Employers may provide option to postpone minimum distributions.

IRS Ann. 97-24 provides that an employer is not precluded from offering to employees (other than 5% owners), who attain age 70k after 1995 and have not retired, an option to defer commencement of benefit distributions under a qualified plan merely because the plan has not yet been amended to provide for this option.

Background

Section 1404(a) of the Small Business Job Protection Act of 1996 (SBJPA) amended Sec. 401(a)(9) to provide that, for employees who are not 5% owners, the required beginning date for minimum distributions from a qualified plan is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70X or the calendar year in which the employee retires. This amendment applies to years beginning after 1996.

However, the amendment does not change the required beginning date for distributions from an individual retirement account (IRA), including an IRA established with a simplified employee pension or savings investment match plan for employees. (See Notice 96-67.) Thus, distributions from these plans must begin by April 1 of the calendar year following the calendar year in which the employee attains age 70k, even though the employee (or IRA participant) has not retired.

Notice 96-67, Q&A-2, provides that, under Sec. 401 (a) (9) (as amended by the SBJPA), an employee (other than a 5% owner) who attained age 70 1/2 in 1996, but who had not retired from employment with the employer maintaining the plan by the end of 1996, was not required to receive a minimum distribution by Apr. 1, 1997.

Many qualified plans continue to contain provisions (consistent with Sec. 401(a)(9) before its amendment) requiring an employee who attains age 70 1/2 in a calendar year to begin receiving distributions by April 1 of the following calendar year. Some employers wish to give employees (other than 5% owners) who have not retired the option to defer commencement of distributions beyond April 1 following the calendar year in which the employees attain age 70 1/2 and have requested guidance as to whether such an option may be offered before their plans are amended to provide for this option.

Ann. 97-24 addresses the addition of an option to defer commencement of distributions before plan amendment. It does not address the elimination of the option to receive in-service distributions after age 7 1/2.

Under Notice 96-67, an amendment that eliminates the right to receive a distribution before retirement after age 70 1/2 is precluded by Sec. 411(d)(6), if the amendment applies to benefits accrued as of the later of the adoption date or the amendment's effective date. In Notice 96-67, the Service requested comments on the extent to which relaxation of Sec. 411 (d) (6) protection is appropriate for amendments that eliminate in-service distributions after age 7 1/2. The IRS is currently considering the comments received.

Timing of Plan Amendments

Under a qualified plan, an employer can offer an employee (other than a 5% owner) who attains age 70 1/2 in a calendar year after 1995 and has not retired by the end of that year the option to delay commencement of benefit distributions until no later than April 1 following the calendar year in which the employee retires from employment with the employer maintaining the plan.

However, a plan that continues to contain provisions requiring an employee to begin receiving distributions by April 1 following the calendar year in which the employee attains age 70 1/2 will not fail to satisfy Sec. 401(a) merely because the employer offers the option described in the preceding paragraph before amending the plan to include this option. Thus, if employees (other than 5% owners) who attained age 70 1/2 in 1996 and did not retire from employment with the employer maintaining the plan by the end of 1996 were offered the opportunity to make an election to defer commencement of benefits rather than to begin receiving benefits from the plan by Apr. 1, 1997, the plan will not fail to satisfy Sec. 401(a) merely because the plan has not yet been amended to provide for this election.

Future guidance will provide that an employer that offers this option under a plan must amend the plan retroactively, no later than the date specified in that guidance, to provide for that option. The retroactive plan amendment must conform the plan to its preamendment operation regarding the option to defer commencement of benefits. The date by which a plan providing for this option must be retroactively amended will not be earlier than 90 days after the future guidance is published (and in no event will be earlier than Jan. 1, 1998).

Ann. 97-24 also applies to an employer that has adopted a master, prototype or regional prototype plan. Such an employer should note that if a conforming amendment is not an available option under the sponsor's prototype plan document, the required amendment may result in the loss of prototype status.

Elections to Stop Receiving Distributions

On the other hand, Ann. 97-24 does not address the conditions under which employers may offer employees who have attained age 70 1/2 and have begun to receive plan distributions an election to stop receiving distributions until a date no later than April 1 of the calendar year following retirement. Employers are cautioned that, under certain circumstances, an election to stop receiving distributions may violate the qualification requirements under Sec. 401 (a), such as Secs. 401(a)(11) and 417 (relating to participant and spousal consent, joint and survivor annuity requirements, and related matters). Future guidance will address the conditions under which these types of elections may be made and the permitted timing of related plan amendments.