Ian Berger, JD
In the May 17, 2021 Slott Report, we discussed the rules governing required minimum distributions (RMDs) from defined benefit (DB) plans, also known as “pension plans.” We said that DB plan payments usually have no problem satisfying the RMD rules, but there are two special rules that sometimes apply.
One special rule kicks in when someone elects a “joint and survivor annuity” with a non-spouse beneficiary more than 10 years younger. (A joint and survivor annuity is an annuity payable over the participant’s lifetime and, if the beneficiary outlives the participant, continues over the beneficiary’s remaining lifetime.) When the beneficiary is more than 10 years younger than the participant, the survivor benefit cannot exceed a certain percentage of the amount payable to the participant. The maximum percentages are based on the age differences between the participant and the survivor and are set forth in an IRS table. The May 17 Slott Report has an example of how this works.
The second special rule applies when a DB lump sum payment is made in a year when an RMD is required. This often happens when a company with a pension plan offers a “lump sum buyout” to retirees. In a lump sum buyout, the retiree is given a limited opportunity to elect a lump sum payment in exchange for giving up future periodic payments.
In that situation, the portion of the lump sum that is an RMD cannot be rolled over. A DB plan can calculate the portion of the lump sum that is an RMD in one of two ways. The first is by using the defined contribution plan/IRA RMD rules and treating the lump sum amount as the retiree’s account balance as of the previous December 31. The second is to treat one year of annuity payments as the portion of the lump sum that is an RMD.
Example: Savannah, age 74, is a DB plan retiree receiving monthly annuity payments of $2,000. In 2021, Savannah’s former employer offers her a lump sum of $300,000, which she accepts. If the plan calculates Savannah’s 2021 RMD using the defined contribution plan/IRA plan rules, her RMD would be $12,605 ($300,000 / 23.8). Savannah could roll over $287,395 ($300,000 – $12,605). If the plan calculates her RMD using the alternative method, the 2021 RMD would be $24,000 ($2,000 x 12), and Savannah could roll over $276,000 ($300,000 – $24,000).