4080 / What minimum distributions requirements apply under Section 401(a)(9) during the life of a tax sheltered annuity participant if distributions are made as annuity payments?
Regulations under Section 401(a)(9) govern annuity distributions from Section 403(b) plans.1 Under those regulations, annuity distributions must be periodic payments made at least annually, for a life or lives, or over a period certain not longer than a life expectancy or a joint and survivor life expectancy of the participant or the participant and a beneficiary, as set forth in the IRC’s provisions for lifetime and after death distributions ( Q 3896).2 The annuity also may be a life annuity with a period certain, as long as the life or lives and period certain each meet the foregoing requirements.3 The distribution of an annuity contract is not a distribution for purposes of meeting the required minimum distribution requirements of IRC
Section 401(a)(9).4
Commencement of Distributions
Distributions from an annuity contract must begin on or before the participant’s required beginning date. The first payment must be the payment that is required for one payment interval. Regulations state that the second payment need not be made until the end of the next payment interval, even if the interval ends in the next calendar year. Examples of payment intervals include monthly, bimonthly, semi-annually, and annually.5
All benefit accruals as of the last day of the first distribution calendar year must be included in the calculation of the amount of the life annuity payments for payment intervals ending on or after the participant’s required beginning date.6
Exceptions to Nonincreasing Annuity Requirement
Except as otherwise provided, annuity payments must be nonincreasing, or increase only in accordance with the following:
(1) an annual percentage not exceeding that of an eligible cost-of-living index, for example, one issued by the Bureau of Labor Statistics or certain others defined in the regulations;
(2) a percentage increase that occurs at specified times or specified ages and does not exceed the cumulative total of annual percentage increases in an eligible cost of living index (see (1)) since the annuity starting date;
(3) increases to the extent of the reduction in the amount of the employee’s payments to provide for a survivor benefit upon death (if a beneficiary dies or is no longer subject to a QDRO, see Q 3915);
(4) increases that result from a plan amendment; or
(5) increases to allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single sum distribution on the employee’s death.7
Additional Permitted Increases
If the total future expected payments from an annuity purchased from an insurance company exceed the total value being annuitized, payments under the annuity will not fail to satisfy the nonincreasing payment requirement merely because the payments are increased in accordance with one or more of the following:
(1) by a constant percentage, applied not less frequently than annually;
(2) to provide a final payment on the employee’s death that does not exceed the excess of the total value being annuitized over the total of payments before the death of the employee;
(3) as a result of dividend payments or other payments resulting from certain actuarial gains; and
(4) an acceleration of payments under the annuity (as defined in the regulations).8
Period Certain Limit
The period certain for annuity distributions commencing during the life of a participant,
with an annuity starting date on or after the required beginning date, may not exceed the
Uniform Lifetime Table. If a participant’s spouse is the sole beneficiary as of the annuity starting date and the annuity provides only a period certain and no life annuity, the period certain may be as long as the joint and survivor life expectancy of the participant and spouse based on their ages as of their birthdays in the calendar year that contains the annuity starting date.9
The IRS privately ruled under the 1987 Regulations that an IRC Section 403(b) annuity contract that offered a settlement option under which the retirement benefit payment was determined in accordance with the individual account rules, that is, the nonannuity payments rule, and provided for nonlevel retirement income benefits satisfied the minimum distribution
rules.10
1. TD 9130, 2004-26 IRB 1082.
2. Treas. Reg. §§ 1.401(a)(9)-6, A-1(a); 1.401(a)(9)-6, A-3; IRC § 401(a)(9)(A).
3. Treas. Reg. § 1.401(a)(9)-6, A-1(b).
4. Treas. Reg. § 1.401(a)(9)-8, A-10.
5. Treas. Reg. § 1.401(a)(9)-6, A-1(c).
6. Treas. Reg. § 1.401(a)(9)-6, A-1(c)(1).
7. Treas. Reg. § 1.401(a)(9)-6, A-14(a).
8. Treas. Reg. §§ 1.401(a)(9)-6, A-14(c), 1.401(a)(9)-6, A-14(e).
9. Treas. Reg. § 1.401(a)(9)-6, A-3(a).
10. Let. Rul. 9128035.