Minimum Distribution Rules May Adversely Affect Pensions

Minimum Distribution Rules May Adversely Affect Pensions

TO: NCTR Members

FROM: Cindie Moore, Washington Counsel

RE: Federal Minimum Distribution Rules Applicable to Public and Other Defined Benefit Plans

The minimum distribution rules under IRC Section 401(a)(9) apply to public sector defined benefit plans. Treasury and IRS recently issued final rules on minimum distributions to take effect on January 1, 2003. With respect to minimum distributions from defined benefit plans, however, the agencies issued a temporary regulation and are seeking additional comments. The deadline for comments is July 16, 2002.

Several NCTR members have reviewed the temporary rules and noted several problems, the least of which is a severe limitation on post-retirement benefit increases (COLAs). The New York State Teachers’ Retirement System laid out some of the problems:

1. The temporary rules state that a retired participant’s benefit, once established, may not increase during retirement with a narrow exception. It permits increases in a retiree’s benefit "[w]ith an annual percentage increase that does not exceed the annual percentage increase in a cost-of-living index that is based on prices of all items and issued by the Bureau of Labor Statistics". It is not clear whether this exception would, for example, permit plan provisions that provide for an automatic percentage increase in the retiree's benefit.

2. In addition, there does not appear to be an exception for increases based upon plan investment performance.

3. There also does not appear to be an exception for the payment of a lump sum survivor benefit instead of a periodic payment to the surviving beneficiary, even in situations where providing the lump sum benefit would cost less actuarially than providing the periodic benefit.

4. The temporary rules like the earlier proposed regulations limits the survivor portion of a joint and survivor benefit where the beneficiary is a non-spouse who is more than 10 years younger than the participant. We pointed out that these limits assumed the participant was retiring at age 70 and were not appropriate in the case of plan participants who retire well short of age 70. This comment has not been addressed in the temporary rules.

Regulations and related documents are listed below should you wish to review them.

If you determine that the temporary rules may pose problems beyond the issues discussed above, please let me know (cmoore@nctr.org ; 703-243-1667) or alert Treasury and IRS. In addition, a letter may be sent to Treasury and IRS from various organizations in which issues can be included.

Treasury and IRS Documents

For the Notice of proposed rulemaking by cross-reference to temporary regulations (Reg 108697-02), click here

For the Regulations Effective 1-1-03 (TD 8987), click here.

For the Guidance for Making Required Minimum Distributions (Notice 2002-27), click here.

For the IRS Summary on Regulations Effective 1-1-03 (2002-50), click here.

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Last Update: November 16, 2006