Distributions

<div class="Section1"><br /> <br /> If an individual has more than one tax sheltered annuity, each must meet the requirements separately. However, after determining the required minimum for each 403(b) annuity separately, the amounts may be totaled and the total taken from any one or more of the annuities.<br /> <br /> Only amounts that an individual holds as a participant may be aggregated under this rule. If an individual account holder is also the beneficiary of the tax sheltered annuity of a decedent, the required distribution from that account may not be aggregated with amounts required under contracts held by the individual for purposes of meeting the distribution requirements.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.403(b)-3, A-4; Prop. Treas. Reg. § 1.403(b)-6(e)(7).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The minimum distribution incidental benefit (&ldquo;MDIB&rdquo;) 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&rsquo;s lifetime.<a href="#_ftn1" name="_ftnref1">¹</a> 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&nbsp;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&nbsp;403(b) required that the death benefit under a tax sheltered annuity be merely incidental to its primary purpose of providing retirement benefits.<br /> <br /> In 2007, regulations under Section&nbsp;403(b) were finalized that briefly addressed the application of the older MDIB rule. These regulations took effect after 2008.<a href="#_ftn2" name="_ftnref2">²</a> They generally restated rules contained in earlier regulations, to the effect that the post-1986 balance is subject to the IRC Section&nbsp;401(a)(9) regulations and that both the pre-1987 balance and the post-1986 balance are subject to the MDIB rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4075">4075</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> 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&nbsp;403(b) contract, including distributions attributable to the post-1986 account balance, satisfy the requirements of Treasury Regulation Section&nbsp;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&nbsp;401(a)(9).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> 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&nbsp;401(a)(9).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> 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.<a href="#_ftn6" name="_ftnref6">⁶</a> The old rules generally required that<br /> distributions commence by age 75.<a href="#_ftn7" name="_ftnref7">⁷</a> It would appear that the old rules may continue to apply in determining distributions required from the pre-1987 balance.<a href="#_ftn8" name="_ftnref8">⁸</a> Of course, nothing would prevent a participant from choosing to apply the Section&nbsp;401(a)(9) rules.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Final 2002 regulations state that if distributions are made in accordance with the individual account rules set forth therein ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>), the MDIB requirement will be satisfied.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(10); Treas. Reg. &sect;&nbsp;1.401-1(b)(1)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; TD 9340, 72 Fed. Reg. 41128 (July&nbsp;26, 2007).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-2, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Rev. Rul. 72-241, 1972-1 CB 108; Rev. Rul. 73-239, 1973-1 CB 201; Let. Ruls. 8642072, 7843043, 7825010.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Let. Ruls. 9345044, 7825010.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Let. Rul. 9345044.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-1(d).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Tax sheltered annuities, including custodial accounts and church retirement income contracts, are subject to minimum distribution rules set forth in IRC Section&nbsp;401(a)(9), both in form and operation.<a href="#_ftn1" name="_ftnref1">¹</a> Except as described below and in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4084">4084</a>, Section&nbsp;403(b) contracts are treated as IRAs for purposes of applying the minimum distribution requirements.<a href="#_ftn2" name="_ftnref2">²</a> Regulations finalized in 2007 address a number of issues concerning the application of these rules to tax sheltered annuities.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If a custodian has adequate records to distinguish between amounts accruing before January 1, 1987, known as the pre-1987 account balance, and amounts accruing after December&nbsp;31, 1986, known as the post-1986 account balance, which includes earnings on the pre-1987 account balance, the minimum distribution requirements are imposed only on the post-1986 account balance.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The issuer or custodian of the contract must be able to identify the pre-1987 balance, maintain accurate records of changes in it, and provide information on request to the participant or beneficiaries with respect to the contract. If the issuer or custodian does not keep these records, the entire balance will be treated as subject to IRC Section 401(a)(9).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The characterization of distributions as coming from pre-1987 or post-1986 balances has no relevance for purposes of determining the portion of a distribution that is includable in income under Section&nbsp;72.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The application of IRC Section&nbsp;401(a)(9) rules to tax sheltered annuities is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a> for lifetime distributions and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4084">4084</a> for after-death distributions. The application of the minimum distribution incidental benefit rule is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4082">4082</a>.<br /> <br /> Guidance on the application of the minimum distribution requirements under IRC Section&nbsp;401(a)(9) is found in regulations finalized in 2002 and 2004, as well as regulations under Section&nbsp;403(b) finalized in 2007.<a href="#_ftn7" name="_ftnref7">⁷</a> The 2007 regulations made minimal changes to the pre-existing requirements, but clarify the treatment of pre-1987 balances.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Distributions that are required under IRC Section&nbsp;401(a)(9) reduce the post-1986 balance to the extent they are necessary to meet the requirements; to the extent they exceed the minimum, they permanently reduce the pre-1987 balance.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Under earlier rules that are still in effect, distributions, regardless of when the amounts accrued, also must satisfy the incidental benefit or Minimum Distribution Incidental Benefit (&ldquo;MDIB&rdquo;) rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4082">4082</a>).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> The distribution requirements under the two sets of rules are different.<br /> <br /> First, the MDIB requirement affects only distributions required to be made to a participant during his or her lifetime although distributions to be made after death are considered in determining the minimum required to be distributed to the participant during the participant&rsquo;s lifetime.<br /> <br /> Second, the amounts required under the two rules may be different. If the two requirements call for different minimums, the larger of the two is the amount that must be distributed.<br /> <br /> According to both the final 2002 regulations and the 2007 regulations, distributions attributable to the pre-1987 account balance are treated as satisfying the MDIB requirement if all distributions from a Section&nbsp;403(b) contract, including distributions attributable to a post-1986 account balance, satisfy the requirements of Treasury Regulation Section&nbsp;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&nbsp;401(a)(9).<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> In the alternative, distributions attributable to a 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&nbsp;401(a)(9).<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> The IRS previously has ruled privately that for purposes of determining the minimum distribution where amounts are transferred, in installments, from an insolvent insurer to another insurer pursuant to an exchange agreement between the two insurers and a court-appointed receiver, all amounts, subject to any grandfathering of unrecovered pre-1987 account balances, under all annuity contracts of the individual, must be taken into account. This includes any amounts not yet transferred under the agreement.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> <em>Rollovers and transfers</em>. If a distribution is made from a participant&rsquo;s pre-1987 balance and rolled over to another tax sheltered annuity, it will be treated as part of the post-1986 balance in the second contract. If a direct transfer of pre-1987 funds is made from one contract to another, the amount transferred retains its character as part of the pre-1987 balance provided the issuer of the second contract meets the recordkeeping requirements described above.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(10); Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(2); <em><em>see</em> </em>Treas. Reg. &sect;&nbsp;1.408-8.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(i); Treas. Reg. &sect;&nbsp;1.403(b)-3, A-2(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-2(b); Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(ii).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(v).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; TD 8987, 67 Fed. Reg. 18988 (4-17-02); TD 9130, 2004-26 IRB 1082; REG-155608-02, 69 Fed. Reg. 67075.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-2(b); Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(3).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IRC &sect;&nbsp;403(b)(10); Treas. Reg. &sect;&sect;&nbsp;1.401-1(b)(1)(i); 1.403(b)-3, A-3.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; Let. Rul. 9442030.<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(iv).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> The SECURE Act significantly changed the rules applicable to designated beneficiaries and eligible designated beneficiaries for tax years beginning in 2020 and thereafter. The SECURE Act generally did not change the rules applicable to surviving spouses. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3902">3902</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for details.<br /> <br /> A designated beneficiary means any individual designated as a beneficiary by a participant.<a href="#_ftn1" name="_ftnref1">¹</a> Under the 2002 regulations, a participant&rsquo;s designated beneficiary is determined based on the beneficiaries designated as of September&nbsp;30 of the calendar year following the year of the participant&rsquo;s death.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Thus, for example, a beneficiary who disclaims his or her interest after the death of the participant but before the September 30 deadline would not be a considered a beneficiary for this purpose. Under the SECURE Act rules, beneficiary status is determined as of the date of the account owner&rsquo;s death. Exceptions apply if the account is payable as an annuity or if a surviving spouse beneficiary dies after the participant but before distributions have begun ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>).<br /> <br /> Under the 2002 regulations, a beneficiary designated as such under the plan is an individual, or certain trusts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>), who is entitled to a portion of a participant&rsquo;s benefit, contingent on the participant&rsquo;s death or another specified event. A designated beneficiary need not be specified by name in the plan or by the participant to the plan to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan as of the date the beneficiary is determined.<br /> <br /> The 2002 regulations state that an individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan so provides, by an affirmative election by the participant or the participant&rsquo;s surviving spouse specifying the beneficiary. The fact that a participant&rsquo;s interest under the plan passes to a certain individual under applicable state law, however, does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan or the plan recognizes succession under applicable state law.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(E).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-1.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a participant&rsquo;s benefit is payable in the form of a life annuity for the life of the participant that satisfies the requirements of IRC Section&nbsp;401(a)(9), the MDIB requirement will be satisfied.<a href="#_ftn1" name="_ftnref1">¹</a> If a participant&rsquo;s sole beneficiary as of the annuity starting date is the participant&rsquo;s spouse, and the distributions satisfy IRC Section&nbsp;401(a)(9), the MDIB requirement will be satisfied.<a href="#_ftn2" name="_ftnref2">²</a> Payments under the annuity must be nonincreasing, except as explained at Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If distributions begin under a particular distribution option that is in the form of a joint and survivor annuity for the joint lives of the participant and a nonspouse beneficiary, the MDIB requirement will not be satisfied as of the date distributions begin unless the distribution option provides that annuity payments to be made to the participant on and after his or her required beginning date will satisfy the conditions set forth in Treasury Regulation<br /> Section&nbsp;1.401(a)(9)-6, A-2(c). Under those provisions, the periodic annuity payment payable to the survivor must not at any time on and after the participant&rsquo;s required beginning date exceed the applicable percentage of the annuity payment payable to the participant using the RMD MDIB Joint and Survivor Annuity Table.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The applicable percentage is based on how much older the participant is than the beneficiary as of their attained ages on their birthdays in the first calendar year for which distributions to the participant are required. For example, if a beneficiary is 10 or fewer years younger, the survivor annuity may be 100 percent. If the age difference is greater than 10 years, the maximum survivor annuity permitted is less than 100 percent. If there is more than one beneficiary, the age of the youngest beneficiary is used.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If a distribution form includes a life annuity and a period certain, the amount of the annuity payments payable to the beneficiary need not be reduced during the period certain, but in the case of a joint and survivor annuity with a period certain, the amount of the annuity payments payable to the beneficiary must satisfy the foregoing requirements after the expiration of the period certain.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The period certain for annuity distributions commencing during the life of a participant with an annuity starting date on or after his or her required beginning date generally may not exceed the applicable distribution period for the participant ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>) for the calendar year that contains the annuity starting date.<br /> <br /> If the participant&rsquo;s spouse is his or her sole beneficiary and the annuity provides only a period certain and no life annuity, the period certain may last as long as the joint and survivor life expectancy of the participant and spouse, if that period is longer than the applicable distribution period for the participant.<a href="#_ftn7" name="_ftnref7">⁷</a> If distributions commence after the death of the participant under the life expectancy rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3900">3900</a>), the period certain for any distributions commencing after death cannot exceed the distribution period determined under the life expectancy provisions of Treasury Regulation Section&nbsp;1.401(a)(9)-5, A-5(b).<br /> <br /> The amount required to be distributed generally is the greater of the MDIB or the regular RMD amount ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3892">3892</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3908">3908</a>). If the amount required to be distributed exceeds the amount distributed, the shortfall is subject to a 50 percent excise tax, levied on the individual, not the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Rev. Proc. 2003-10, 2003-1 CB 259; Notice 2003-2, 2003-1 CB 257.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(c)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(c)(1).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(d).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-3(a).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;4974.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, except to the extent the amounts are a recovery of the employee&rsquo;s investment in the contract including the amount of a defaulted loan or to the extent the employee rolls over an eligible distribution to another tax sheltered annuity, a qualified retirement plan, an eligible governmental 457 plan, or a traditional individual retirement plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>).<br /> <br /> Where an annuity contract without life insurance protection is used for funding, all payments received normally are taxable in full as ordinary income to the employee. This is the result regardless of whether contributions were made by the employer as additional compensation to the employee, were derived from a reduction in the employee&rsquo;s salary, or were paid in part by deductible voluntary employee contributions. Because salary reduction contributions have not been previously taxed to the employee, where they have come within the overall limit, they cannot be treated as a cost basis for the contract.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In some instances, however, the employee will have a cost basis for the contract. An employee&rsquo;s cost basis consists of any nondeductible contributions the employee has paid and any portion of the contributions made by the employer on which the employee has paid tax, except that excess salary reduction amounts not distributed from the plan by April&nbsp;15 of the year following the contribution are not included in basis even though they were included in income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>). The value of a non-distributed defaulted loan is also included in the employee&rsquo;s cost basis.<br /> <br /> Where a life insurance policy is used ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4034">4034</a>), the sum of the annual one year term costs that have been taxed to the employee are included in the employee&rsquo;s cost basis.<a href="#_ftn2" name="_ftnref2">²</a> <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4061">4061</a> regarding the proper measure of the value of current life insurance protection.<br /> <br /> Similarly, any portion of an employer&rsquo;s premiums that have been included in an employee&rsquo;s gross income because they exceeded the employee&rsquo;s overall limit are included in the employee&rsquo;s cost basis ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4042">4042</a>). The amount of any policy loans included in income as a taxable distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4063">4063</a>) also constitutes part of the employee&rsquo;s cost basis.<br /> <br /> Once a loan is deemed distributed under IRC Section&nbsp;72(p), the interest that accrues thereafter on that loan is not included in income for purposes of determining the amount that is taxable under IRC Section&nbsp;72. In addition, neither the income that results from the deemed distribution nor the interest that accrues thereafter increases the participant&rsquo;s investment or cost basis in the contract under IRC Section&nbsp;72. To the extent that a participant repays by cash any portion of a loan that has been deemed distributed, the participant acquires a tax basis in the contract in the same manner as if the repayments were after-tax contributions.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If an employee takes an account balance in a single lump sum cash payment, the full amount received will be ordinary income to the employee in the year of receipt unless the employee has a cost basis, except as provided in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4057">4057</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4059">4059</a>.If the employee has a cost basis, the amount in excess of the cost basis will be ordinary income.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Amounts received before the annuity starting date, that is, in-service distributions, by an employee who has a cost basis are taxed under a rule that provides for pro rata recovery of cost.<a href="#_ftn5" name="_ftnref5">⁵</a> An employee excludes that portion of the distribution that bears the same ratio to the total distribution as the employee&rsquo;s investment in the contract bears to the total value of the employee&rsquo;s accrued benefit as of the date of the distribution. Amounts received prior to July&nbsp;2, 1986 were taxed under a cost recovery rule permitting recovery of basis before taxing any of the distribution as interest.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The annuity starting date is the first day of the first period for which an amount is received as an annuity under a contract ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="536">536</a>).<a href="#_ftn7" name="_ftnref7">⁷</a> If a plan on May&nbsp;5, 1986 permitted in-service withdrawal of employee contributions, the pro rata recovery rules do not apply to investment in the contract prior to 1987. Instead, investment in the contract prior to 1987 will be recovered first and the pro rata recovery rules will apply only to the extent that amounts received before the annuity starting date, when added to all other amounts previously received under the contract after 1986, exceed the employee&rsquo;s investment in the contract as of December&nbsp;31, 1986.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> If an employee who has a cost basis for his or her contract receives life annuity or installment payments, the payments are taxed as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="613">613</a>, depending on the annuity starting date.<br /> <br /> Where the 403(b) annuity contract or custodial account is solely liable for the payment of investment expenses, the direct payment of investment advisor fees from a participant&rsquo;s annuity or account is not treated as a distribution.<a href="#_ftn9" name="_ftnref9">⁹</a> Likewise, where an annuity contract consists of different subaccounts for which a financial advisor provides asset allocation advice, if the annuity contract expenses are assessed directly against the contract value itself, those payments then are expenses of the contract itself and, therefore, are not distributions from the contract includable in gross income. Furthermore, assessing expenses against a contract in this manner does not cause the contract to lose its qualified status under IRC Section&nbsp;403(b).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 68-304, 1968-1 CB 179.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.72(p)-1, A-19(a), 1.72(p)-1, A-21(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;72(e)(5).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;72(e)(8).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;72(e)(5)(D).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;72(c)(4).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;72(e)(8)(D).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Let. Ruls. 9332040, 9316042, 9047073.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Let. Rul. 9845003.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The SECURE Act now requires non-eligible designated beneficiaries to deplete the entire account balance within ten years of the original account owner&rsquo;s death.&nbsp; Eligible designated beneficiaries can continue to use the life expectancy method discussed below or can opt to follow the ten-year distribution rule.&nbsp; Under regulations proposed in 2024, post-SECURE Act, a beneficiaries subject to the ten-year rule are required to take annual RMDs during the ten-year distribution period if the original account owner died on or after his or her required beginning date. <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3901">3901</a> for details. <em><em>See</em></em> Q 3903 for the definition of &ldquo;eligible designated beneficiary&rdquo; post-SECURE Act.<br /> <br /> Pre-SECURE Act, if a participant died before his or her required beginning date, distributions were made under one of two methods:<br /> <p style="padding-left: 40px;">(1)&nbsp; Under the five year rule, the entire interest must be distributed within five years after the death of the participant regardless of who or what entity receives the distribution.<a href="#_ftn1" name="_ftnref1">¹</a> To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the participant&rsquo;s death.<a href="#_ftn2" name="_ftnref2">²</a></p><br /> <p style="padding-left: 40px;">(2)&nbsp; Under the life expectancy rule, if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life or life expectancy of the beneficiary, beginning within one year of the participant&rsquo;s death.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> To the extent that the interest is payable to a non-spouse beneficiary, distributions must begin by the end of the calendar year immediately following the calendar year in which the participant died.<a href="#_ftn4" name="_ftnref4">⁴</a> The non-spouse beneficiary&rsquo;s life expectancy for this purpose is measured as of his or her birthday in the year following the year of the participant&rsquo;s death. In subsequent years, this amount is reduced by one for each calendar year that has elapsed since the year immediately following the year of the participant&rsquo;s death.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If the sole designated beneficiary is the participant&rsquo;s surviving spouse, distributions must begin by the later of the end of the calendar year immediately following the calendar year in which the participant died or the end of the calendar year in which the participant would have reached age 73 (72 for 2020-2022, 70&frac12; pre-2020).<a href="#_ftn6" name="_ftnref6">⁶</a> The payout period during the surviving spouse&rsquo;s life is measured by the surviving spouse&rsquo;s life expectancy as of his or her birthday in each distribution calendar year for which a minimum distribution is required after the year of the participant&rsquo;s death.<a href="#_ftn7" name="_ftnref7">⁷</a> After the surviving spouse&rsquo;s death, the distribution period is based on his or her remaining life expectancy. This is determined using the age of the surviving spouse in the calendar year of his or her death, reduced by one for each calendar year that has elapsed after the calendar year of the surviving spouse&rsquo;s death.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The 2002 regulations set forth tables containing single and joint and survivor life expectancies for calculating required minimum distributions, as well as a Uniform Lifetime Table for determining the appropriate distribution periods.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Unless a plan adopts a provision specifying otherwise, if distributions to a participant have not begun prior to his or her death, they must be made automatically either under the life expectancy rule described above or, if there is no designated beneficiary, under the five year rule.<a href="#_ftn10" name="_ftnref10">¹⁰</a> A plan may adopt a provision specifying that the five year rule will apply after the death of a participant, or a provision allowing participants or beneficiaries to elect whether the five year rule or the life expectancy rule will be applied.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(ii), Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(iii); Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-1(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-3(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(1).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(iv); Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-3(b).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(2).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-9.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.401(a)(9)-1, A-3(c), 1.401(a)(9)-3, A-4(a).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; Treas. Reg. &sect;&sect;&nbsp;1.401(a)(9)-3, A-4(b), 1.401(a)(9)-3, A-4(c).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The SECURE Act now requires non-eligible designated beneficiaries to deplete the entire account balance within ten years of the original account owner&rsquo;s death.&nbsp; Eligible designated beneficiaries can continue to use the life expectancy method or can opt to follow the ten-year distribution rule.&nbsp; When the beneficiary inherits from an individual who died on or after the required beginning date, they are not required to take annual distributions during the ten-year distribution period.&nbsp; <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4085">4085</a> for details on who qualifies as an eligible designated beneficiary.<br /> <p style="text-align: center;"><strong>Pre-SECURE Act</strong></p><br /> If the participant dies on or after the date distributions have begun (i.e., generally on or after the required beginning date), but before the entire interest in the plan has been distributed, the IRC states that the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect as of the participant&rsquo;s date of death.<a href="#_ftn1" name="_ftnref1">¹</a> This method of distribution will depend on whether the distribution was in the form of distributions from an individual account or annuity payments.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the 2002 regulations, a beneficiary determination is made as of September&nbsp;30 of the year after the year of the participant&rsquo;s death.<a href="#_ftn3" name="_ftnref3">³</a> If the participant does not have a designated beneficiary as of that date, the participant&rsquo;s interest is distributed over the remaining life expectancy, using the age of the participant in the calendar year of the participant&rsquo;s death, reduced by one for each calendar year that elapses thereafter.<a href="#_ftn4" name="_ftnref4">⁴</a> If the participant does have a designated beneficiary as of the determination date, the beneficiary&rsquo;s interest is distributed over the longer of the following: (1) the beneficiary&rsquo;s life expectancy, calculated as described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4085">4085</a> under the life expectancy rule (i.e., under Treasury Regulation Section&nbsp;1.401(a)(9)-5, A-5(c)(1) or (2)), or (ii) the remaining life expectancy of the participant, determined using the age of the participant in the calendar year of death, reduced by one for each calendar year that elapses thereafter (i.e., under Treasury Regulation Section&nbsp;1.401(a)(9)-5, A-5(c)(3)).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-2, A-5.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(c)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-5(a)(1).<br /> <br /> </div></div><br />