4078 / What minimum distributions must be made under Section 401(a)(9) from a tax sheltered annuity during the life of the participant?

If a post-1986 account balance is not totally distributed to a participant by the required beginning date, distributions of the balance must begin by that date and must, at a minimum, be distributed over one of the following periods: the life of the participant, the lives of the participant and the beneficiary, or a period not extending beyond the life expectancy of the participant or the life expectancy of the participant and a designated beneficiary.¹ If the issuer or custodian of the account does not keep adequate records to distinguish between pre-1987 and post-1986 balances, the entire account will be treated as subject to IRC Section 401(a)(9).²

The minimum distribution requirements include regulations finalized in 2002.³ Additional regulations finalized in 2004 govern annuity distributions under Section 403(b) plans.⁴ Regulations finalized in 2007 apply to distributions after 2008.⁵

The Pension Protection Act of 2006 called for regulations that would provide that governmental plans are subject to a reasonable, good faith interpretation of the minimum distribution requirements.⁶ This same standard is applicable under earlier guidance and compliance with the 2002 regulations, the 2001 regulations, or the 1987 regulations will be considered to meet that standard.⁷

A participant’s required beginning date is April 1 of the calendar year following the later of the calendar year in which the participant attains age 73 (72 in 2020-2022) or the calendar year in which the participant retires.⁸ For any part of a Section 403(b) contract that is not part of a government plan or church plan, regulations state that the required beginning date for a 5 percent owner is April 1 of the calendar year following the calendar year in which the employee reaches age 73.⁹

Under 2002 regulations (as under earlier guidance), a plan is permitted to provide that the required beginning date for all participants is April 1 of the calendar year following the calendar year in which the participant attains age 72.¹⁰ Governmental or church plan participants are permitted under the IRC to delay distributions until April 1 of the calendar year following the later of the year in which the participant retires or turns 72; consequently, this provision is not applicable to them.¹¹

A distribution for the calendar year a participant becomes age 73 or retires, if applicable, must be made by April 1 of the following calendar year. The distribution for each calendar year after the year the participant becomes 73 or retires, if applicable, must be made by December 31 of that year. Thus, it is possible that distributions for the calendar year in which a participant becomes 73 or retires and the following calendar year will be made in the same calendar year.

Account Balance

For purposes of calculating minimum distributions, the account balance is determined as of the last valuation date in the immediately preceding calendar year, that is, the valuation calendar year. The account balance does not include the value of any QLAC held under the plan on or after July 2, 2014.¹² Distributions in excess of the amount required in one year may not be used to reduce the amount required in subsequent years.¹³