After months of delay

IRS Issues Final Regulations under Section 401(a)(9)

After months of delay, the IRS has finally issued final regulations under Section 401(a)(9). These finalize proposed regulations that had been issued in January, 2001. Those proposed regulations had superceded proposed regulations originally issued in 1987.

The final regulations are officially effective as of January 1, 2003. However, they can be used for computing 2002 minimum required distributions. One also has the option of using the 2001 proposed regulations or the 1987 proposed regulations to compute the 2002 minimum required distribution. For most people, the final regs will result in the lowest minimum required distribution.

The following is a short, by no means exhaustive, summary of changes and clarifications made in the final regulations, as compared to the 2001 proposed regs.

–The computation of the life expectancy divisor after the death of the spouse beneficiary has been corrected. In the 2001 regs, if the spouse was the beneficiary after the account holder’s death, and did not do a spousal rollover, the divisor in the year of spouse’s death was used again in the following year. The final regs clarify that in the following year, the year of death divisor is reduced by one.

–The final regs have a new mortality table, as mandated by EGTRRA. Under the new uniform distribution table, the age 70 divisor changes from 26.2 to 27.4, and the year 71 divisor changes from 25.3 to 26.5. The divisors for the other ages are adjusted as well. The larger divisor results in a lower minimum required distribution. Single life divisors that are used by beneficiaries are changed as well, as well as the joint life tables used when the spouse is more than ten years younger and is the sole beneficiary.

–The new mortality tables can also be used when computing pre 59½ substantially equal payments.

–The designated beneficiary of the account will be determined as of September 30^th of the year after the year of the account holder’s death, rather than December 31^st as stated in the 2001 proposed regs. Also, if the designated beneficiary dies between the account holder’s date of death and the September 30^th determination date, then that beneficiary will still be the measuring life for post-death minimum required distributions.

–One can still disclaim in order to move a contingent beneficiary into a designated beneficiary, and use that new designated beneficiary’s life expectancy as the measuring life. However, the disclaimer must be valid under Section 2518.

–The final regs clarifies that beneficiaries can be removed by disclaimer or payout, but they cannot be added. Therefore, the final regs clarify that you cannot look through an estate to get a designated beneficiary.

–The final regs confirms that if a trust is a beneficiary, all beneficiaries of the trust are considered in determining the beneficiary with the shortest life expectancy. An individual whose benefit is contingent upon another beneficiary dying prior to the payout of the entire plan balance is ignored. However, a beneficiary whose benefit is merely postponed until the death of another beneficiary is not ignored. An example, is the remainder beneficiary of a trust where another individual is only entitled to the income.

–In order to qualify a beneficiary of a trust as a designated beneficiary, the documentation required by the regs has to be provided to the plan administrator or IRA custodian by October 31^st of the year after the year of the account holder’s death. However, since some people may have missed the old deadline when the IRS changed the 1987 regs to permit revocable trusts as beneficiaries, there is a transition rule that allows the trust documentation to be provided by October 31, 2003.

–As stated in the 2001 regs, when death occurs before the required beginning date, the default is for the designated beneficiary to use his or her life expectancy, rather than the five year rule which was the default under the 1987 regs. The final regs permit a beneficiary who defaulted to the five year rule under the 1987 regs to switch to the life expectancy method provided that any missed minimum required distributions are taken by the earlier of December 31, 2003 or the end of the fifth year after the account holder’s death.

–The 2001 regs stated that when death occurred after the required beginning date, post-death distributions would be made over the life expectancy of the designated beneficiary. The final regs state that the distribution period will be the LONGER of the life expectancy of the designated beneficiary, or the deceased account holder. Thus, if the beneficiary is older than the account holder, the final regs actually provide a longer payout than the proposed regs did.

–Section 645 permits a revocable trust to be treated as an estate for income tax purposes. This election will not be effective for Section 401(a)(9) as long as the trust is still treated as a trust under state law.

–The final regs clarify that accounts with multiple beneficiaries can be split after death so that each separate account will have one designated beneficiary for that account.

–The final regs clarify that a spouse can take a distribution and roll that distribution (except for any part that is a minimum required distribution) into her own IRA within 60 days.

–In order to ease the minimum required distribution computation, the regs will determine marital status as of January 1 of the distribution year. Any change in marital status subsequent to that date will not be reflected until the following year. Similarly, if the beneficiary of the account is changed due to the death of the spouse-beneficiary, that will not be reflected until the following year.

–Contributions after the end of the year (a prior year’s IRA contribution made between 1/1 and 4/15 of the age 70½ year), or a distribution after the end of the year (the first distribution taken between 1/1 and 4/1 of the year after the account holder attains 70½) will no longer be reflected in the computation of the subsequent year’s minimum required distribution. However, rollovers and recharacterizations will still be reflected.

–A trustee to trustee IRA transfer after age 70½ will no longer require the transferor to retain the minimum required distribution for that account. This now conforms the transfer rule with IRS Notice 88-38 which allows an IRA holder to take the minimum required distribution from any IRA account or accounts.

--Starting in 2003, IRA custodians must either notify IRA holders of the amount of their minimum required distribution, or offer to compute it for the IRA holder on request. Starting in 2004, the custodian will notify the IRS that a minimum distribution is required for an account. These reporting requirements are only applicable when the IRA holder is alive. There is no reporting requirements, at this time, for inherited IRAs.