Inherited 403(b), death 2020, gov’t plan per 414(d), splits to some beneficiaries in 2021. Who/how is their 2021 RMD calculated?
Background: 403(b) was inherited in 2020. RMD’s had already begun. Beneficiaries are not EDB’s. Plan fits 414(d) definition of gov’t plan (and also collectively bargained agreement), and therefore this death before 1/1/2022 means stretch RMD’s apply rather than 10-year rule. Year-of-death RMD wasn’t needed, due to 2020 RMD cancellation by law.
Account was to be divided to multiple beneficiaries. Custodian opened most of those accounts in 2020, and transferred the funds. But one beneficiary was still 17, and the custodian opted to delay opening that account until he was 18 (in mid-2021). So, those remaining funds were still in the decedent’s account at the end of 2020.
Clearly, each of the 2020 beneficiaries should take a 2021 RMD based on the value in their accounts as of 12/31/20, and their own life expectancy calculations.
But what about the 2021 beneficiary? Custodian isn’t showing a 2021 RMD due for him, since beneficiary had no balance on 12/31/20 (account was opened in middle of 2021). It seems like estate could have taken a 2021 RMD before emptying itself completely into the 2021 beneficiary’s account, but it didn’t, and custodian hadn’t offered that.
Now what? Is somebody on the hook for that 2021 RMD, and if so, who, and based on what calculation? Based on 12/31/20 balance in decedent’s account? Based on whose life expectancy? If it was the estate’s responsibility (to take based on whose life expectancy? The deceased person, or the anticipated beneficiary’s?), can the 2021 beneficiary be held liable for it not having happened, despite his own account having not existed on 12/31/20, and custodian claiming he owes no 2021 RMD? If not, can anyone be held liable, long after the decedent’s estate has closed?
That is, how are year-after-death RMD’s computed when the account wasn’t emptied until sometime in the year after death?
Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-08 23:11
IRS Reg 1.401(a)(9)-8 is linked below, to which I will add my own personal opinion:
26 CFR § 1.401(a)(9)-8 – Special rules. | CFR | US Law | LII / Legal Information Institute (cornell.edu)
The separate account rules in the above Reg clearly apply to the separate accounts created for beneficiaries other than the minor, whose benefit remained in the 403b. It should’t matter whether these other beneficiaries had separate accounts (or accounting) within the 403b, or whether their shares were directly rolled into individual inherited IRAs. Either way, once all the other beneficiaries became subject to separate accounting, the remaining minor beneficiary should also be treated as having a separate account by default. In my opinion it follows that the minor’s annual RMDs should also be based on his own single LE starting in 2021 just like the others. The Secure Act did not change the separate account rules for designated beneficiaries, and this death was pre Secure as you indicated. It makes no sense that the plan administrator is not indicating an RMD using any calculation method since death was post RBD and the 5 year rule would therefore not apply with any interpretation by the plan.
The 12/31/2020 balance in the decedent’s account was solely for the benefit of this minor beneficiary, so it would be easy to calculate the minor’s 2021 beneficiary RMD. The decedent’s estate would have no responsibility for the RMD of designated beneficiaries, but there is a joint responsibility on the part of the plan to comply with 401(a)(9), and also on the part of the plan beneficiary. While the formerly minor beneficiary could easily secure a penalty waiver with a proper 5329 if the 2021 RMD was not distributed by year end, the former minor should determine the RMD as indicated and request a distribution of that amount ASAP. If the distribution is not made by year end, this beneficiary cannot file a 5329 for 2021 until the 2021 RMD, however late, is actually distributed, but as soon as it is the beneficiary should file the 5329 requesting the penalty waiver. This beneficiary should also consider a direct rollover to an inherited IRA under which LE RMDs would continue after resetting the divisor to reflect the new 2022 RMD tables.
Permalink Submitted by aldem on Thu, 2021-12-09 01:32
Thanks for the separate account rules. I will study those shortly.
To your last point: Why should this beneficiary consider a direct rollover to an inherited IRA? Are you suggesting that LE RMD’s will NOT continue in the inherited 403(b) after the 2022 divisor reset occurs? (And, if you are suggesting that, wouldn’t the same also be true for all the other beneficiaries, whose accounts opened in 2020?)
(This 403(b) is invested favorably in a way that would be lost by rolling into an IRA, and so we are hoping to not have to move any money out beyond the RMD’s.)
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-09 02:06
Typical benefits of an inherited IRA v. inherited qualified plan would be better control of investment options, custodians not mishandling RMD issues (403b could force out distributions, IRA custodian cannot), and avoiding possible lump sum distributions to beneficiary’s beneficiary. However, these benefits may be more than offset by specific advantages of remaining with the plan. RMDs would continue to be the same either way, but in this particular case the plan has already mishandled the RMD and beneficiary may or may not be able to appeal their decision, which so far is to under state the RMD.
If the 403b investment options are considered superior, that could trump other disadvantages on a case by case situation.
Permalink Submitted by aldem on Thu, 2021-12-09 01:36
You said “it makes no sense the plan administrator is not indicating an RMD using any calculation method.” I was thinking they might be using the 10-year-rule calculation method (despite that this shouldn’t apply to this account due to its government status). Does that seem plausible? In any event, that would be incorrect of them.
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-09 02:12
Yes, thinking that this plan is subject to the beneficiary provisions of the Secure Act is the only explanation for no RMD indicated whatever, and Secure does not apply to beneficiary RMDs for the govt plan.
Permalink Submitted by aldem on Thu, 2021-12-09 01:40
Let’s say he doesn’t do a 2021 RMD (i.e. he follows the lead of the administrator who says there isn’t one). Let’s say later we determine that was an error. The penalty is…50% of the missed 2021 RMD, once ever? Or 50% of the missed 2021 RMD repeated every single year until the 2021 RMD is finally taken?
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-09 03:27
Just one time, but with these circumstances the IRS would almost certainly waive the penalty with a properly filed 5329. And IRS oversight of beneficiary RMDs is almost non existent.
Permalink Submitted by aldem on Thu, 2021-12-09 03:08
I’ve now read through the separate account rules there, plus at https://www.thetaxadviser.com/issues/2011/mar/burilovich-mar11.html , and have a slightly better understanding of that now, including that I now think the concept of separated accounts is that they’re still tied to a single original plan and there is still responsibility overall for that plan regarding RMD’s.
And, your point makes sense, that it was clear that the whole balance on 12/31/20 was intended for that final beneficiary.
Even if I can’t get the administrator to acknowledge that there should be a 2021 RMD for this final beneficiary, if we instead just compute RMD based on 12/31/20 FMV in the decedent’s account and the final beneficiary’s LE, and ask the administrator to make a distribution in that amount, that’s the same result, right? The only thing that’s ever reported is that a distribution was made in this amount, not whether it was actually the computed RMD amount, right? (As far as I understand, even FMV of 403(b)’s isn’t reported to the IRS, right?)
The fact that the beneficiary was a minor on 12/31/20 ought to be irrelevant to this, right?
Now, I might then discover in 2022 that they’re not offering him a 2022 RMD either, which would point to that the reason they hadn’t offered a 2021 RMD was not because of the absence of his separated account on 12/31/20, but that they thought this particular beneficiary should be subject to 10-year rule (despite that they hadn’t set the other beneficiaries in the same plan to such), and then I guess that’s a hassle to resolve with them.
But as long as they don’t stop him from taking voluntary distributions in amounts he computes, and as long as they don’t force out a full distribution in 10 years, he should be able to keep the RMD’s going as expected, and there’s no other possible catch, is there? (Considering how little reporting there is of 403(b) details besides those annual distributions.)
Thanks for your elaboration on IRA advantages over 403(b)’s. In this case, the investment option in the 403(b) is favorable and not otherwise available.
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-09 03:48
Your 3rd bullet points – all correct. A distribution not intended to be an RMD by the plan will still satisfy the RMD if it turns out an RMD was required.
4th point – correct, minor status is irrelevant. Minors are not exempt from RMDs.
5th point – it appears to me that there is no one explanation for this plan’s RMD inconsistency. Who is actually serving as the administrator of this plan?
6th – as long as the beneficiary can receive the distributions he believes are the correct RMDs, there should not be a problem. But if there is any possibility that they think the 10 year rule applies, beneficiary would need to do a direct rollover to an inherited IRA in year 9 because once the plan makes any unwelcome distribution it would not be rollover eligible.
Permalink Submitted by aldem on Thu, 2021-12-09 04:36
5th point: My first theory is that these account separations happened at two points in time: The first ones in 2020, and the last one in mid-2021, and that a different person simply made a different designation in their system at each time, and that it’s only a coincidence that the first designations (with RMD’s) agrees with our interpretation of the SECURE Act. My second theory is that their system simply looks at FMV from prior year of the beneficiary account, and since there was no account yet on 12/31/20, their system is too dumb to use the decedent’s account’s FMV instead. I’m predicting that come January, one theory will be knocked out and the other will remain (depending on whether they show an RMD option for 2022 or not).
6th point: So, you’re saying that the beneficiary should be prepared to rollover to an inherited IRA, since then he could continue to take LE RMD’s (if he still wants to after losing the favorable investment of this 403(b))? But only if there’s some worry that the administrator would autonomously decide to distribute in year 10. But I believe you’ve said previously, that regardless of their particular policy (which currently seems to be to ask us before taking any distributions), as a 403(b) administrator, they always have the right to force a distribution?
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-09 15:42
Yes, they could always force out a distribution, correct or incorrect. If the recipient was the participant and correctly believed it was not an RMD, they could roll it over. The problem here is that a non spouse beneficiary cannot roll over an incorrect distribution, so they would need to act before the plan administrator believed a given year was an RMD year. If the plan thought the 10 year rule applied, the beneficiary would have to do the direct rollover prior to the start of year 10.