On December 20, 2002, the Internal Revenue Service ("IRS") published two notices and a revenue procedure making several important changes to the minimum required distribution ("MRD") rules.
Background
Section 401(a)(9) of the Internal Revenue Code of 1986, as amended ("Code") provides rules for mandatory minimum distributions from retirement plans qualified under Code sections 401(a) and 403(a). The MRD rules are incorporated by reference in Code sections 408(a)(6) and 408(b)(3) for distributions from IRAs (including for distributions from Roth IRAs that are paid following the death of the Roth IRA owner), in Code section 403(b)(10) for distributions from 403(b) annuity contracts, and in Code section 457(d) for distributions from eligible deferred compensation plans.
In 1987, the IRS issued proposed regulations for MRDs. Over 13 years later, in January 2001, the IRS issued new proposed regulations for MRDs, which were intended to simplify the rules for computing MRDs as compared with the 1987 proposal. As we described in a prior legal alert, in April 2002, the IRS published final regulations, and additional proposed and temporary regulations, for MRDs. In the latest guidance, the IRS revokes some of the earlier guidance that it issued with respect to MRDs, gives a preview of certain changes that it anticipates making in the MRD rules, and provides some transition rules regarding MRDs.
Revenue Procedure 2003-10
In Rev. Proc. 2003-10, the IRS says that defined benefit plans do not need to be amended to comply with the final and temporary MRD regulations until the end of EGTRRA’s remedial amendment period. (As of now, the EGTRRA remedial amendment period for qualified plans extends through the last day of the first plan year beginning on or after January 1, 2005, provided that good faith amendments implementing EGTRRA’s provisions are adopted during the 2002 plan year.) Thus, Rev. Proc. 2002-29, which required that both defined benefit and defined contribution plans be amended to reflect the new MRD regulations by the last day of the first plan year beginning on or after January 1, 2003, is superceded with respect to defined benefit.plans. The postponement does not, however, extend the time specified in Rev. Proc. 2002-29 to amend defined contribution plans to comply with the requirements of Code section 401(a)(9).
In addition, the requirement specified in Rev. Proc. 2002-29 that pre-approved defined benefit plans (such as master and prototype plans and volume submitter plans) be amended by December 31, 2003, is postponed until further notice. Rev. Proc. 2003-10 further provides that determination letters issued for defined benefit plan applications that are submitted on or after the first day of the first plan year beginning on or after January 1, 2003, will consider whether the plan satisfies the statutory requirements of Code section 401(a)(9), but will not take into account the requirements of the final and temporary regulations governing MRDs.
Notice 2003-2
In Notice 2003-2, the IRS provides transitional relief for issues related to defined benefit plans and annuity contracts under the April 2002 proposed and temporary regulations. In the April 2002 regulations, the IRS eliminated the rule that had been in the 1987 and 2001 proposed regulations that allowed a defined benefit plan to make payments in a form other than a nonvariable annuity and satisfy the MRD rules by applying the rules applicable to defined contribution plans. Apparently the IRS received few comments on the 2001 proposal; however, the IRS received numerous comments when the rule was proposed to be eliminated in 2002. Therefore, the Notice indicates that the final MRD rules are expected to include a transition rule that will allow a defined benefit plan to make distributions according to the 1987 or 2001 proposed regulations. The transition rule is also expected to provide that distributions paid under an annuity contract, including an IRA or 403(b) annuity, may satisfy the requirements of either the 2001 or 1987 proposed regulations. The transition rules will apply at least through the end of the calendar year in which final regulations are published.
The temporary regulations issued last April required that the determination of a participant’s interest under an annuity contract include the actuarial value of other benefits, such as minimum survivor benefits, provided under the annuity contract. Notice 2003-2 states that final regulations are expected to provide that the entire interest under an annuity contract may be determined as the dollar amount credited to the employee or beneficiary, without regard to the actuarial value of any other benefits (including minimum survivor benefits) that are provided under the contract.
Finally, Notice 2003-2 says that the final regulations are expected to contain a special effective date by which governmental plans will have to comply with the changes in MRD rules for defined benefit plans or annuity contracts. The special effective date is expected not to be earlier than the first calendar year beginning after the later of (1) the calendar year in which the final regulations are published, or (2) if the governing body with authority to amend the plan does not meet continuously, 90 days after the opening of the first legislative session of the governing body with authority to amend the plan that begins on or after the date final regulations are published.
Except as otherwise provided in Notice 2003-2, taxpayers are required to comply with the final and temporary regulations (including Treas. Reg. § 1.401(a)(9)-6T) for purposes of determining MRDs for calendar years beginning on or after January 1, 2003. The IRS is accepting written comments on the issues addressed in Notice 2003-2 through March 1, 2003.
Notice 2003-3
In Notice 2003-3, the IRS modified the rules concerning reports that trustees are required to make under Notice 2002-27 relating to MRDs from individual retirement accounts and annuities. Among other requirements, Notice 2002-27 requires that, beginning in 2003, the IRA trustee, custodian or issuer must either report the amount of the MRD to the IRA owner or must advise the IRA owner that a MRD is required for the year and offer to calculate the amount of the MRD at the IRA owner’s request. In Notice 2003-3, the IRS says that in the case of an annuity contract under an IRA from which annuity payments have not commenced on an irrevocable basis, the IRA trustee, custodian or issuer may determine the entire interest under the annuity contract as the dollar amount credited to the employee or beneficiary under the annuity contract, without regard to the actuarial value of any other benefits (such as minimum survivor benefits) to be provided under the contract.
Notice 2003-3 also permits the IRA trustee, custodian or issuer to transmit the required MRD notice electronically. For notice of MRDs in 2003, the electronic transmission must comply with a reasonable and good-faith interpretation of applicable law. For calendar years after 2003, a more stringent standard is imposed: the notice of MRD for such future years may be transmitted electronically only if the procedures that apply to the electronic transmission of Forms W-2, and the consent requirements under Code section 6051, are satisfied.
Sutherland Legal Alerts are intended to provide clients with information on recent legal developments, not to render legal advice.
