How Do RMDs Work in DB Plans?
By Ian Berger, JD
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Rules governing defined benefit (DB) plans are typically more complicated than defined contribution (DC) plan rules. But required minimum distributions (RMDs) are one area where the DB plan requirements are easier to understand.
If you’re in a DB plan, your benefit payments must begin no later than your “required beginning date” (RBD) – just like with IRA distributions or DC plan benefits. Your RBD is generally the April 1 following the year you reach age 72. However, if your DB plan allows the “still-working exception,” you can delay your RBD until you retire.
As a practical matter, most DB plan benefits begin at one of three dates; (1) the plan’s “early retirement date” (often age 55); (2) the plan’s “normal retirement date” (often age 65); or (3) the actual retirement date, for folks who work past their normal retirement date. So, most DB benefit payments automatically satisfy the RBD requirement.
Unlike in DC plans, DB plan participants don’t have individual accounts. So, the RMD in a DB plan isn’t calculated by dividing an account balance by life expectancy. Instead, DB plans satisfy the RMD rules if benefits are made in periodic payments over the life of the participant or the joint lives of the participant and a beneficiary, and the benefit amount doesn’t increase. (There’s an exception for cost-of-living increases.)
In just about every case, DB benefits are paid exactly that way. They are usually paid monthly, and participants can choose between a “single life annuity” (an annuity over the participant’s life only) or a “joint and survivor annuity” (an annuity over the participant’s life and, if the beneficiary outlives the participant, over the beneficiary’s remaining life).
This explains why the RMD rules are usually no big deal for DB plans.
There are, however, two RMD DB plan rules that are a little tricky. One rule kicks in when someone elects a joint and survivor annuity with a non-spouse beneficiary more than 10 years younger. In that case, the survivor’s benefit cannot exceed a certain percentage of the amount payable to the participant. The maximum percentages are set forth in an IRS table.
Example: Chloe retires at age 70 and elects a joint and 75% survivor annuity with her son, age 45, as beneficiary. Under that annuity, Chloe will receive payments over her lifetime and, if her son outlives her, he will receive 75% of that amount over his remaining lifetime. Because of the 25-year age difference, however, the plan cannot pay Chloe a joint and survivor annuity that provides a survivor benefit more than 66% of the benefit she will receive during her lifetime. Chloe will have to choose a different type of annuity.
The second rule applies when a DB lump sum payment is paid when an RMD is due. We’ll tackle that rule in a future Slott Report.
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