105-7 Plan Distributions - Part II

Question 1

Beneficiary vs. Designated Beneficiary for Qualified Plan

Answer 1

Designated Beneficiary: the person whose age is used to calculate the RMD.

• Must be a person or qualifying trust that is named by the original owner of the retirement account.
• A charity is not allowed to be a designated beneficiary.
• The estate cannot be a designated beneficiary.
• Date for determining a designated beneficiary is Sept. 30 of the year following the year of the participant-owner’s death.

Question 2

Designated Beneficiary’s Interest Distributed Over the Longer of:

Answer 2

• the beneficiary’s life expectancy
• either the 5-yr rule or the remaining life expectancy of the participant-owner

If more than 1 beneficiary is designated w/ respect to a participant-owner as of the Sept. 30 date, the designated beneficiary w/ the shortest life expectancy is the measuring life for purposes of determining the distribution period

Question 3

Surviving Spouse Beneficiary

Answer 3

May elect to be treated as the account owner or as the designated beneficiary

Can receive distributions over the surviving spouse’s own remaining single-life expectancy, recalculated each year. Distributions must begin in the year in which the owner would have attained age 70.5

Can also roll the plan balance over and defer distributions until the surviving spouse attains age 70.5

This election may be made only if the surviving spouse is the sole beneficiary

The surviving spouse can also elect to distribute the entire account balance within 5 years after the owner’s death (5-yr rule)

Question 4

Nonspouse Beneficiary

Answer 4

An individual, not an entity, who is also not the surviving spouse of the decedent
Distribution options depend on whether death of the participant-owner occurred before or after the RBD for RMDs
Death Occurring Before the RBD: If the beneficiary is an individual other than the surviving spouse, the distribution period is the remaining life expectancy of the designated beneficiary

Death Occurring After the RBD: for a nonspouse beneficiary, the distribution must be distributed at least as rapidly as the longer of remaining life expectancy of the designated beneficiary or the owner’s life expectancy that would have been applicable for RMD purposes

Question 5

Qualifying Trust as Beneficiary

Answer 5

If qualifying trust is named as beneficiary, the bene’s of the trust will be treated as a designated bene so long as:

1. the trust is valid under state law
2. the trust is irrevocable or will become so on the participant’s death
3. the beneficiaries of the trust are identifiable from the trust instrument
4. appropriate documentation has been provided to the plan administrator

Assuming these are met, the trust can then use the life expectancy of the oldest trust beneficiary as the measuring life upon which to calculate the minus 1 method

Question 6

Estate as a beneficiary

Answer 6

Cannot be treated as a designated beneficiary

Benefits payable to the estate have to be distributed under the 5-yr rule if death occurs before the RBD

If death occurs after the RBD, a single, lump-sum distribution is still available, but any installment payments must continue over the deceased participant’s remaining distribution period, reduced by 1 each year

From an income tax perspective, the drawback of naming the estate as beneficiary is that an estate reaches the highest marginal income tax bracket after generating just $12,750 (2019) of taxable income

Question 7

Automatic Survivor Benefits (QJSAS and QPSAS)

Answer 7

Under ERISA, all defined benefit plans and those defined contribution plans that are subject to minimum funding standards (for example, money purchase and target benefit pension plans) must offer automatic survivor benefits in the form of:

1. Qualified joint and survivor annuity (QJSA)
2. Qualified preretirement survivor annuity (QPSA)

The automatic survivor benefit rules do not apply to IRAs but do apply to Section 403(b) plans that match employee elective deferrals

Question 8

Qualified Domestic Relations Order (QDRO)

Answer 8

QDRO is a decree, order, or property settlement under state law relating to child support, alimony, or marital property rights that assigns all or part of a participant’s plan benefits to alternate payee

Distributions made from a qualified plan to an alternate payee pursuant to a QDRO or other court order are still subject to income tax but are exempt from the 10% premature distribution penalty

An alternate payee who is the former spouse of the participant, and who receives a distribution by reason of a QDRO or other court order, may roll over the distribution in the same manner as if she were the participant (including to her own IRA)

Question 9

ROTH IRA Post-Death Distributions

Answer 9

Generally, the entire interest in the ROTH IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death, unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary