3897 / 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). SECURE 2.0 increased the required beginning date to age 73 starting in 2023.  The SECURE Act also eliminated 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, 2019² (see Q 3892 to Q 3908).

In response to the COVID-19 pandemic, the CARES Act³ 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. 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 3899, 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 3897) 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 3897.

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