible cost of living index (see (1)) since the annuity starting date;

      (3) in accordance with the extent of the reduction in the amount of the employee’s payments to provide for a survivor benefit upon death but only if there is no longer a survivor’s benefit ( because the beneficiary dies or is no longer the employee’s beneficiary subject to a QDRO);

      (4) in accordance with a plan amendment; or

      (5) to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single sum distribution upon the employee’s death.[5]

      Additional Permitted Increases

      If the total future expected payments from an annuity purchased from an insurance company exceed the total value being annuitized, payments under the annuity will not fail to satisfy the non-increasing payment requirement merely because the payments are increased in accordance with one or more of the following:

      (1) by a constant percentage, applied not less frequently than annually;

      (2) to provide a final payment on the employee’s death that does not exceed the excess of the total value being annuitized over the total of payments before the death of the employee;

      (3) as a result of dividend payments or other payments resulting from certain actuarial gains; and

      (4) an acceleration of payments under the annuity (as defined in the regulations).[6]

      In the case of annuity payments made by a qualified defined benefit plan (i.e., paid directly from the trust rather than a commercial annuity), payments will not fail to satisfy the non-increasing payment requirement merely because the payments are increased in accordance with one or more of the following: (1) by a constant percentage, applied not less frequently than annually, at a rate that is less than 5 percent per year; (2) to provide a final payment on the death of the employee that does not exceed the excess of the actuarial present value of the employee’s accrued benefit (as defined in the regulations) over the total of payments before the death of the employee; or (3) as a result of dividend payments or other payments resulting from actuarial gain (measured and paid as specified in the regulations).[7]

      An annuity contract purchased with an employee’s plan benefit from an insurance company will not fail to satisfy the rules of Section 401(a)(9) merely because of the purchase, provided the payments meet the foregoing requirements.[8] If the annuity contract is purchased after the required beginning date, the first payment interval must begin on or before the purchase date and the payment amount required for one interval must be made no later than the end of that payment interval.[9]

      __________________

      [1].    IRC Sec. 401(a)(9)(C)(iii) after modification by PL 116-94, Sec. 114. The American Retirement Association in its comment letter to the IRS as to the Act said:  “This appears to require a technical correction, unless Treasury and IRS find sufficient statutory authority to clarify in regulations.”  See  https://www.asppa.org/sites/asppa.org/files/PDFs/Comment Letters/20.02.12 ARA Comment Letter to Treasury – SECURE Act guidance.pdf

      [2].    IRC Sec. 401(a)(9)(C)(iii) after modification by PL 116-94, Sec. 114.

      [3].    Treas. Reg. §1.401(a)(9)-6, A-7(a).

      [4].    Treas. Reg. §§1.401(a)(9)-6, A-7(c), 1.401(a)(9)-6, A-7(d).

      [5].    Treas. Reg. §1.401(a)(9)-6, A-14(a).

      [6].    Treas. Reg. §§1.401(a)(9)-6, A-14(c), 1.401(a)(9)-6, A-14(e).

      [7].    Treas. Reg. §§1.401(a)(9)-6, A-14(d), 1.401(a)(9)-6, A-14(e).

      [8].    Treas. Reg. §1.401(a)(9)-6, A-4.

      [9].    Treas. Reg. §1.401(a)(9)-6, A-4.

  • 3900. How are the minimum distribution requirements met after the death of an employee?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, generally set back the late start date for required minimum distributions (RMDs) from age 70½ to age 72 for distributions to participants attaining age 70½ beginning in 2020.[1] It also made other major changes to these requirements, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces it with a 10-year fixed period, including for IRAs, unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules apply only to plan participants who die after December 31, 2019[2] (see Q 3892 to Q 3908). In light of the COVID-19 pandemic, the CARES Act[3] was passed waiving most RMDs from defined contribution plans for 2020. The IRS released Notice 2020-51 to allow a waiver of or repayment of RMD distributions made in early 2020 that would have otherwise not have been required as a consequence of enactment of the SECURE Act.

      The minimum distribution requirements that apply after the death of an employee depend on whether the employee died before(Q 3901) or after (Q 3902) his or her required beginning date. For this purpose, distributions are treated as having begun in accordance with the minimum distribution requirements under IRC Section 401(a)(9)(A)(ii) without regard to whether payments have been made before that date.[4]

      If distributions irrevocably (except for acceleration) began prior to the required beginning date in the form of an annuity that satisfies the minimum distribution rules (Q 3892), the annuity starting date will be treated as the required beginning date (Q 3895) for purposes of calculating lifetime and after death minimum distribution requirements.[5] For details on the ability of a non-spouse designated beneficiary to rollover funds from a qualified plan account to an inherited IRA, see Q 4014.

      _____________________

      [1].     See generally PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     Treas. Reg. §1.401(a)(9)-2, A-6(a).

      [5].     Treas. Reg. §1.401(a)(9)-6, A-10, A-11.

  • 3901. How are the minimum distribution requirements met if an employee died before the required beginning date?

    • Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans. It added a new subsection (H) to IRC Section 401(a)(9) to change the mandatory start date for RMDs from age 70½ to age 72 for distributions made after December 31, 2019 (the change applies only to individuals who attain age 70½ after that date). It also eliminates so-called “stretch” distributions upon the participant’s death. Under prior law, those distributions could be based upon the life expectancy of the designated beneficiary. Under the SECURE Act, a 10-year fixed distribution period generally applies unless the beneficiary is an “eligible designated beneficiary”.[1] The change in the stretch distribution rules applies only to plan participants who die after December 31, 2019[2] (see Q 3893 to Q 3908).

      In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs taken in early 2020 that otherwise were not required under the CARES Act waiver.   See below for more details on these changes.

      Pre-SECURE ACT Distribution Rules for Employees of All Qualified Plans

      Under the pre-SECURE Act rules, if an employee dies before his or her required beginning date, distributions must be made under one of two methods:

      (1)  Under the life expectancy rule, if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life (or life expectancy) of the beneficiary, beginning within one year of the employee’s death or later date prescribed by regulations.[4] As described below, regulations do provide a later date.

      To the extent that the interest is payable to a non-spouse beneficiary, distributions must begin by the end of the calendar year immediately following the calendar year in which the employee died.[5] The nonspouse beneficiary’s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the employee’s death. In subsequent years, this amount is reduced by one for each calendar year that has elapsed since the year immediately following the year of the employee’s death.[6]

      (2)  Under the five year rule, if there is no designated beneficiary, or if the foregoing rule is not satisfied, the entire interest must be distributed within five years after the death of the employee (regardless of who or what entity receives the distribution).[7] To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the employee’s death.[8]

      Surviving spouse beneficiary. If the sole designated beneficiary is the employee’s surviving spouse, distributions must begin by the later of the end of the calendar year immediately following the calendar year in which the employee died or the end of the calendar year in which the employee would have reached age 70½.[9]

      In the event that a surviving spouse beneficiary dies after the employee, but before distributions to the spouse have begun, the five year rule and the life expectancy rule for surviving spouses will be applied as though the surviving spouse were the employee.[10] The payout period during the surviving spouse’s life is measured by the surviving spouse’s life expectancy as of his or her birthday in each distribution calendar year for which a minimum distribution is required after the year of the employee’s death.[11] The provision that treats a surviving spouse as though the surviving spouse were the employee (i.e., the surviving spouse rules of IRC Section 401(a)(9)(B)(iv)) will not allow a new spouse of the deceased employee’s spouse to continue delaying distributions.[12]

      Life expectancy tables. There are tables with single and joint and survivor life expectancies for calculating required minimum distributions, as well as a “Uniform Lifetime Table,” for determining the appropriate distribution periods.[13] See Appendix F. The Single Life Table must be used to calculate the required minimum distributions after the death of the employee.

      Plan provisions. Unless a plan adopts a provision specifying otherwise, if distributions to an employee have not begun prior to his or her death, they must commence automatically—either under the life expectancy rule described above or, if there is no designated beneficiary, under the five year rule.[14] A plan may adopt a provision specifying that the five year rule will apply after the death of an employee, or a provision allowing employees (or beneficiaries) to elect whether the five year rule or the life expectancy rule will be applied.[15]

      Post-SECURE ACT Distribution Rules for Employees after December 31, 2019

      For all qualified plans (defined benefit and defined contribution), the “required beginning date” for RMDs must be no later than April 1 of the calendar year immediately following the year in which the participant attains age 72, or, if the participant is not a 5 percent owner of the employer, April 1 of the calendar year following the year in which the participant’s employment terminates (retires), if later.

      For IRAs, the “required beginning date” is April 1 of the calendar year immediately following the calendar year in which the IRA account owner attains age 72.


      Note: Roth accounts in qualified plans continue to be subject to RMD requirements, while Roth IRAs continue to be exempt from RMD requirements during an IRA account owner’s lifetime. These new delayed required beginning dates are applicable for distributions made after December 31, 2019 to qualified plan participants and IRA account owners who attain age 70½ after December 31, 2019.[16] Hence, this new beginning date will apply to those born after June 30, 1949, and the pre-SECURE Act law will continue to apply to those born on or before June 30, 1949.


      Actuarial Adjustment: The SECURE Act did not amend Section 409(a)(9)(C)(iii) to change the age 70½ to age 72, although it did amend subsections (C)(i) and (C)(ii) to modify the age. Subsection (C)(iii) deals with required actuarial adjustments of benefits under defined benefit plans to participants that retire after the “require beginning date” (still age 70½ and not age 72), and begins to receive his or her pension benefit. This subsection requires the plan to provide an actuarially increased benefit that has the same value as a benefit beginning at age 70½ (not age 72). This could be an error, but may be intentional, since the other two subsections were addressed and leaving the age unchanged at 70½ effectively provides cutback protection for pension benefits to older workers who remain working.[17] We will need clarification or Congressional correction in a likely technical corrections act if this failure to change the age is an error in legislative drafting.


      Note: The IRS recently released new actuarial tables to better reflect longer life expectancies and allow qualified plan distributions to be taken more slowly than under prior law. For instance, the divisor for a 72-year-old is 25.6 and the revised divisor is 27.3 for an RMD.[18] The combined effect of the SECURE Act changes and the revised actuarial tables is a delay in the start of an RMD to age 72 and a reduced RMD when finally taken.


      Distributions Beginning When Death Occurs after a Participant’s “Required Beginning Date”. See Q 3901 and Q 3902 for the new rules that imposes the 10-year rule on distributions to a designated beneficiary when death occurs after a participant’s required beginning date.

      [1].      See generally PL 116-94, Sec.114.

      [2].      See generally PL 116-94, Sec. 401.

      [3].      PL 116-136; also see Notice 2020-51 for transition relief for certain non-COVID RMDs.

      [4].     IRC Sec. 401(a)(9)(B)(iii); Treas. Reg. §1.401(a)(9)-3, A-1(a).

      [5].     Treas. Reg. §1.401(a)(9)-3, A-3(a).

      [6].     Treas. Reg. §1.401(a)(9)-5, A-5(c)(1).

      [7].     IRC Sec. 401(a)(9)(B)(ii), Treas. Reg. §1.401(a)(9)-3, A-1(a).

      [8].     Treas. Reg. §1.401(a)(9)-3, A-2.

      [9].     IRC Sec. 401(a)(9)(B)(iv); Treas. Reg. §1.401(a)(9)-3, A-3(b).

      [10].   IRC Sec. 401(a)(9)(B)(iv)(II); Treas. Reg. §1.401(a)(9)-3, A-5.

      [11].   Treas. Reg. §1.401(a)(9)-5, A-5(c)(2).

      [12].   Treas. Reg. §1.401(a)(9)-3, A-5.

      [13].   Treas. Reg. §1.401(a)(9)-9.

      [14].   Treas. Reg. §§1.401(a)(9)-1, A-3(c), 1.401(a)(9)-3, A-4(a).

      [15].   Treas. Reg. §§1.401(a)(9)-3, A-4(b), 1.401(a)(9)-3, A-4(c).

      [16].    IRC Sec 401(a)(9)(C) as amended by PL 116-94, Sec. 114.

      [17].    IRC Sec. 401(a)(9)(C)(iii) reads:

      “(iii) Actuarial adjustment: In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 70½, the employee’s accrued benefit shall be actuarially increased to take into account the period after age 70½ in which the employee was not receiving any benefits under the plan.”

      [18].    See Prop. Treas. Reg. §132210-18, Nov. 7, 2019. Final regulations were effective November 12, 2020.

  • 3902. How are the minimum distribution requirements met if an employee died on or after the required beginning date?

    • Editor’s Note: Post SECURE Act, minimum distribution requirements after death are the same regardless of whether the death occurred before or after the required beginning date.  Generally, the value of an inherited account must now be depleted within ten years of the account owner’s death unless the beneficiary is an eligible designated beneficiary (see Q 3903).1 The ten-year rule applies to all defined contribution retirement plans, including IRAs.2

      The SECURE Act

      Under the new law, most non-spouse account beneficiaries will be required to take distributions over a ten-year period.3 The law did not change the rules applicable to surviving spouses who inherit the account. Under regulations proposed in 2022,4 Spousal beneficiaries will also be required to elect to treat the deceased spouse’s IRA as their own by the later of (1) December 31 of the year following the year of the owner’s death or (2) age 72.

      __________________________________________________________________

      Planning Point: Under regulations proposed in 2022, designated beneficiaries are required to take annual RMDs throughout the ten-year distribution period if the original account owner died after the required beginning date (it was originally expected that the beneficiary could elect to deplete the entire account in year ten if desired).  The IRS has yet to provide guidance on whether retroactive RMDs will be required for accounts inherited after the SECURE Act effective date and before the proposed regulations were released.


      Planning Point: Prior to enactment of the SECURE Act, financial institutions were required to notify account owners who turned 70½ in 2020 of their RMD obligations by January 31.  Post-SECURE Act, taxpayers are not required to begin taking RMDs until age 72. Therefore, sponsors currently have two groups of employees to notify—those who are still subject to the age 70½ rule and those subject to the age 72 rules. However, some taxpayers turning 70½ in 2020 may have received an incorrect notice of their 2020 RMD obligations.  Under relief provided in Notice 2020-06, the IRS did not consider statements that were mailed incorrect if corrected forms were sent by April 15, 2020 (corrected forms would notify these taxpayers that no RMD was due for 2020 under the new law).


      Pre-SECURE Act Rules

      The entire remaining balance generally had to be distributed at least as rapidly as under the method of distribution in effect as of an employee’s date of death.5 If an employee died after distributions have begun, (i.e., generally on or after his or her required beginning date), but before the employee’s entire interest in the plan has been distributed, the method of distribution depended on whether the distribution was in the form of distributions from an individual account under a defined contribution plan or annuity payments from a defined benefit plan.6 If the distributions are annuity payments from a defined benefit plan, they will be determined as explained in Q 3896.

      The beneficiary must be determined as of September 30 of the year after the year of the employee’s death.7 In the case of an individual account plan, if the employee does not have a “designated beneficiary” (Q 3904) as of that date, the employee’s interest is distributed over the employee’s remaining life expectancy, using the age of the employee in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.8

      If the employee does have a designated beneficiary as of the determination date, the beneficiary’s interest is distributed over the longer of the beneficiary’s life expectancy, calculated as described above under the life expectancy rule9 or the remaining life expectancy of the employee determined using the age of the employee in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.10 In both situations, the life expectancy is calculated using the IRS Single Life Table.11


      1. IRC Sec. 401(a)(9)(H)(i)(II).

      2. IRC Sec. 401(a)(9)(H)(vi).

      3. IRC Sec. 401(a)(9)(H)(i)(I).

      4. REG-105954-20.

      5. IRC Sec. 401(a)(9)(B)(i).

      6. Treas. Reg. §1.401(a)(9)-2, A-5.

      7. Treas. Reg. §1.401(a)(9)-4, A-4(a).

      8. Treas. Reg. §1.401(a)(9)-5, A-5(c)(3).

      9. Treas. Reg. §1.401(a)(9)-5, A-5(c)(1) or (2).

      10. Treas. Reg. §§1.401(a)(9)-5, A-5(c)(3), 1.401(a)(9)-5, A-5(a)(1).

      11. Treas. Reg. §1.401(a)(9)-9, A-1.

  • 3903. What is an eligible designated beneficiary? How does this designation impact the rules governing retirement plan distributions after an account owner’s death?

    • Exceptions to the 10-year distribution rule (see Q 3901 to Q 3902) created by the SECURE Act exist for a newly created class of beneficiaries labeled “eligible designated beneficiaries”.  Eligible designated beneficiaries who are not required to use the “ten-year rule” for distributions (and who may continue to use the life expectancy rules) include:[1]

      • Surviving spouses,
      • Disabled beneficiaries,
      • Chronically ill beneficiaries,
      • The account owner’s children who have not reached “the age of majority” (proposed regulations provide that, for defined contribution plans, a child reaches the age of majority on their 21st birthday),
      • Individuals who are not more than 10 years younger than the account owner.

      Whether an individual is an eligible designated beneficiary is determined as of the date of the original account owner’s death.[2] Under proposed regulations, an account owner is treated as having no eligible designated beneficiary if the owner has multiple designated beneficiaries and one of those beneficiaries is not an eligible designated beneficiary.

      Once a minor child reaches the age of majority,[3] the child becomes subject to the 10-year rule beginning at that point, rather than beginning with the account owner’s death.[4]


      Planning Point: Note that only the account owner’s minor children qualify as eligible designated beneficiaries.  Grandchildren and other minor children become subject to the 10-year rule beginning with the account owner’s death regardless of their age.


      If the disabled beneficiary is under 18 at the time of the account owner’s death, the individual must have a medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or be of long-term and indefinite duration.  For older beneficiaries, disability, disability is determined based on the definition used in IRC Section 72(m)(7).  Disabled beneficiaries include those who are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.

      “Chronically ill beneficiaries” include those who are unable to perform (without substantial assistance) at least two activities of daily living for a period of 90 days due to a loss of a functional capacity or those who require substantial supervision to protect them from threats to health and safety because of severe cognitive impairment.[5]

      A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary. (See Q 3901 for requirements when a trust for the benefit of multiple disabled or chronically-ill beneficiaries is desired).

      Upon the death of the eligible designated beneficiary, the 10-year rule applies regardless of whether that individual’s beneficiary is also an eligible designated beneficiary.[6]

      The SECURE Act modifications apply to all defined contribution plans.  These new rules apply to distribution as to employees who die after December 31, 2019 and applies to all defined contribution-type plans (the rules governing distributions from Roth IRAs were not changed).


      [1]      IRC Sec. 401(a)(9)(E)(ii), as added by PL 116-94, Sec. 401.

      [2]      IRC Sec. 401(a)(9)(E)(ii) (flush language).

      [3]      What constitutes the “age of majority” is defined by state law, which is 18 in all but three states.

      [4]      IRC Sec. 401(a)(9)(E)(iii).

      [5]      I.e., the standard of IRC Sect. 7702B(c)(2).

      [6]      IRC Sec. 401(a)(9)(H)(iii), as added by PL 116-94, Sec. 401.

  • 3904. How is the designated beneficiary determined for purposes of the minimum distribution requirements?

    • Editor’s Note:  The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs) only. It generally replaces the lifetime distribution rule,  with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019. [2]  In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act. See Q 3901 for more details on these changes.

      A designated beneficiary means any individual designated as a beneficiary by the employee.[4] An individual may be designated as a beneficiary under a plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the employee (or the employee’s surviving spouse) specifying the beneficiary.[5]

      The fact that an employee’s interest under a plan passes to a certain individual under applicable state law, however, does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan.[6] For details on the ability of a non-spouse designated beneficiary to rollover funds from a qualified plan account to an inherited IRA, see Q 4014.

      A beneficiary designated under a plan is an individual (or certain trusts (see below)) who is entitled to a portion of an employee’s benefit, contingent on the employee’s death or another specified event. A designated beneficiary need not be specified by name in the plan or by the employee to the plan to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan as of the date the beneficiary is determined.


      Planning Point: To be a QDRO, the beneficiary should be named or otherwise be clearly identified (see Q 3908).


      The choice of beneficiary is subject to the IRC’s provisions for joint and survivor annuities, QDROs, and consent requirements (Q 3882, Q 3890, and Q 3915).[7] For an explanation of the effect of a QDRO on the minimum distribution requirements, see Q 3908.

      To be a designated beneficiary for purposes of minimum distributions, an individual first must be a beneficiary on the date of the employee’s death. The determination of the existence and identity of a designated beneficiary for purposes of minimum distributions is made on September 30 of the calendar year following the year of the employee’s death.[8] Post-SECURE Act, it is the date of the employee’s death.

      Exceptions may apply if the account is payable as an annuity, or if a surviving spouse beneficiary dies after the employee but before distributions have begun. This is so a distribution may be calculated and made by the deadline of December 31 following the year of the employee’s death.

      Consequently, pre-SECURE Act, an individual who was a beneficiary as of the date of the employee’s death, but is not a beneficiary as of September 30 of the following year (e.g., because the individual disclaims entitlement to the benefit or because the individual receives the entire benefit to which he or she is entitled before that date) was not considered for purposes of determining the distribution period for required minimum distributions after the employee’s death.[9]

      A disclaiming beneficiary’s receipt (prior to disclaiming the benefit) of a required distribution in the year after death will not result in the beneficiary being treated as a designated beneficiary for subsequent years.[10]

      An entity other than an individual or a trust meeting certain requirements (see Q 3907) cannot be a designated beneficiary for required minimum distribution purposes. Thus, for example, an employee’s estate cannot be a designated beneficiary.[11]

      See Q 3905 for a discussion of the impact of multiple, contingent and successor beneficiaries.

      ____________________

      [1].     See generally  PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 for transition relief for certain non-COVID RMDs.

      [4].     IRC Sec. 401(a)(9)(E).

      [5].     Treas. Reg. §1.401(a)(9)-4, A-1.

      [6].     Treas. Reg. §1.401(a)(9)-4, A-1. See e.g. Kennedy v. Plan Adm’r for DuPont Sav. & Inv. Plan, 555 U.S. 285 (2009).

      [7].     Treas. Reg. §1.401(a)(9)-4, A-2.

      [8].     Treas. Reg. §1.401(a)(9)-4, A-4(a).

      [9].     Treas. Reg. §1.401(a)(9)-4, A-4(a).

      [10].   Rev. Rul. 2005-36, 2005-26 IRB 1368; Let. Rul. 201125009; Let. Rul. 201245004.

      [11].   Treas. Reg. §1.401(a)(9)-4, A-3.

  • 3905. How does the presence of multiple, contingent or successor beneficiaries impact the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019. [2]  In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act.  See Q 3901 for more detail on these changes.

      Editor’s Note: Under regulations proposed in 2022, an account owner is treated as having no eligible designated beneficiary if the owner has multiple designated beneficiaries and one of those beneficiaries is not an eligible designated beneficiary.

      Multiple Beneficiaries

      If more than one beneficiary is designated with respect to an employee as of the date on which the designated beneficiary is to be determined, the designated beneficiary with the shortest life expectancy is the measuring life for purposes of determining the distribution period.[4] Special rules apply if the employee’s benefit is divided into separate accounts, or segregated shares, and the beneficiaries of each account differ.

      If an employee has designated multiple beneficiaries, and as of the date on which the designated beneficiary is to be determined, one of the beneficiaries is an entity (such as a trust not meeting applicable requirements or a charitable organization), the employee will be treated as having no beneficiaries.[5]

      Contingent and Successor Beneficiaries

      If a beneficiary’s entitlement to an employee’s benefit is contingent on an event other than the employee’s death or the death of another beneficiary, the contingent beneficiary will be considered a designated beneficiary for purposes of determining whether an entity is designated as a beneficiary and the designated beneficiary who has the shortest life expectancy.[6] The fact that the contingency may be extremely remote (e.g., two children predeceasing a sixty-seven-year-old relative) does not appear to affect this outcome.[7]

      In contrast, if a “successor beneficiary’s” entitlement is contingent on the death of another beneficiary, the successor beneficiary’s life expectancy will not be counted for purposes of determining the designated beneficiary who has the shortest life expectancy unless the other beneficiary dies prior to the date on which the beneficiary is determined.[8]

      Under the 2022 proposed RMD regulations, a successor beneficiary is typically subject to the ten-year payout rule post-SECURE Act.  If the original beneficiary was subject to the ten-year rule (so was not an eligible designated beneficiary (EDB)), the successor must continue payments within the same ten-year window.  If the previous beneficiary was an EDB and was using the life expectancy method, the successor beneficiary obtains a new ten-year window.  A beneficiary subject to the ten-year rule must take annual RMDs if the original beneficiary died after his or her required beginning date (otherwise, no annual RMDs are required).  So, the successor beneficiary must first determine whether the original account owner died before his or her required beginning date to determine whether annual RMDs will be required within the ten-year payout window.

      ______________________

      [1].     See generally  PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].    Treas. Reg. §1.401(a)(9)-5, A-7(a)(1).

      [5].    Treas. Reg. §1.401(a)(9)-4, A-3.

      [6].    Treas. Reg. §1.401(a)(9)-5, A-7(b).

      [7].    See Let. Rul. 200228025.

      [8].    Treas. Reg. §1.401(a)(9)-5, A-7(c)(1).

  • 3906. What are the separate account rules for purposes of the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019. [2]  In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act.  See Q 3901 for more detail on these changes.

      If an employee’s benefit is divided into separate accounts under a defined contribution plan (or in the case of a defined benefit plan, into segregated shares) and the separate accounts have different beneficiaries, the accounts do not have to be aggregated for purposes of determining the required minimum distributions for years subsequent to the calendar year in which they were established (or date of death, if later).[4] Separate account treatment is permitted for the year following the year of death, provided the separate accounts are actually established by the end of the calendar year following death.

      For purposes of Section 401(a)(9), separate accounts are portions of an employee’s benefit representing the separate interests of the employee’s beneficiaries under the plan as of the employee’s date of death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the accounts.

      Once separate accounts actually are established, the separate accounting can provide for separate investments in each account, with gains and losses attributable to such investments allocable only to that account. A separate accounting also must allocate any post-death distribution to the separate account of the beneficiary receiving it.[5]

      The applicable distribution period is determined for each separate account disregarding the other beneficiaries (i.e., allowing each beneficiary to use his or her own life expectancy) only if the separate account is established no later than December 31 of the year following the decedent’s death.[6]

      If a trust is the beneficiary of an employee’s plan interest, separate account treatment is not available to the beneficiaries of the trust.[7] The IRS has determined repeatedly that the establishment of separate shares under the trust did not entitle multiple beneficiaries of the same trust to use their own life expectancies as the distribution period.[8] The IRS has privately ruled that where separate individual trusts were named as beneficiaries, the ability of each beneficiary to use his or her life expectancy was preserved even though the trusts were governed by a single “master trust.”[9]

      If the December 31 deadline is missed, or if the plan beneficiary is a trust with multiple beneficiaries, separate accounts still may be established (e.g., for administrative convenience); however, the applicable distribution period will be the shortest life expectancy of the various beneficiaries.[10] The fact that the trust meets the requirements for a “see-through trust” does not change this result.[11]

      ________________________

      [1].     See generally  PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      [5].     Treas. Reg. §1.401(a)(9)-8, A-3.

      [6].     Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      [7].     Treas. Reg. §1.401(a)(9)-4, A-5(c).

      [8].     See, e.g., Let. Ruls. 200307095, 200444033, 200528031.

      [9].     See Let. Rul. 200537044.

      [10].   Treas. Reg. §1.401(a)(9)-8, A-2(a)(2).

      [11].   See Let. Rul. 200317044.

  • 3907. When may a trust be a designated beneficiary for purposes of the minimum distribution requirements?

    • Editor’s Note:  The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1]  It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019.[2] In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act. See Q 3901
      for more details on these changes.

      General Rule Documentation Requirements for Trust Beneficiaries of Employees Dying Prior to January 1, 2020

      Under pre-SECURE Act law, only an individual could be a designated beneficiary for required minimum distribution purposes. However, if special requirements are met, beneficiaries of a trust could be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the period over which required minimum distributions must be made.

      During any period in which required minimum distributions are being determined by treating the beneficiaries of the trust as designated beneficiaries of the employee, the requirements could be met if:

      (1)  the trust is a valid trust under state law, or would be but for the fact that there is no corpus;

      (2)  the trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee;

      (3)  the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument, as described below; and

      (4)  the documentation described below has been provided to the plan administrator.[4]

      Under pre SECURE Act law, the IRS privately ruled that a see-through trust’s provision for payment of expenses such as funeral and burial costs, probate administration expenses, and estate costs, whether before or after September 30 of the year after the decedent’s death, did not preclude the trust from meeting the foregoing requirements.[5]

      A designated beneficiary did not need to be specified by name in a plan or by an employee to a plan to be a designated beneficiary, so long as the individual who is to be the beneficiary is identifiable under the plan as of the date the beneficiary is determined (see above). The members of a class of beneficiaries capable of expansion or contraction will be treated as identifiable if it is possible, as of the date the beneficiary is determined, to identify the class member with the shortest life expectancy.[6]

      Pre-SECURE Act Documentation Requirements for Distributions before Death

      To satisfy the documentation requirement for trust beneficiaries to be treated as designated beneficiaries for purposes of lifetime distributions, an employee must meet one of two requirements:

      (1)  the employee must provide to the plan administrator a copy of the trust and agree that if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide the plan administrator with a copy of any such amendment, or

      (2)  the employee must provide the plan administrator with a list of all the beneficiaries (including contingent and remainder beneficiaries, as well as a description of the conditions on their entitlement) of the trust. If the spouse is the sole beneficiary, the employee must provide a description of the conditions of the remainder beneficiaries’ entitlement sufficient to establish that fact. The employee must certify that to the best of the employee’s knowledge, the list is correct and complete, and that the other requirements for the beneficiaries of the trust to be treated as designated beneficiaries have been satisfied. The employee also must agree to provide a copy of the trust instrument on demand. In any event, if the trust is amended, the employee must provide a copy of any such amendment or provide a corrected certification to the extent that the amendment changes the information previously certified.[7]

      Pre-SECURE Act Documentation Requirements for After-Death Distributions

      To satisfy the documentation requirements for required minimum distributions after the death of an employee (or after the death of an employee’s surviving spouse, if the spouse dies after the employee but before distributions have begun), the trustee must meet following requirements by October 31 of the calendar year after the year of the employee’s death:

      • the trustee must:
        1. provide the plan administrator with a final list of all the beneficiaries (including contingent and remainder beneficiaries, as well as a description of the conditions on their entitlement) as of September 30 of the calendar year following the calendar year of the employee’s death;
        2. certify that to the best of the trustee’s knowledge the list is correct and complete and that the trust meets the general requirements listed above for all trust beneficiaries; and
        3. agree to provide a copy of the trust instrument to the plan administrator on demand; or
      • the trustee must provide the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the employee under the plan as of the employee’s date of death.[8]

      If the foregoing requirements were met, a plan would not fail to satisfy Section 401(a)(9) merely because the actual terms of the trust instrument were inconsistent with the information in the certifications or trust instruments previously provided. This relief applied, however, only if the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the discrepancy was discovered are determined based on the actual terms of the trust instrument.[9] The actual trust terms would govern for purposes of determining the amount of any excise tax under Section 4974 for failure to take the RMD for the year (Q 3910).[10]

      General Rule Documentation Requirements for Trust Beneficiaries of Employees Dying After December 31, 2019

      Under the general rule for employees dying on or after January 1, 2020, beneficiaries of a trust may be treated as having been designated as beneficiaries of the employee under a qualified plan for purposes of determining the period over which RMDs must be made.  The SECURE Act did not eliminate the IRC Sections governing designated beneficiaries when there is a trust, but further limited the applicability of who are eligible to receive distributions based upon the life expectancy of the designated beneficiary (so-called “stretch distributions”). There are now three classes of beneficiaries: (1) nondesignated beneficiaries, (2) designated beneficiaries, and (3) eligible designated beneficiaries.

      Under the SECURE Act, distributions based upon life expectancy of the beneficiary are limited an individual who falls into one of five categories of the new class referred to as “eligible designated beneficiaries” (See Q 9015), who are a new subset of those who are “designated beneficiaries” as defined by pre-SECURE Act law.[11] Therefore, the pre-SECURE Act documentation requirements discussed above for creating a “see-through trust” to obtain the advantage of the lifetime stretch distribution will generally continue to apply.

      Beneficiaries of a see-through trust can continue to be treated as designated beneficiaries under regulations proposed in 2022.  The regulations continue to apply the requirement that the trust beneficiaries be identifiable.  Beneficiaries of a valid see-through trust will be taken into account if they could receive amounts in the trust representing the participant’s interest in the retirement plan that are not contingent upon, or delayed until, the death of another trust beneficiary who predeceases the plan participant.  Those beneficiaries with only remote interests will be disregarded.

      Beneficiaries must continue to be identifiable to be treated as designated beneficiaries.  Trust beneficiaries will not cease to be “identifiable” if the trust names a class of individuals and other individuals are later added to the class (for example, “children” or “grandchildren”).  Similarly, if state law allows the trust to be modified after the owner’s death to add or change beneficiaries, the beneficiaries will not cease to be identifiable.  If an individual is given a power of appointment and exercises that power by a certain date, the trust will not fail the identifiability requirement.

      For a more detailed discussion of eligible designated beneficiaries and the new rules governing distributions from trusts of employees dying after December 31, 2019, see Q 3903.

      ________________________

      [1]      See generally  PL 116-94, Sec. 114

      [2]      See generally PL 116-94, Sec 401.

      [3]      PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     Treas. Reg. §1.401(a)(9)-4, A-5(b); Let. Rul. 201320021.

      [5].     See Let. Rul. 200432027.

      [6].     Treas. Reg. §1.401(a)(9)-4, A-1.

      [7].     Treas. Reg. §1.401(a)(9)-4, A-6.

      [8].     Treas. Reg. §1.401(a)(9)-4, A-6(b).

      [9].     Treas. Reg. §1.401(a)(9)-4, A-6(c)(1).

      [10].   Treas. Reg. §1.401(a)(9)-4, A-6(c)(2).

      [11]      See IRC Sec. 401(a)(9)(H)(ii) as added by PL 116-94, Sec. 401 and IRC 401(a)(9)(E) as amended by PL 116-94, Sec. 401.

  • 3908. Who is the employee’s spouse or surviving spouse for purposes of the minimum distribution requirements? What is the effect of a QDRO?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019.[2] In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act. See Q 3901 for more details on these changes.

      For purposes of the minimum distribution requirements under IRC Section 401(a)(9), unless a Qualified Domestic Relations Order (“QDRO”) is in effect (see below), an individual will be considered a spouse or surviving spouse of an employee if that individual is treated under applicable state law as the spouse or surviving spouse of the employee.


      Planning Point: Since the federal Defense of Marriage Act was successfully challenged in front of the Supreme Court in the U.S. v. Windsor[4] decision, same sex spouses have the same rights as opposite sex spouses for purposes of these rules.


      For purposes of the life expectancy rule applied after an employee’s death, the spouse of the employee is determined as of the employee’s date of death.[5]

      If a portion of an employee’s benefit is payable to a former spouse pursuant to a QDRO (Q 3915), the former spouse will be treated as a spouse or surviving spouse, as the case may be, of the employee for purposes of the minimum distribution and minimum distribution incidental benefit requirements. This treatment applies even if the QDRO does not specifically provide that the former spouse is treated as the spouse for purposes of the rules governing qualified joint spousal annuities and qualified preretirement spousal annuities.[6]

      If a QDRO provides that an employee’s benefit is to be divided and a portion is to be allocated to an alternate payee, that portion will be treated as a separate account or as a segregated share for purposes of satisfying the minimum distribution requirements. For example, distributions from the account generally will satisfy IRC Section 401(a)(9) if required minimum distributions begin not later than the employee’s required beginning date, using the rules for individual accounts.[7]

      A distribution of a separate account allocated to an alternate payee will satisfy the lifetime distribution requirements if the distribution begins no later than the employee’s required beginning date (Q 3895) and is made over the life or life expectancy of the payee.


      Planning Point: Because of these rules, distributions to a child pursuant to a QDRO can be stretched out over a greater period than otherwise would be allowed under the minimum distribution rules to a spousal alternate payee. Under the SECURE Act, the 10-year distribution period begins to run when the account owner’s minor child reaches the age of majority.


      If an alternate payee dies after distributions have begun but before the employee dies, distribution of the remaining portion of the benefit allocated to the alternate payee must be made in accordance with the lifetime distribution rules for individual accounts (Q 3897) or annuity payouts (Q 3896).[8]

      If a QDRO provides that a portion of the employee’s benefit is to be paid to an alternate payee but does not provide for the benefit to be divided, the alternate payee’s portion will not be treated as a separate account (or segregated share) of the employee. Instead, the alternate payee’s portion will be aggregated with any amount distributed to the employee and will be treated, for purposes of meeting the minimum distribution requirement, as if it had been distributed to the employee.[9]

      A plan will not fail to satisfy IRC Section 401(a)(9) merely because it fails to distribute a required amount during the period in which the qualified status of a domestic relations order is being determined provided it does not extend beyond the eighteen-month period described in the IRC and ERISA. Any distributions delayed under this rule will be treated as though they had not been vested at the time distribution was required.[10]

      ______________________

      [1].     See generally  PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     U.S. v. Windsor, 570 U.S. 744, 133 S.Ct. 2675 (2013).

      [5].     Treas. Reg. §1.401(a)(9)-8, A-5.

      [6].     Treas. Reg. §1.401(a)(9)-8, A-6(a).

      [7].     Treas. Reg. §1.401(a)(9)-8, A-6(b)(1).

      [8].     Treas. Reg. §1.401(a)(9)-8, A-6(b)(2).

      [9].     Treas. Reg. §1.401(a)(9)-8, A-6(c).

      [10].   Treas. Reg. §1.401(a)(9)-8, A-7.

  • 3909. What is the incidental benefit rule for qualified plans?

    • Editor’s Note:  The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019. [2]  In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act.  See Q 3901 for more detail on these changes.

      Qualified retirement plans exist primarily for payment of retirement benefits, although certain other benefits (e.g., death benefits) may be provided through the “incidental benefit rule” or “incidental death benefit rule.” This restriction commonly refers to two similar, but separate, rules.

      One limits pre-retirement distributions in the form of nonretirement benefits such as life, accident, or health insurance (Q 3830).

      The second is a rule more properly referred to as the “minimum distribution incidental benefit (“MDIB”) rule.” The purpose of the MDIB rule is to ensure that funds are accumulated under a qualified plan primarily for distribution to employee participants as retirement benefits, and that payments to their beneficiaries are merely “incidental.”[4]

      The MDIB requirement applies only during an employee’s life.[5] The MDIB requirement will be met if:

      (1)  non-annuity distributions are made in accordance with the individual account rules of IRC Section 401(a)(9) (Q 3897);[6]

      (2)  the employee’s benefit is payable in the form of a life annuity for the life of the employee that satisfies the requirements of IRC Section 401(a)(9) without regard to the MDIB requirement (Q 3896);[7] or

      (3)  the employee’s sole beneficiary as of the annuity starting date is the employee’s spouse, and the distributions otherwise satisfy IRC Section 401(a)(9).

      Payments under the annuity must be non-increasing, except for the exceptions explained at Q 3899.[8]

      If distributions begin under a particular distribution option that is in the form of a joint and survivor annuity for the joint lives of the employee and a non-spouse beneficiary, the MDIB requirement will not be satisfied as of the date distributions begin unless the distribution option provides that annuity payments to be made to the employee on and after the employee’s required beginning date will satisfy the conditions set forth in regulations.[9] Under those provisions, the periodic annuity payment payable to the survivor must not at any time on and after the employee’s required beginning date exceed the applicable percentage of the annuity payment payable to the employee using the RMD MDIB Joint and Survivor Annuity Table found in Appendix F.[10]

      The applicable percentage is based on how much older the participant is than the beneficiary as of their attained ages on their birthdays in the first calendar year for which distributions to the participant are required. For example, if the beneficiary is ten or fewer years younger, the survivor annuity may be 100 percent. If the age difference is greater than ten years, the maximum survivor annuity permitted is less than 100 percent. If there is more than one beneficiary, the age of the youngest beneficiary is used.[11]

      If a distribution form includes a life annuity and a period certain, the amount of the annuity payments payable to the beneficiary need not be reduced during the period certain, but in the case of a joint and survivor annuity with a period certain, the amount of the annuity payments payable to the beneficiary must satisfy the foregoing requirements after the expiration of the period certain.[12]

      Period Certain Limitations

      The period certain for annuity distributions commencing during the life of the employee with an annuity starting date on or after his required beginning date generally may not exceed the applicable distribution period for the employee for the calendar year that contains the annuity starting date.

      If the employee’s spouse is the employee’s sole beneficiary and if the annuity provides only a period certain and no life annuity, the period certain may last as long as the joint and survivor life expectancy of the employee and spouse, if that period is longer than the applicable distribution period for the employee.[13]

      If distributions commence after the death of the employee under the life expectancy rule explained in Q 3900, the period certain for any distributions commencing after death cannot exceed the distribution period determined under the life expectancy provisions of Treasury Regulation Section 1.401(a)(9)-5, A-5(b).

      ___________________

      [1]      See generally  PL 116-94, Sec. 114

      [2]      See generally PL 116-94, Sec 401.

      [3]      PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     Cf. Rev. Rul. 56-656, 1956-2 CB 280; Rev. Rul. 60-59, 1960-1 CB 154.

      [5].     IRC Sec. 401(a)(9)(G); Treas. Reg. §1.401(a)(9)-2, A-1(b).

      [6].     Treas. Reg. §1.401(a)(9)-5, A-1(d).

      [7].     Treas. Reg. §1.401(a)(9)-6, A-2(a).

      [8].     Treas. Reg. §1.401(a)(9)-6, A-2(b).

      [9].     Treas. Reg. §1.401(a)(9)-6, A-2(c).

      [10].   Treas. Reg. §1.401(a)(9)-6, A-2(c)(2).

      [11].   Treas. Reg. §1.401(a)(9)-6, A-2(c).

      [12].   Treas. Reg. §1.401(a)(9)-6, A-2(d).

      [13].   Treas. Reg. §1.401(a)(9)-6, A-3(a).

  • 3910. How is an individual taxed when a qualified plan distribution fails to meet the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019.[2]  In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act.  See Q 3901 for more detail on these changes.

      An individual who is required to take a minimum distribution is subject to an excise tax equal to 50 percent of the amount that should have been distributed as a minimum distribution but was not.[4]

      The amount that must be distributed from a plan for a calendar year is the greater of (1) the amount that must be distributed for that year under the required minimum distribution (“RMD”) rules (Q 3892 to Q 3908), or (2) the amount required to be distributed for that year under the minimum distribution incidental benefit (“MDIB”) rule (Q 3909).

      The excise tax is imposed on the recipient of the distribution for the taxable year beginning with or within the calendar year for which the distribution is required.[5] For purposes of the excise tax, a distribution for a participant’s first distribution year is not required until April 1 of the following year (i.e., the required beginning date) (Q 3895).[6]

      The excise tax may be waived if the IRS is satisfied that the shortfall was due to reasonable error and reasonable steps are being taken to remedy it.[7]

      Planning Point: Form 5329 should be filed to request that the IRS waive the penalty. If a waiver is requested, the penalty should not be paid unless the IRS denies the waiver request.

      In addition, if an employee dies before his or her required beginning date, the excise tax will be automatically waived if the recipient is the sole beneficiary, the RMD amount for a calendar year is determined under the life expectancy rule (Q 3900), and the entire distribution is completed by the end of the fifth calendar year following the calendar year of the employee’s date of death.[8]

      Individual Accounts

      If distributions are being made in a form other than an annuity under a contract purchased from a life insurance company or directly from a defined benefit plan, the rules for individual accounts apply and the shortfall is determined by subtracting the actual amount of the distribution from the amount required under the RMD rules or the MDIB rule, whichever is greater.

      For this purpose, if there is more than one permissible method for determining a required distribution, the default method provided by the regulations is used unless the plan provides otherwise (Q 3897 to Q 3908).

      If distributions following the death of a participant are to be made under a method that complies with the five-year rule (Q 3900), no amounts need be distributed, and thus there can be no excise tax, until the fifth calendar year following the participant’s death. In that year, the recipient must take a distribution of the entire remaining balance.  Presumably, this rule will also apply with respect to the new 10-year rule under the SECURE Act.

      State Insurer Delinquency Proceedings

      There is no violation of the minimum distribution requirements and thus no excise tax if a shortfall occurs because assets are invested in a contract issued by an insurance company that is in the midst of state insurer delinquency proceedings. The RMD rules are not violated merely because payments were reduced or suspended by reason of state insurer delinquency proceedings against the life insurance company issuing the annuity. This amount and any additional amount accrued during this period will be treated as though it is not vested during such proceedings. Any distributions with respect to such amounts must be made under the relevant rules for non-vested benefits described in Treasury Regulations Sections 1.401(a)(9)-5, A-8 or 1.401(a)(9)-6, A-6 (Q 3897, Q 3896).

      ____________________

      [1].     See generally  PL 116-94, Sec. 114

      [2].     See generally PL 116-94, Sec 401.

      [3].     PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4].     IRC Sec. 4974(a).

      [5].     IRC Sec. 4974; Treas. Reg. §54.4974-2, A-6.

      [6].     Treas. Reg. §54.4974-2, A-6.

      [7].     IRC Sec. 4974(d); Treas. Reg. §54.4974-2, A-7.

      [8].     Treas. Reg. §54.4974-2, A-7.

  • 3911. How is an individual taxed when a qualified plan distribution made under an annuity contract or defined benefit plan annuity option fails to meet the minimum distribution requirements?

    • Editor’s Note: The SECURE Act, enacted December 20, 2019, changed the required beginning date for required minimum distributions (RMDs) from age 70½ to age 72 (the change applies with respect to distributions to participants who reach age 70½ in 2020 and thereafter).[1] It also made other major changes, including substantially eliminating so-called “stretch” beneficiary distributions from defined contribution plans (including IRAs). It generally replaces the lifetime distribution rule with a 10-year distribution period unless the beneficiary is an “eligible designated beneficiary”. The change in the stretch distribution rules applies only to plan participants in defined contribution plans and IRAs who die after December 31, 2019. [2] In response to the COVID-19 pandemic, the CARES Act[3] waived RMDs from defined contribution plans for 2020. IRS Notice 2020-51 allowed repayment of RMDs made in early 2020 that were otherwise waived under the CARES Act. See Q 3891 for more detail on these changes.

      For purposes of the following rules, determinations as to whether there is a designated beneficiary and the designated beneficiary’s life expectancy that is controlling are made under the rules explained in Q 3904 and Q 3905.[4]

      If distributions are being made under an annuity contract purchased from a life insurance company or under an annuity option of a defined benefit plan, and that annuity contract or option would meet the requirements of both the RMD rules and the MDIB rule, the shortfall is determined by subtracting the actual amount of distributions for the calendar year from the amount that should have been made for that calendar year under the provisions of the contract or option.[5]

      If the annuity contract or option is an impermissible contract or option (i.e., one that fails to meet either the RMD rules or the MDIB rule), the shortfall is determined by subtracting the actual amount distributed for the calendar year from the minimum distribution determined under the following rules:

      (1) In the case of a defined benefit plan, if distributions commence before the death of the participant, the minimum distribution is the amount that would have been distributed under the plan’s joint and survivor annuity option for the lives of the participant and designated beneficiary, which is permissible under both the RMD rules and the MDIB rule, and provides the greatest level amount payable to the participant on an annual basis. If the plan does not provide such an option, or there is no designated beneficiary, the minimum distribution is the amount that would have been distributed under the plan’s life annuity option payable in a level amount for the life of the participant with no survivor benefit.[6]

      (2) In the case of a defined benefit plan, if distributions commence after the death of the participant and a designated beneficiary is named under the impermissible annuity option, the minimum distribution is the amount that would have been distributed under the plan’s life annuity option payable in a level amount for the life of the beneficiary. If there is no designated beneficiary, no amount need be distributed until the fifth calendar year following the participant’s death, at which time the entire interest must be distributed.[7]

      (3) In the case of a defined contribution plan, if distributions commence before the death of the participant, the minimum distribution is the amount that would have been distributed from an annuity contract purchased under the plan’s joint and survivor annuity option for the lives of the participant and designated beneficiary, which is both permissible under the RMD rules and the MDIB rule, and provides the greatest level amount payable to the participant on an annual basis. If there is no designated beneficiary, the minimum distribution is the amount that would have been distributed from a contract purchased under the plan’s life annuity option providing level payments for the life of the participant with no survivor benefit.[8]

      If a plan does not provide a permissible annuity distribution option, the minimum distribution is the amount that would have been distributed under a theoretical annuity contract purchased with the amount used to purchase the impermissible annuity. If there is a designated beneficiary, this theoretical contract is a joint and survivor annuity, which (1) provides level annual payments, (2) would be permissible under the RMD rules, and (3) provides the maximum survivor benefit permissible under the MDIB rule. If there is no designated beneficiary, the theoretical contract is a life annuity for the life of the participant, which provides level annual payments and which is permissible under the RMD rules and the MDIB rule.[9]

      (4) In the case of a defined contribution plan, if distributions commence after the death of the participant and a designated beneficiary is named under the impermissible annuity option, the minimum distribution is the amount that would have been distributed under a theoretical life annuity for the life of the designated beneficiary, which provides level annual payments and which would be permissible under the RMD rules. If there is no designated beneficiary, no amount need be distributed until the fifth calendar year following the participant’s death, at which time the entire interest must be distributed.[10]

      The amount of the payments will be determined using the interest rate and mortality tables prescribed under IRC Section 7520 using the distribution commencement date determined under Treasury Regulation Section 1.401(a)(9)-3, A-3 and using the age of the beneficiary as of his or her birthday in the calendar year that contains that date.[11]

      [1]      See generally PL 116-94, Sec. 114

      [2]      See generally PL 116-94, Sec 401.

      [3]      PL 116-136; also see Notice 2020-51 reference transition relief for certain non-COVID RMDs.

      [4]      Treas. Reg. §54.4974-2, A-4(b)(1)(ii).

      [5]      Treas. Reg. §54.4974-2, A-4(a).

      [6]      Treas. Reg. §54.4974-2, A-4(b)(1)(i).

      [7]      Treas. Reg. §§54.4974-2, A-4(b)(1)(ii), 54.4974-2, A-4(b)(3).

      [8]      Treas. Reg. §54.4974-2, A-4(b)(2).

      [9]      Treas. Reg. §54.4974-2, A-4(b)(2).

      [10]    Treas. Reg. §§54.4974-2, A-4(b)(2), 54.4974-2, A-4(b)(3).

      [11]     Treas. Reg. §54.4974-2, A-4(b)(2)(ii).

  • 3912. What restrictions apply to the assignment or alienation of a participant’s qualified plan benefit?

    • A qualified plan must provide that benefits under the plan generally may not be assigned, alienated, or subject to garnishment or execution.[1] Limited exceptions are provided, including a Qualified Domestic Relations Order (“QDRO,” see Q 3915), for collection of taxes or certain federal judgments (see Q 3913), or when a participant has committed a breach of fiduciary duty, or a criminal act, against the plan (see Q 3914).[2]

      The U.S. Supreme Court has held that, for purposes of the anti-alienation provision, a working business owner and the owner’s spouse are ERISA-protected participants, provided the plan covers one or more employees other than the owner and spouse.[3]

      Bankruptcy Protection

      The Supreme Court has held that qualified plan interests generally are protected from the reach of plan participants’ creditors in bankruptcy.[4] The  Supreme Court also has extended the protection offered to qualified plan assets under the federal Bankruptcy Code to an IRA containing a rolled over lump sum distribution from a qualified plan.[5] Even where it is unclear whether a plan was tax qualified, lower courts have allowed anti-alienation provisions to stand.[6]


      Planning Point: The U.S. Bankruptcy Court for the Western District of North Carolina recently held that inherited 401(k)s may also receive creditor protection in bankruptcy if the funds remain in the inherited account when the bankruptcy petition is filed.  The court specifically distinguished this treatment for ERISA-covered plans from the treatment of inherited IRAs, which may not be protected in bankruptcy (in Clark v. Rameker,[7] the Supreme Court unanimously ruled that inherited IRAs were not “retirement funds,” and were thus not entitled to bankruptcy protection.  A key factor in the case was the fact that the funds remained within the inherited 401(k), which was set up by the financial institution in the debtor’s name.  However, this case was decided by a lower district court and is apparently a case of first impression.  Therefore, clients should proceed cautiously and examine state laws when determining whether inherited 401(k)s can be excluded from a bankruptcy estate.[8]


      Payment of a participant’s accrued benefit to a bankruptcy trustee pursuant to a bankruptcy court order, even with the participant’s consent, is a prohibited alienation for qualification purposes.[9] If the plan permits and the participant consents, however, a plan administrator may draw a loan check or a hardship withdrawal check payable to the participant and send such checks directly to the bankruptcy trustee, to be endorsed over to the trustee by the participant, without violating the anti-alienation prohibition.[10]

      A Bankruptcy Code requirement that debtors apply all “projected disposable income to be received … to make payments under the [bankruptcy] plan” does not require a plan participant to take out a plan loan to pay toward his or her debt, because plan loans are not “income” for bankruptcy purposes.[11] If a participant has already taken a plan loan and subsequently files for bankruptcy, amounts used to repay the loan do not receive preferential treatment merely because the loans are secured by plan assets. In at least two rulings, the payments were not deemed necessary for the participant’s “maintenance and support.”[12]


      Planning Point: In a 2021 decision, the Sixth Circuit Court of Appeals confirmed that 401(k) contributions made by debtors in Chapter 13 bankruptcy are not always protected if the debtors had not regularly contributed to the account in the six months prior to filing for bankruptcy.  In other words, debtors cannot shield assets from bankruptcy by beginning to make contributions after filing for bankruptcy.  In this case, the court denied the debtors’ request to exclude $1,375 per month from their disposable income to contribute to a 401(k).  The court confirmed the denial even though the debtor had made contributions in the past, but stopped because he accepted a new job that did not offer a 401(k) savings option.  However, in a similar case where the debtor had been making regular 401(k) contributions in the six months prior to bankruptcy, the debtors were permitted to withhold their contributions from disposable income.[13]


      QDRO Exception

      A plan may not distribute, segregate, or otherwise recognize the attachment of any portion of a participant’s benefits in favor of the participant’s spouse, former spouse, or dependents unless such action is mandated by a QDRO (Q 3914).[14] The voluntary partition of a participant’s vested account balance between the participant’s spouse and the participant in a community property state is an alienation of benefits.[15] The Tax Court ruled that a participant’s voluntary waiver of benefits was a prohibited alienation, despite the PBGC’s approval of the plan’s termination. The waiver resulted in the plan’s disqualification and the participant, who was the sole shareholder, was taxed on benefits the participant did not receive.[16]

      Other Exceptions

      A plan may provide that, after a benefit is in pay status, the participant or beneficiary receiving such benefit may make a voluntary and revocable assignment not to exceed 10 percent of any benefit payment, provided the assignment is not for the purpose of defraying plan administrative costs.[17]

      Payment, pursuant to a court order that is the result of a judicial determination that benefits cannot be paid to a beneficiary who murdered the plan participant, is permitted if the order conforms to the terms of the plan for directing payments when there is an ineligible beneficiary.[18]


      Planning Point: Courts sometimes hold that ERISA preempts state slayer statutes. The U.S. Supreme Court has not yet decided the issue. If faced with this issue, the plan can argue that federal common law precludes payment to a beneficiary who murders the participant.[19]


      A disclaimer of qualified plan benefits that satisfies the requirements of state law and IRC Section 2518(b) is not a prohibited assignment or alienation.[20]

      An anti-alienation provision also will not prevent a plan from holding a rolled over distribution from another plan subject to an agreement to repay a part of the distribution in the event of early termination of the other plan.[21]

      A loan from a plan made to a participant or beneficiary and secured by a participant’s accrued nonforfeitable benefit is not treated as an assignment or alienation if the loan is exempt from the excise tax on prohibited transactions or would be exempt if the participant or beneficiary were a disqualified person.[22]

      A participant or beneficiary may direct payment of his or her plan benefit payment to a third party, including the employer, if the arrangement is revocable and the third party files with the plan administrator a written acknowledgement stating that he or she has no enforceable right to any plan benefit other than payments actually received. The written acknowledgement must be filed within ninety days after the arrangement is entered into.[23] After the death of a participant, an assignment made pursuant to a bona fide settlement between good faith adverse claimants to the participant’s pension plan benefits was not invalidated by ERISA’s anti-alienation provision.[24]

      ___________________________

      [1].     IRC Sec. 401(a)(13), ERISA Sec. 206(d).

      [2].     IRC Sec. 401(a)(13)(C).

      [3].     Yates v. Hendon, 541 U.S. 1, 124 S. Ct. 1330 (2004).

      [4].     Patterson v. Shumate, 112 S. Ct. 2242 (1992).

      [5].     See Rousey v. Jacoway, 540 U.S. 753, 125 S. Ct. 1561 (2005).

      [6].     Traina v. Sewell, 180 F.3d 707 (5th Cir. 1999) (citing Baker v. LaSalle, 114 F.3d 636 (7th Cir. 1997)). See also United States v. Wofford, 560 F.3d 341 (5th Cir. 2009).

      [7]      573 U.S. 122, 134 S. Ct. 2242 (2014).

      [8]      In re Corbell-Dockins, No. 20-10119 (Bankr. W.D.N.C. June 4, 2021).

      [9].     Let. Ruls. 9011037, 8910035, 8829009.

      [10].   Let. Rul. 9109051.

      [11].   In re Stones, 157 BR 669 (Bankr. S.D.Cal. 1993).

      [12].   In re Cohen, 246 BR 658 (Bankr. D. Colo. 2000); In re Estes, 254 BR 261 (Bankr. D. Idaho 2000).

      [13]     Penfound v. Ruskin, Case No. 19-2200 (6th Cir. Aug. 10, 2021).

      [14].   IRC Secs. 401(a)(13)(B), 414(p).

      [15].   Let. Rul. 8735032.

      [16].   Gallade v. Comm., 106 TC 355 (1996).

      [17].   IRC Sec. 401(a)(13)(A); Treas. Reg. §1.401(a)-13(d)(1).

      [18].   Let. Rul. 8905058.

      [19].    See Standard Ins. Co. v. Coons, 141 F.3d 1179 (9th Cir. 1998); see also dicta in Egelhoff v. Egelhoff, 532 U.S. 141 (2000).

      [20].   GCM 39858 (9-9-91).

      [21].   Francis Jungers, Sole Proprietorship v. Comm., 78 T.C. 326 (1982), acq. 1983-1 CB 1.

      [22].   Treas. Reg. §1.401(a)-13(d)(2); Rev. Rul. 89-14, 1989-1 CB 111.

      [23].   Treas. Reg. §§1.401(a)-13(d), 1.401(a)-13(e); TD 7534.

      [24].   Stobnicki v. Textron, Inc., 868 F.2d 1460 (5th Cir. 1989).

  • 3913. Do anti-alienation rules prevent collections of federal taxes or judgments from qualified plan assets?

    • An anti-alienation provision will not prevent collection of federal taxes from the plan benefits.1 The IRS determined that a retirement plan was not obligated to honor an IRS levy on the benefits of a participant who was not yet entitled to receive a distribution; instead, the levy could be ignored until such time as the participant was eligible for a distribution.2 Similarly, when a participant dies, pension benefits no longer are “property” of the deceased participant; consequently, the IRS cannot attach benefits payable to a participant’s son as beneficiary for the participant’s tax debts if the participant’s only rights under the plan were to collect lifetime benefits and designate a beneficiary but could not obtain or alienate the funds.3

      In some cases, the IRS has permitted the collection of criminal fines and restitution against plan assets.4 The IRS has privately ruled that benefits of individuals already in “pay status” may be subject to garnishment under the Federal Debt Collection Procedures Act regardless of whether the defendant is a plan participant or a beneficiary. The IRS noted that such collections could be made whether the recipient was a government entity or a private party; the government, in effect, “steps into the shoes of the taxpayer,” receiving funds the taxpayer would have received and applying them toward a valid debt of the taxpayer. These collections did not extend to individuals not yet in pay status, because they were not yet eligible for a distribution under the terms of the plan.5


      1.    Treas. Reg. §1.401(a)-13(b)(1); Iannone v. Comm., 122 TC 287 (2004).

      2.    FSA 199930039.

      3.    Asbestos Workers Local No. 23 Pension Fund v. U.S., 303 F. Supp. 2d 551 (D.C. Pa. 2004).

      4.    See Let. Rul. 200342007.

      5.    Let. Rul. 200426027.

  • 3914. Do anti-alienation rules prevent collections of payments from qualified plan assets if the payment is required because the participant committed a crime or violated his or her fiduciary duties?

    • A plan generally may offset a participant’s benefit under a qualified plan to recover certain amounts that the participant is ordered or required to pay.1 For this exception to apply, the order or requirement to pay must arise under a judgment of conviction for a crime involving the plan, under a civil judgment entered by a court in an action brought in connection with a violation of the fiduciary responsibility provisions of ERISA, or pursuant to a settlement agreement between the Department of Labor or the Pension Benefit Guaranty Corporation and the participant in connection with a fiduciary violation. The judgment, order, decree, or settlement specifically must provide for the offset of all or part of the amount required to be paid to the plan.

      If a plan is subject to survivor annuity rules (Q 3881), the offset will be permitted if the spouse has consented to the offset or signed a waiver of the survivor annuity rules, the spouse is ordered or required to pay an amount to the plan in connection with a fiduciary violation (e.g., the spouse is held responsible for the fiduciary violation), or the judgment, order, decree, or settlement provides that the spouse retains the right to the minimum survivor annuity.2 Special rules are provided for determining the amount of the minimum survivor annuity.3


      1.    IRC Sec. 401(a)(13).

      2.    IRC Sec. 401(a)(13)(C)(iii).

      3.    See IRC Sec. 401(a)(13)(D).

  • 3915. What is a qualified domestic relations order?

    • A Qualified Domestic Relations Order (“QDRO”) is a judgment, decree, or order (including an approval of a property settlement agreement) that awards all or a portion of a participant’s benefits to an alternate payee and that meets all the requirements under the IRC for being qualified.

      A plan may distribute, segregate, or otherwise recognize the attachment of any portion of a participant’s benefits in favor of the participant’s spouse, former spouse, or dependents without violating the restrictions on alienation of benefits (Q 3912) only if such action is mandated by a QDRO.1 Only a spouse, former spouse, child, or other dependent of a participant may be classified as an alternate payee under a QDRO.

      The following requirements must be met for a domestic relations order (“DRO”) to be qualified:

      (1) it must relate to the provision of child support, alimony, or property rights to a spouse, former spouse, child, or other dependent;

      (2) it must be made under a state’s community property or other domestic relations law;

      (3) it must create, recognize, or assign to the spouse, former spouse, child, or other dependent of the participant the right to receive all or a portion of a participant’s plan benefits;

      (4) it must clearly specify the names and, unless the plan administrator has reason to know them, the addresses of the participant and each alternate payee, the amount or percentage of the participant’s benefit to be paid to each alternate payee (or a method for determining the amount), the number of payments or the period to which the order applies, and each plan to which the order applies; and

      (5) it may not require the plan to provide any type or form of benefit or benefit option increased benefits to an alternate payee that are required to be paid to another alternate payee under another previously ordered qualified DRO.2

      A distribution from a governmental plan, a church plan, or an eligible Section 457 governmental plan (Q 3584) will be treated as made pursuant to a QDRO as long as the domestic relations order meets requirements (1) through (3).3

      Note: The plan sponsors of unfunded nonqualified deferred compensation plan subject to Section 409A are optionally permitted, but not required, to make distribution under a DRO as defined in Section 414(p)(i)(B) and not the full set of requirements imposed in a QDRO by Section 414(p) on “qualified” plans, and it will not be treated as a 409A prohibited acceleration4 (See Q 3547 and Q 3575).5

      Model language for a QDRO is set forth in Notice 97-11.6

      A marital settlement agreement that was incorporated into a divorcing couple’s dissolution agreement constituted a QDRO, not merely a property settlement.7

      An amendment to a divorce decree did not constitute a QDRO, and thus could not confer on the ex-wife a 50 percent interest in the participant’s preretirement survivor annuity because prior to the amendment the participant had died and the benefits had lapsed. As a result, the amendment impermissibly provided for increased benefits.8

      In a private ruling, the IRS approved the use of a second QDRO to secure other marital obligations. The second QDRO ordered the segregation of a portion of the husband’s retirement plan benefit for the wife’s benefit.9

      Most federal circuit courts hold that a QDRO is enforceable after a participant’s death.10 The Department of Labor has issued regulations under which a QDRO will not fail to be treated as valid merely because it revises, or is issued after, another QDRO. The regulations also provide that a QDRO will not be treated as invalid solely because of the time it was issued.11

      The applicability of the QDRO provisions to benefits other than those provided by qualified plans is not fully clear. After having ruled in 1992 that they were inapplicable to nonqualified deferred compensation plans and welfare benefit plans, a Michigan district court reversed itself in 1996, holding that a QDRO provision should be followed with respect to the disposition of a welfare plan, such as life insurance.12

      The Court of Appeals for the Seventh Circuit has ruled that the QDRO provisions of ERISA were applicable to group term life insurance and other welfare plans.13

      Final regulations governing Section 403(b) plans extend the application of the QDRO rules to tax-sheltered annuity contracts, at least with respect to taxable years beginning after 2005.14

      A QDRO generally may not require that the plan provide any form of benefit not otherwise provided under the plan and may not require that the plan provide increased benefits. Within certain limits, it is permissible for a QDRO to require that payments to an alternate payee begin on or after the participant’s earliest retirement age, even though the participant has not separated from service at that time. For these purposes, a participant’s earliest retirement age is the earlier of (1) the date that the participant is entitled to a distribution under the plan or (2) the later of (i) the date the participant reaches age fifty or (ii) the earliest date on which the participant could begin receiving benefits under the plan if the participant separated from service.15 A plan may provide for payment to an alternate payee prior to the earliest retirement age as defined in the IRC.16

      Planning Point: Employers should consider drafting their retirement plans to offer in-service distributions to alternate payees so as not to be burdened with administering the benefits of employees’ ex-spouses, a group that by its nature may be hostile to the employer. Martin Silfen, J.D., Brown Brothers Harriman Trust Co., LLC.

      A domestic relations order requiring payment of benefits to an alternate payee is not qualified if the benefits are required to be paid to another alternate payee under a previous QDRO. The IRS has determined that the assignment of or placement of a lien on a participant’s retirement account to secure payment of obligations under the terms of a QDRO was not a prohibited alienation.17

      The IRC provides that, to the extent specified in a QDRO, the former spouse of a participant (and not the current spouse) may be treated as a surviving spouse for purposes of the survivor benefit requirements and, for that purpose, a former spouse will be treated as married to the participant for the requisite one year period if the former spouse and the participant had been married for at least one year (Q 3882).18 In the absence of this provision, a former spouse was not entitled to receive any benefits where the husband died before becoming entitled to receive retirement benefits and the preretirement survivor annuity was payable to the current spouse.19

      A recent case addressed an issue that may arise when the nonparticipant spouse dies prior to the participant spouse’s retirement (so that benefits have yet to commence). In this case, the plan argued that the nonparticipant spouse’s benefit reverted to the plan, so that the participant spouse was only entitled to receive 50 percent of his pension benefit. The court disagreed, finding that an amended QDRO obtained by the participant spouse was valid, but also that the non-participant spouse’s benefit reverted to the plan participant upon her death. Therefore, the plan participant was entitled to receive the full amount of his pension benefit.20

      The plan administrator is required to make the determination as to whether an order is a QDRO. All plans must establish reasonable procedures for making such determinations.21 In addition, a plan administrator who has reason to believe an order is a sham or is questionable in nature must take reasonable steps to determine its credibility.22

      A plan administrator is not required under the IRC or ERISA to review the correctness of the determination that an individual is a surviving spouse under state domestic relations law.23 A plan administrator is not required to, and should not, “look beneath the face” of a state court order to determine whether amounts to which it relates were properly awarded.24

      Final DOL regulations effective August 9, 2010 make it clear that a plan administrator cannot disqualify a QDRO solely because it is issued after, or revises, another domestic relations order or QDRO, or because it is issued after the participant’s death, divorce, or annuity starting date.25

      The DOL has stated that nothing in ERISA Section 206(d)(3) precludes a state court from altering or modifying an earlier QDRO of a couple petitioning the court for such a change, provided the new order satisfies the requirements of a QDRO. In such a case, the DOL noted that the new order would operate on a prospective basis only.26

      A plan may provide for a “hold” to be placed on a participant’s account while the determination is being made as to whether an order is a QDRO; however, where a plan with such a provision went beyond its written procedures and placed a hold on an account before the order was received but after the divorce was final, the hold violated ERISA.27 The Department of Labor also has stated that plans are not permitted to impose separate fees for the costs of these procedures to individual participants or alternate payees.28

      For the taxation of payments made pursuant to a QDRO, see Q 3944 and Q 3969. For an explanation of the effect of a QDRO on the minimum distribution requirements, see Q 3908.


      1. IRC Secs. 401(a)(13)(B), 414(p).

      2. IRC Sec. 414(p)(1).

      3. IRC Sec. 414(p)(11).

      4.Treas. Reg., Sec. 1.409A-3(j)(4)(ii); also see 1.409A-6(a)(4)(i)(C) as to grandfathered plans.

      5.There are important key differences between qualified plans and nonqualified deferred compensation plans.  For instance there are no RERISA “plan assets” for the DRO to direct; all asset connected to a nonqualified plan belong to the employer, even if held in a “rabbi” grantor trust.

      6. 1997-1 CB 379.

      7Hawkins v. Comm. 86 F.3d 982 (10th Cir. 1996), rev’g 102 TC 61.

      8Samaroo v. Samaroo, 193 F.3d 185 (3d Cir. 1999).

      9. See Let. Rul. 200252097.

      10. See Hogan v. Raytheon, 302 F.3d 854 (8th Cir. 2002); Trustees of the Directors Guild of America-Producer Pension Benefits Plans v. Tise, 234 F.3d 415 (9th Cir. 2000); see also IRC Sec. 414(p)(7), ERISA Sec. 206(d)(3)(H).

      11. 29 CF.R. §2530.206(b) and (c).

      12. See Metropolitan Life Ins. Co. v. Fowler, 922 F. Supp. 8 (E.D. Mich. 1996), rev’g Metropolitan Life Ins. Co. v. Person, 805 F. Supp. 1411 (E.D. Mich. 1992).

      13. See Metropolitan Life Ins. Co. v. Wheaton, 42 F.3d 1080 (7th Cir. 1994).

      14. See Treas. Reg. §§1.403(b)-10(c); 1.403(b)-11(a).

      15. IRC Sec. 414(p)(4)(B).

      16. Treas. Reg. §1.401(a)-13(g)(3).

      17. Let. Ruls. 9234014, 200252093.

      18. IRC Sec. 414(p)(5); Treas. Reg. §1.401(a)-13(g)(4).

      19Dugan v. Clinton, 1987 U.S. Dist. LEXIS 4276 (N.D. Ill. 1987).

      20Cingrani v. Sheet Metal Workers’ Local No. 73 Pension Fund, No. 15-c-6430.

      21. IRC Secs. 414(p)(6), 414(p)(7).

      22. DOL Adv. Op. 99-13A.

      23. DOL Adv. Op. 92-17A.

      24Joint Trs. of the Int’l Longshore & Warehouse Union-Pacific Mar. Ass’n Pension Plan v. Pritchow, 2012 U.S. Dist. LEXIS 179633 (W.D. Wash. Dec. 19, 2012); Brown v. Cont’l Airlines, Inc.,647 F.3d 221 (5th Cir. 2011);Blue v. UAL Corp., 160 F.3d 383 (7th Cir. 1998).

      2529 CFR 2530.206.

      26. DOL Adv. Op. 2004-02A.

      27Schoonmaker v. The Employee Sav. Plan of Amoco Corp., 987 F.2d 410 (7th Cir. 1993).

      28. DOL Adv. Op. 94-32A.