KEYWORD:

EMPLOYEE BENEFITS MEMORANDUM

Date:	January 5, 1998
Re:	Section 401(a)(9) Required Distribution Rules

There are times when you've got to love them.

As part of the Small Business Job Protection Act of 1996 Congress amended the minimum required distribution rules under Section 401(a)(9) of the Internal Revenue Code to eliminate the requirement that distributions commence before retirement. Stated differently, the "required beginning date" for distributions is now April 1 following the later of attainment of age 70 1/2 or retirement. The change took effect on January 1, 1997. It does not -- nor does anything that I say in the rest of this letter -- apply to 5% owners.

The conventional wisdom has been that this is a simplification of the rules. Certainly, the drafters of this change intended for it to be a simplification.

But look at what has happened.

• IRS issues Notice 96-67 saying that, for employees who turned age 70 1/2 in 1996, and who didn't retire in 1996, their required beginning date is determined under the new rules even though they reached age 70 1/2 before the changes took effect.
• IRS issues Announcement 97-24 saying that, for employees who turn age 70 1/2 after 1995, a plan may offer them the option to postpone the receipt of their benefits until retirement. The announcement leaves open how to eliminate or stop minimum required distributions that are currently being paid.
• IRS issues Announcement 97-70 saying that, in addition to offering employees who turned age 70 1/2 in 1996 the option to postpone the receipt of benefits, a plan may of its own accord skip the 1997 distribution so long as a make-up distribution is made when the employee finally retires.
• IRS issues proposed regulations saying that a plan cannot eliminate the option to receive in-service distributions at April 1 of the year following attainment of age 70 1/2 for employees who turn age 70 1/2 on or before January 1, 1999. The thinking is that older employees may be counting on these distributions. For employees who reach age 70 1/2 after that date, a plan may eliminate in-service distributions altogether.
• IRS issues Revenue Procedure 97-41 saying that amendments for all of these Section 401(a)(9) changes must be made no later than the end of the plan year beginning on or after January 1, 1999.
• IRS issues Notice 97-75 (the most recent guidance on Section 401(a)(9) and the immediate impetus for this letter) saying as follows:

1. If a defined benefit plan delays required minimum distributions until retirement the plan must actuarially increase the benefit, offset by any actuarial increases that the plan already gives for late retirement. Continued accruals after age 70 1/2 may also be offset by the actuarial increases required under the Notice. None of this actuarial increase stuff applies to defined contribution plans.

2. For employees who are currently receiving required minimum distributions you may offer them the option to stop receiving benefits using one of two methods. Under method A, you can allow employees to stop distributions and restart them at retirement, without having to reobtain spousal consent, only if (a) distributions resume in the same form at retirement and with the same beneficiary, (b) the spouse executed a general, as opposed to a specific, spousal consent, or (c), the spouse executed a specific spousal consent and is not the spouse at the time benefits recommence. Under method B, you will need to get spousal consent to stop benefit payments if the payments are being made in the form of a qualified joint and survivor annuity. When distributions recommence you will need to reobtain spousal consent. And if the employee dies before recommencement of benefits the plan will have to provide a qualified preretirement survivor annuity unless that benefit has been properly waived. Neither one of these methods can be described as user-friendly, which may cause you to leave well enough alone and continue making distributions to the group of employees who were receiving them at the time the law changed.
3. You have the option to ignore (for the most part) all of the Section 401(a)(9) simplifications and continue to maintain and operate your plan just as you did before the law changed. In other words, the plan can continue to provide that minimum required distributions will begin by April 1 of the calendar year following the year in which an employee reaches age 70 1/2. If you do this, however, the date for fixing an employee's designated beneficiary and recalculation of life expectancy options will be the date on which your plan requires distributions to begin, not the date on which they are legally required to begin. This has important estate planning consequences for your plan's participants.

Note that, under Internal Revenue Code Section 403(b)(10), these same rules apply for the most part to tax deferred annuity programs.

We do not mean to make light of the Section 401(a)(9) rules or Congress' recent effort to simplify the rules. The simplifications are a step forward. But they are also serve as an example of how difficult it can sometimes be to unwind the overly complex set of rules that govern the private pension system.

The only recommendation that we can, or should, give at this point is to study these rules and make a management decision how much, or little, of the new simplification provisions you want to take advantage of.