4082 / What is the minimum distribution incidental benefit requirement with respect to tax sheltered annuities?

The minimum distribution incidental benefit (“MDIB”) requirement constitutes a second set of minimum distribution rules that must be considered in determining the minimum amount required to be distributed during a participant’s lifetime.¹ The MDIB rules apply to the pre-1987 account balance as well as the post-1986 balance. The reason they apply to the pre-1987 account balance, while the minimum distribution rules under IRC Section 401(a)(9) do not, is that unlike those requirements, the incidental benefit rule existed in regulations for many years before it was enacted into the IRC in 1986 and amounts accumulated before 1987 were subject to its requirements. Regulations under IRC Section 403(b) required that the death benefit under a tax sheltered annuity be merely incidental to its primary purpose of providing retirement benefits.

In 2007, regulations under Section 403(b) were finalized that briefly addressed the application of the older MDIB rule. These regulations took effect after 2008.² They generally restated rules contained in earlier regulations, to the effect that the post-1986 balance is subject to the IRC Section 401(a)(9) regulations and that both the pre-1987 balance and the post-1986 balance are subject to the MDIB rule ( Q 4075).³

The 2007 regulations do not interpret the old MDIB rule but describe two ways it can be satisfied. First, distributions attributable to the pre-1987 account balance are treated as satisfying the MDIB requirement if all distributions from a Section 403(b) contract, including distributions attributable to the post-1986 account balance, satisfy the requirements of Treasury Regulation Section 1.401-1(b)(1)(i) (which the regulations cite as authority for the old MDIB rule) without regard to whether distributions under the 2002 regulations and distributions from the post-1986 account satisfy the requirements of IRC Section 401(a)(9).⁴

Second, and in the alternative, distributions attributable to the pre-1987 account will be treated as satisfying the MDIB requirement if all distributions from the contract, whether pre-1987 or post-1986 amounts, satisfy the regulations under IRC Section 401(a)(9).⁵

Under much earlier rulings, the old rule generally was interpreted as requiring a distribution arrangement under which the present value of the aggregate payments to be made to the participant must be more than 50 percent of the present value of the total payments to be made to the participant and his or her beneficiaries.⁶ The old rules generally required that
distributions commence by age 75.⁷ It would appear that the old rules may continue to apply in determining distributions required from the pre-1987 balance.⁸ Of course, nothing would prevent a participant from choosing to apply the Section 401(a)(9) rules.⁹

Final 2002 regulations state that if distributions are made in accordance with the individual account rules set forth therein ( Q 4078), the MDIB requirement will be satisfied.¹⁰