Old Technical Terms

Technical Terms And Concepts You Need To Understand

When Congress and the IRS wrote the Rules Of The Road for required distributions from IRA's, qualified retirement plans and TSA's, the politicians and bureaucrats disregarded the concept of "tax simplification". To be an effective navigator, it is necessary to grasp a few definitions and general ideas before leaving your driveway for a trip across town.

Required Beginning Date (RBD): All IRA owners as well as participants in qualified retirement plans that own more than five percent of the sponsoring employer must begin distributions no later than April 1 of the year following the year in which the participant attains age 70½. The RBD for all other employees and §403(b) plan participants is April 1 of the calendar year following the later of either: (1) the calendar year in which the employee attains age 70½, or (2) the calendar year in which the employee retires. [§401(a)(9)(C)] Note, however, that under Revenue Notice 97-75 a plan may elect to use the RBD rules mandated for IRA’s, i.e., April 1 of the year following the year the employee attains age 70½. Therefore, it is necessary to determine if such an election has been made for the plan in question before it is possible to be certain about the Required Beginning Date for its participants. It is also important to keep in mind that the special rule for extending the RBD only applies to qualified plans and §403(b) plans maintained by the participant’s current employer. The RBD rules for all plans associated with a former employer are the same as for IRA’s.

Life Expectancy Factor (LEF): Except for MDIB purposes (see item "E" below), the life expectancy factor must be computed by using the "expected return multiples" listed on Tables V or VI of Regulation §1.72-9. [§1.401(a)(9)-1, E-3 & E-4] Excerpts of those tables are included in Appendix E of IRS Publication 590. Note, however, that in the latter publication the tables are numbered I and II respectively.

Designated Beneficiary (DB): It is possible to name a beneficiary for a qualified plan but NOT have a "Designated Beneficiary". (See item "H" below for examples of those exceptions.)

The "designation" must be spelled out in the plan itself or with an affirmative election by the plan participant. [§1.401(a)(9)-1, D-1]

It is not valid if merely stipulated under state law. [§1.401(a)(9)-1, D-2,(a)(1)]
It is not valid to simply use a joint and last survivor annuity settlement without also naming a beneficiary. [§1.401(a)(9)-1, D-2,(a)(1)]

The IRC only allows the Designated Beneficiary to be an individual or group of individuals. [§.401(a)(9)(E)]

For purposes of required distributions during the participant’s lifetime on or after the RBD, that individual (or those individuals) must be identifiable as of the required beginning date. [§1.401(a)(9)-1, D-2(a)(1)]
If a participant dies before the RBD, the individual (or those individuals) must be identifiable as of the date of death. [§1.401(a)(9)-1, D-2(a)(1)]
That individual (or those individuals) must be identifiable at all subsequent times. [§1.401(a)(9)-1, D-2(a)(1)]

Under certain circumstances specified in the Proposed Regulations, DB status can be achieved if a trust is named as beneficiary.

A Designated Beneficiary can exist when a trust is the qualified plan’s beneficiary provided four prerequisites are met. [§1.401(a)(9)-1, D-5]

The trust is valid under state law, or would be but for the fact that there is no corpus.
The trust is irrevocable or will, by its terms, become irrevocable upon the death of the participant.
The trust’s own beneficiaries who will be receiving proceeds from the qualified plan are named individuals or readily identifiable from the trust instrument, e.g., a class of beneficiaries such as spouse, children, etc. is acceptable.
Certain documentation is provided to the plan administrator so that the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the participant’s benefit are identifiable to the plan administrator.

For purposes of required distributions during the participant’s lifetime, all four of the prerequisites must be met as of the later of the date on which the trust is named as a beneficiary of the participant or the participant’s RBD and all subsequent periods during which the trust is named as a beneficiary. [§1.401-(a)(9)-1, D-5(b)] The fourth requirement can be satisfied under either of the following conditions. [§1.401-(a)(9)-1, D-7(a)]

The participant provides a copy of the trust instrument to the plan administrator and agrees that if the trust instrument is amended at any time in the future, he/she will, within a reasonable time, provide to the plan administrator a copy of each such amendment.
The participant provides the plan administrator with a list of all the beneficiaries of the trust (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. He or she must certify that, to the best of his/her knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied. In addition, the plan participant must agree to provide corrected certifications if an amendment changes any information previously certified. Finally, the participant agrees to provide a copy of the trust instrument to the plan administrator upon demand.

For purposes of required distributions following a participant’s death before his or her RBD, prerequisites (1), (2) and (3) in item 3 a) above must be satisfied as of the date of death. Requirement (4) must be satisfied prior to the end of the ninth month following the month of the participant’s death. [§1.401(a)(9)-1, D-6(a)] The documentation requirement can be fulfilled under either of the following conditions. [§1.401(a)(9)-1, D-7(b)]

The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.
The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of the date of death (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. The trustee must certify that, to the best of the trustee’s knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied as of the date of death. In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.

For purposes of required distributions following a participant’s death after his or her RBD, all four prerequisites must have been fulfilled as outlined in item 3 b) above pertaining to distributions during the participant’s lifetime. In addition, either of the following steps must be carried out prior to the end of the ninth month following the month of the participant’s death. [§1.401(a)(9)-1, D-7(b)]

The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.
The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of the date of death (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. The trustee must certify that, to the best of the trustee’s knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied as of the date of death. In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.

Calculation-DB: If a group of individuals are DB’s, the person with the shortest life expectancy will be the Designated Beneficiary for purposes of selecting the life expectancy factor to use in MRD calculations. [§1.401(a)(9)-1, E-5(a)(1)] This person is sometimes referred to as the "calculation-DB" although that term does not appear in the Code or Regulations.

In the event one or more of the plan’s beneficiaries does not qualify as a Designated Beneficiary, the participant will be treated as not having any DB’s even if the balance of the beneficiaries are individuals that fulfill the DB requirements. NOTE: This rule applies regardless of when death occurs. [§1.401(a)(9)-1, D-2A(b) and E-5(a)(1)]
The existence of a contingent beneficiary will have no bearing on determining the individual DB with the shortest life expectancy OR whether there is a beneficiary that does not qualify as a DB. [§1.401(a)(9)-1,E-5(e)(1)]

Minimum Distribution Incidental Benefit (MDIB) Rule: To eliminate one possible abuse when calculating MRD’s, there is a special rule for cases involving a non-spouse DB that is more than ten years younger than the participant. [Note: IRC §408A(c)(5)(B) exempts Roth IRA’s from the MDIB provisions.]

When the age spread between the participant and the calculation-DB exceeds ten years, the "applicable divisor" listed in §1.401(a)(9)-2, Q-4 or Q-5 must be substituted for the life expectancy factor when calculating MRD’s. Those applicable divisors can also be found in Appendix E of IRS Publication 590.
Except in cases of multiple beneficiaries, the actual age of a spousal beneficiary is always used even if he/she is fifteen or twenty years younger than the participant. [§1.401(a)(9)-2, Q-7(a)] Please note, however, that the MDIB rules do apply whenever a spouse that is more than ten years younger than the participant is not the sole primary beneficiary. [§1.401(a)(9)-2, Q-7(b)]
Special Note: The MDIB rule only applies to years when the plan participant is alive for at least a portion of the year. Starting in the year following a participant’s death, the MDIB rule is ignored. [§1.401(a)(9)-2, Q-3]

Changing DB’s: While the participant is alive, it is permissible to add a new Designated Beneficiary or replace an existing one after the RBD. [§1.401(a)(9)-1, E-5(c)]

Note, however, that a new beneficiary added to an existing group of DB’s may alter the minimum required distribution calculations in future years. There is no impact on the calculations for the year in which the addition occurs. [§1.401(a)(9)-1, E-5(c)(1)]

If the newly added Designated Beneficiary was born before the other members of the group, a larger minimum distribution will be required because the shorter LEF of the new person must be used in the computation.
In the event the new beneficiary is not the oldest member of the group, the MRD calculations will continue to be based on the same variables that would have been used had he/she not become a beneficiary.

A similar possibility occurs if a new individual replaces someone in a group of DB’s. [§1.401(a)(9)-1, E-5(c)(1)]

If that new beneficiary is older than the person he/she replaces and the new beneficiary is also the oldest person in the newly formed group, his/her LEF must be used when calculating minimum distributions in future tax years. The net result will be a larger MRD.
In the event the new beneficiary is younger than the person he/she replaces, there is no need to alter the MRD calculations in future years.
The MRD calculations will likewise remain the same if the new beneficiary happens to be older than the person he/she replaces but NOT the oldest member of the newly formed group.

If a new beneficiary is named after the required beginning date due to the death of the original DB whose LEF was being used in the MRD calculations, the remaining life expectancy of the original calculation-DB will continue to be used in those calculations. [§1.401(a)(9)-1, E-5(e)(2)]

This is true even if the new beneficiary’s life expectancy is shorter than the LEF of the deceased DB.
There is an exception to this "post-death" rule if the spouse were the original DB and his/her life expectancy were being redetermined each year.

In that event, the remaining life expectancy of the deceased spouse reduces to zero in the year following his/her death.
However, that glitch is avoided if the life expectancy of the deceased spouse was NOT being redetermined. In the latter case his/her death will be treated as if it were the death of a non-spouse DB.

Account Value: The minimum required distribution calculations for a particular year are always based on each account’s balance as of the last valuation date in the preceding calendar year. [§1.401(a)(9)-1, F-5,(a)]

Non-DB Status: Naming a charity, partnership, corporation or an estate as a partial or total beneficiary of a separate account within a qualified plan means that at least a portion of the assets will pass to a non-human entity. Without an identifiable human being to receive the proceeds after the participant’s death, it is impossible to establish a life expectancy.

Without a beneficiary with a measurable life expectancy, the plan lacks a Designated Beneficiary! [§1.401(a)(9)-1, D-2A & D-5] Hence, the participant is forced to use a single life expectancy from Table V of Reg. §1.72-9 when computing MRD’s. [§1.401(a)(9)-1, D-2A(b)]
A qualified plan also lacks a DB if a charity, partnership, corporation or an estate is added as a "new" beneficiary following the participant’s required beginning date. [§1.401(a)(9)-1, E-5(c)(2)]

Except in the case of a DB’s death, similar results occur if a plan has no named beneficiary after the required beginning date. [§1.401(a)(9)-1, E-5(c)(2)]

Spousal Rollover IRA: Except for required distributions, benefits payable to a surviving spouse as beneficiary of a qualified plan may be transferred to an IRA in the name of that surviving widow(er). This is true regardless of when the participant dies. If handled properly, such a transfer does not create a taxable event. The survivor becomes the owner of the new IRA. Thereafter, he or she is eligible to use all the normal distribution options available to an IRA owner.