New Required Minimum Distribution Regulations

The IRS recently issued new proposed regulations modifying the conditions under which trusts may be treated as designated beneficiaries of a participant's interest in a qualified plan. As you may be aware, Section 401(a)(9) of the Code generally provides that a participant in a qualified plan otherthan a five percent owner must begin distributions from a plan by the later of the April 1 following the participant's (a) attainment of age 70Þ and (b) retirement. For five percent owners, distributions must begin by the April 1 following the owner's attainment of age 70Þ. Not only do the regulations require that distributions begin as stated above, but also that a certain minimum amount be distributed from the qualified plan each year. In addition, qualified plan minimum distributions may be paid over the joint life expectancy of a participant and a designated beneficiary. Thus, the designation of a beneficiary may determine both the period over which distributions are to be made and the amount of each required distribution. Prior to the new regulations, the designated beneficiaries of a trust could only be treated as the designated beneficiary of a qualified plan under Section 401(a)(9) if the trust met certain requirements. The requirements were that as of the later of (a) the date on which the trust was named as a beneficiary of the employee's interest in a plan and (b) the employee's required beginning date:

If a trust failed to meet these requirements, the participant was treated as not having a designated beneficiary usually accelerating the rate of distribution from the plan.

The new proposed regulations retain the first two requirements but change requirements (iii) and (iv). First, the new regulations permit a revocable trust to be treated as a designated beneficiary for purposes of determining required minimum distributions under Section 401(a)(9) of the Code, if the trust becomes irrevocable upon the death of the employee. This change allows trusts that are established for estate planning purposes and are revocable prior to an employee's death to be named as designated beneficiaries, provided that they become irrevocable at the employee's death.

In addition, the new proposed regulations permit a trust within a trust to be named as the beneficiary of a plan for purposes of determining the distribution period. In such a case the life expectancy of the beneficiaries of the trust within the trust would be used to determine the distribution period. This "trust within a trust" provision should grant additional flexibility in estate planning.

The new proposed regulations also provide an alternative means of complying with the Substantiation Requirement. An employee may generally meet the Substantiation Requirement by providing to the plan (a) a list of all of the beneficiaries of the trust and the terms and conditions under which each beneficiary is entitled to benefit and (b) an acknowledgment that the list is correct and complete and that the other requirements for a trust to be a designated beneficiary have been satisfied. The new proposed regulations provide relief to a plan administrator in the event that there is a discrepancy between the trust instrument and an employee certification. Alternatively, an employee may continue to satisfy the Substantiation Require-ment by providing a copy of the trust instrument and any subsequent amendments thereto.

These new distribution rules present unique opportunities for distribution planning for individuals with large qualified plan account balances.