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Proposed regulations: Updated life expectancy, distribution period tables for retirement plans

Updated life expectancy, distribution period tables

The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-132210-18) to update the life expectancy and distribution period tables that are used to calculate required minimum distributions from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored employer-provided retirement arrangements.

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The proposed regulations [PDF 432 KB] (33 pages) were published in the Federal Register on November 8, 2019. Comments are due 60 days after publication in the Federal Register.

A public hearing on these proposed regulations has been scheduled for January 23, 2020. Outlines of topics to be discussed at the public hearing are also due 60 days after publication in the Federal Register.

Background

Executive Order 13847 (dated August 31, 2018) directed the U.S. Treasury Department and Department of Labor to consider how to revise or eliminate rules imposing unnecessary costs and burdens on businesses that would discourage employers, especially on small businesses, from offering retirement plans to employees. Read TaxNewsFlash

The preamble to today’s proposed regulations explains that in accordance with Executive Order 13847, Treasury and the IRS examined the life expectancy and distribution period tables in Reg. section 1.401(a)(9)-9, and the currently available mortality data, and as a result of this review, determined that the tables needed to be updated to reflect current life expectancies. Today’s proposed regulations aim to update these tables. 

Proposed regulations

The life expectancy tables and applicable distribution period tables in today’s proposed regulations reflect longer life expectancies than the tables in the existing regulations. The preamble provides the following examples illustrating the application of the proposed regulations:

  • A 70-year old IRA owner who uses the uniform lifetime table to calculate required minimum distributions must use a life expectancy of 27.4 years under the existing regulations, but applying the uniform lifetime table under the proposed regulations, would use a life expectancy of 29.1 years to calculate required minimum distributions.
  • A 75-year old surviving spouse who is the employee’s sole beneficiary and uses the single life table to compute required minimum distributions must use a life expectancy of 13.4 years under current regulations. Under the proposed regulations, the spouse would use a life expectancy of 14.8 years.

As noted in the preamble, the effect of these changes would be to reduce required minimum distributions, and in turn to allow participants to retain larger amounts in their retirement plans to account for the possibility they may live longer.

Updated life expectancy and distribution period tables

The life expectancy and distribution period tables in the proposed regulations have been developed based on mortality rates for 2021. The preamble explains the process used to arrive at these mortality rates and to develop the single life table and the uniform lifetime table.

The life expectancy tables in the current regulations are used in several examples in Reg. section 1.401(a)(9)-6, Q&A-14(f) that illustrate the availability of the exception described in Reg. section 1.401(a)(9)-6, Q&A-14(c) (regarding certain increasing payments under insurance company annuity contracts). The preamble explains that today’s proposed regulations do not include revisions to these examples to reflect the life expectancy tables in the proposed regulations.

Effective date, transition rule

The life expectancy tables and uniform lifetime table under the proposed regulations would apply for distribution calendar years beginning on or after January 1, 2021.

An example illustrating the application of the changes is provided, as follows: An individual who attains age 70½ during 2020 (so that the minimum required distribution for the distribution calendar year 2020 is due April 1, 2021), the final regulations would not apply to the minimum required distribution for the individual’s 2020 distribution calendar year (which is due April 1, 2021), but would apply to the minimum required distribution for the individual’s 2021 distribution calendar year (which is due December 31, 2021).

These proposed regulations include a transition rule that applies if an employee died before January 1, 2021, and under the rules of Reg. section 1.401(a)(9)-5, Q&A-5, the distribution period that applies for calendar years following the calendar year of the employee’s death is equal to a single life expectancy calculated as of the calendar year of the employee’s death (or if applicable, the year after the employee’s death), reduced by one for each subsequent year. Under the transition rule, the initial life expectancy used to determine the distribution period is reset by using the new single life table for the age of the relevant individual in the calendar year for which life expectancy was set under Reg. section 1.401(a)(9)-5, Q&A 5(c).

For distribution calendar years beginning on or after January 1, 2021, the distribution period is determined by reducing that initial life expectancy by one for each year subsequent to the year for which it was initially set.

The transition rule applies in three situations:

  • The employee died before the required beginning date with a non-spousal designated beneficiary (so that the applicable distribution period is determined based on the remaining life expectancy of the designated beneficiary for the calendar year following the calendar year of the employee’s death).
  • The employee died after the required beginning date without a designated beneficiary (so that the applicable distribution period is determined based on the remaining life expectancy of the employee for the year of the employee’s death).
  • The employee, who is younger than the designated beneficiary, died after the required beginning date (so that the applicable distribution period is determined based on the remaining life expectancy of the employee for the year of the employee’s death).

The proposed regulations illustrate the application of this transition rule with an example involving an employee who died at age 80 years in 2018 with a designated beneficiary (who was not the employee’s spouse) who was age 75 in the year of the employee’s death. For 2019, the distribution period that applies for the beneficiary is 12.7 years (the period applicable for a 76 year old under the single life table in current Reg. section 1.401(a)(9)-9), and for 2020, it is 11.7 years (the original distribution period, reduced by one year). For 2021, taking into account the life expectancy tables under the proposed regulations and applying the transition rule, the applicable distribution period would be 12.0 years (the 14.0 year life expectancy for a 76 year old under the single life table in the proposed regulations, reduced by two years).

A similar transition rule applies if an employee’s sole beneficiary is the employee’s surviving spouse, and the spouse died before January 1, 2021. Under the rules of Reg. section 1.401(a)(9)-5, Q&A-5(c)(2), the distribution period that applies for the spouse’s beneficiary is equal to the single life expectancy for the spouse calculated for the calendar year of the spouse’s death, reduced by one for each subsequent year. Under the transition rule, the initial life expectancy used to determine the distribution period is reset by using the new single life table for the age of the spouse in the calendar year of the spouse’s death. For distribution calendar years beginning on or after January 1, 2021, the distribution period is determined by reducing that initial life expectancy by one for each year subsequent to the year for which it was initially set.

Treasury and the IRS reported that these transition rules—under which there is a one-time reset for the relevant life expectancy using the single life table under the proposed regulations—are designed to recognize that the general population has longer life expectancies than the life expectancies set forth in the 2002 regulations. However, because the reset life expectancy is based on the age for which life expectancy was originally determined (rather than the relevant individual’s current age), this treatment would be consistent with congressional intent to limit recalculation of life expectancy to the employee and the employee’s spouse.

Intersection with the rules under Rev. Rul. 2002-62

The preamble continues to explain that after the issuance of final regulations that provide updated life expectancy and distribution period tables under section 401(a)(9), if a taxpayer began receiving

substantially equal periodic payments before January 1, 2021, using the required minimum distribution method described in section 2.01(a) of Rev. Rul. 2002-62, then the application of the final regulations will not be treated as a modification to a series of substantially equal periodic payments (under section 72(t)(4)(A)(ii)).

In addition, if a taxpayer begins receiving substantially equal periodic payments on or after January 1, 2021, and uses either the fixed amortization method described in section 2.01(b) of Rev. Rul. 2002-62 or the fixed annuitization method described in section 2.01(c) of Rev. Rul. 2002-62, then the method would be applied by applying the corresponding life expectancy, distribution period, and mortality tables in the final regulations in lieu of the tables in formerly applicable Reg. section 1.401(a)(9)-9 (as referenced in Rev. Rul. 2002-62).

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