Separate Accounts Rule

[Kathleen Reynolds]

#4265

You may not use separate life expectancies for multiple beneficiaries unless all of the beneficiaries are individuals and you have satisfied the separate accounts rule. If all of the beneficiaries are individuals, but the separate accounts rule has NOT been met, all of the beneficiaries must use the oldest beneficiary’s life expectancy for required minimum distributions. If the plan is being split between multiple beneficiaries and the separate accounts rule has been met, enter the names, what percentage of the plan each receives, and the birth years.

The final regulations on required distributions published on 4/17/02 includes the following discussion on the Separate Accounts Rule:

Separate Accounts

Several commentators requested clarification concerning when an employee’s individual account can be divided into separate accounts that are permitted to satisfy section 401(a)(9) separately and concerning whether separate accounts could also provide for separate investments. In response to these comments, these final regulations provide that separate accounts with different beneficiaries under the plan can be established at any time, either before or after the employee’s required beginning date. However, the final regulations provide that the separate accounts are recognized for purposes of determining required minimum distributions only after the later of the year of the employee’s death (whether before or after the required beginning date) and the year the separate accounts are established. In addition, the final regulations clarify that, in order to determine the distribution period for the separate account by disregarding the beneficiaries of the other separate account, the separate account must be established no later then the end of the year following the year of the employee’s death.

The separate accounting must allocate all post-death investment gains and losses for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent basis among the separate accounts for the different beneficiaries. The separate accounting must also allocate any post- death distribution to the separate account of the beneficiary receiving that distribution. Once the separate accounts are established, the final regulations permit the separate accounting to provide for separate investments for each separate account.

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Part of the final regulations from §1.401(a)(9)-5 Required minimum distributions from defined contribution plans:

A-7. (a) General rule — (1) Except as otherwise provided in paragraph (c) of this A-7, if more than one individual is designated as a beneficiary with respect to an employee as of the applicable date for determining the designated beneficiary under A-4 of §1.401(a)(9)-4, the designated beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the applicable distribution period.

(2) See A-3 of §1.401(a)(9)-4 for rules that apply if a person other than an individual is designated as a beneficiary and see A-2 and A-3 of §1.401(a)(9)-8 for special rules that apply if an employee’s benefit under a plan is divided into separate accounts and the beneficiaries with respect to a separate account differ from the beneficiaries of another separate account.

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