Qualified Plans

Code Sec. 401 contains three provisions which relate to distributions: those regarding the commencement of the payment of benefits; requirements concerning the minimum amounts and timing of distributions; and provisions which relate to the form of benefit payments (Lassila and Kilpatrick, 2007). Code Sec. 01(a)(14) requires that qualified plans provide that the payment of benefits to a participant must commence not later than sixty days after the close of the plan year in which the latest of the following events occur: (1) the participants attains the earlier age of 65 or the normal retirement age stated under the plan; (2) the tenth anniversary of the year in which the participant commenced participation in the plan; or (3) the participant terminates his service with the employer.

The regulations also provide that a plan may permit a participant to delay the commencement of his benefit payments to a date later than the abovementioned dates. The plans must require that the election be in writing and specify the date on which the payment of the benefits shall commence. Many pension plans provide for an early retirement option. In order to qualify for early retirement, participants must usually reach a certain age and have a certain number of years of service.

In such a plan, if a participant satisfies the requirements for early retirement benefits, but separates from service prior to reaching the early retirement age, the plan must provide that the participant will be eligible to receive the early retirement benefit (actuarially reduced from normal retirement age) only upon the attainment of the required age. Code Sec. 401(a)(9) contains provisions requiring the commencement and duration of benefit payments to a participant and to the participant beneficiary after the death of the participant.

Failure to meet the minimum distributions required under this section can result in a 50% penalty assessment on the shortfall under Code Sec. 4974. Under new required minimum distribution rules effective in 2003, the period over which required minimum distributions must be made (referred to as the applicable distribution period) is determined using the Uniform Lifetime Table, based on the participant’s age as of his or her birthday in the relevant distribution calendar year.

If the sole designated beneficiary is the participant’s spouse, the applicable distribution period is the longer of the period determined using the Uniform Lifetime Table (based solely on the participant’s age) or the joint life expectancy of the employee and spouse from the Joint and Last Survivor Table, based on the participant’s and spouse’s ages as of their birthdays in the distribution calendar year.

In an individual account plan, the benefit used to compute the minimum distribution in a distribution calendar year is the participant’s account balance as of the last valuation date in the previous calendar year. Most qualified plans must provide automatic survivor benefits: (1) in the case of a married participant who retires under the plan, in the form of a qualified joint and survivor annuity, and (2) in the case of a married participant who dies before the annuity starting date and who has a surviving spouse, in the form of a qualified pre-retirement survivor annuity.

Thus, the survivor annuity is the automatic form of benefit payment, unless a proper election to the contrary has been made by the participant or the participant’s spouse. The annuity starting date is the first day of the first period for which an amount is payable as an annuity. If the benefits are not payable as an annuity, the annuity starting date is the first day on which all events have occurred which entitle the participant to a benefit. This rule applies to all pension plans (defined benefit, money purchase and target benefit).

It also applies to profit-sharing and stock bonus plans unless: (1) the plan requires that the participant’s vested accrued benefit is payable in full, on the participant’s death, to the surviving spouse; (2) the participant does not elect the payment of benefits in the form of life annuity; and (3) with respect to the participant, the plan is not a direct or indirect transferee from a plan that is subject to the annuity requirement (Rutherford, 2006).