Inherited 403b from public school teacher, died in 2020, not to EDB: 10-year rule or Life Expectancy RMD’s?
The facts:
– Original 403b account holder died after passing required beginning date, had begun taking RMD’s
– Employee passed away in 2020
– Beneficiary who inherited is not an eligible designated beneficiary (i.e. not spouse, disabled, chronically ill, minor, or within 10 years of age of original owner)
– Employee was a public school teacher (i.e. worked for the state)
– 403b plan is associated with teacher’s public school district (which is in the title of the plan)
– I know that the new 10-year rule for inherited plans goes into effect for deaths that happened 1/1/20 and later.
– I also know that for “government plans” and “collectively bargained plans,” the 10-year rule doesn’t going into effect until deaths that happened 1/1/22 and later.
The question:
– Is this public school teacher’s plan considered a “government plan” for purposes of the 2-year delay in 10-year rule applying? Or does the 2-year delay only apply to TSP’s and 457 plans?
I’ve found some online sources (including one from a public school district) suggest the public-school-related 403b does get the 2-year delay, and thus never applies for public school 403b’s where the employee died in 2020 or 2021.
The IRS says these plans get the delayed effective date for deaths: “IRC Section 414(d) governmental plan, collectively bargained plan, or in other special circumstances.”
414(d) says, in part:
“(d) Governmental plan
…the term “governmental plan” means a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. … “
I think there’s no question that a public school teacher’s employee was the government of the state (or subdivision, etc.). The question is, is the 403(b) plan, administered by the big retirement/annuity company, considered a plan “established and maintained for its employees”? If yes, then it seems clear that this 403(b) plan is exempt from the 10-year rule if the employee died in 2020 or 2021.
Additionally, I would also like to get clarification: For a plan that DOES have this delayed applicability (whether the one I’m asking about does or doesn’t), that would mean that a death that occurs in 2020 or 2021 would get to use Stretch RMD’s for the lifetime of the beneficiary, correct? Some sources online seem to incorrectly suggest that, beginning in 2022, those recipients from the account owner who’d died prior to 2022 would have to switch over to the 10-year rule. I believe that’s incorrect, and that the correct reading is that deaths in 2020 or 2021 for “government plans” completely bypass the new 10-year rule. Am I right?
For what it’s worth, a worker at my plan administrator’s company claimed this plan is subject to the new 10-year rule, because “it’s not a government plan.” But then, the plan administrator sent me a “you have to take the following $x annual RMD” notice. So, I’d like to figure out what the actual legal reality is.
Thanks very much!
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-19 23:15
If the employee worked for the state, the 403b is a govt plan and pre Secure Act rules apply in determining the beneficiary RMD requirements. The beneficiary is entitled to the life expectancy stretch using Table I. There is no RMD change made in 2022 or any later year as long as the beneficiary lives, although new RMD tables will apply starting in 2022.
Permalink Submitted by aldem on Sat, 2021-11-20 00:40
Thanks! Does it seem solid to assume that any public school teacher worked for the state?It seems like the plan administrating company would have to have a determination on this, yes? I.e. They would surely need to flag the account one way or the other. Should their opinion thus be considered authoritative?
Permalink Submitted by Alan - IRA critic on Sat, 2021-11-20 03:05
Yes, 414(d) as you quoted defines a govt plan for purposes of the Secure Act. A plan administrator may not be recognizing all the facts. Is this particular school funded through tax dollars? If so, that should indicate a govt plan. Should a plan administrator force out an RMD incorrectly, the distribution is not a statutory RMD, and a plan owner can roll that distribution over. Unfortunately, a non spouse beneficiary cannot roll over a distribution, however that beneficiary can still request a direct rollover to an inherited IRA from which the IRA custodian is not able to force out distributions. Is the beneficiary’s remaining LE considerably longer than 10 years? Sometimes the distribution flexibility of the 10 year rule is worth more than a rigid RMD even when a LE RMD would stretch the plan for a few more years. Finally, note that the beneficiary is also eligible to convert the plan to an inherited Roth IRA to take advantage of a low tax year, as long as this is done while the balance is still in the 403b.
Permalink Submitted by aldem on Sat, 2021-11-20 20:27
Thanks, those are good points. 1) I’m sure the school is funded through tax dollars. It’s an ordinary public school, in New York state, with no admissions fee or anything like that. 2) The plan administrator isn’t “forcing” the RMD, but merely claiming that the RMD should happen. They won’t actually do it without the beneficiary taking their recommended action. 3) The beneficiary’s LE is considerably longer than 10 years. 4) The account earns a very favorable guaranteed rate of interest; hence, it would be more desireable to leave it in longer, over the beneficiary LE. 5) I thus also wouldn’t want to have to roll anything over, because then that money would be out of the favorable high-interest investment forever. I think an inherited IRA or Roth IRA would no longer be invested in that special fund. 6) So, if the plan administrator might not be recognizing all the facts…who will? Who is the ultimate arbiter? If it’s not up to them to note which accounts go with which rules, then is it just a matter of the IRS auditing the beneficiary’s return(s) at some point down the line and trying to make a determination based on facts? Thanks a lot for this discussion.