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A recent call with a financial advisor in South Dakota is representative of a common question on a “242(b)(2)” election.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“Can a plan participant skip required minimum distributions (RMDs) if they have a “242(b)(2)” election?”
Yes, it is possible for eligible participants who made valid Section 242(b)(2) elections under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) to avoid modern-day RMD requirements.
TEFRA Section 242(b)(2) permitted a participant to make a transitional rule election that would govern plan distributions made to the participant. If the participant made such an election, and the election is still valid, the distribution made pursuant to the election must satisfy the requirements of Internal Revenue Code Section (IRC §) 401(a)(9) as in effect on December 31, 1983.
The modern RMD rules were effective beginning in 1984. Prior to this date most participants were not required to take RMDs unless the plan required such. When the RMD rules changed, participants, generally, could avoid the new RMD requirements if they made a timely TEFRA 242(b)(2) election.
The participant had to have made the election by December 31, 1983. The TEFRA 242(b)(2) rules are strict, and if the participant rolled over or transferred an account, after the election, to an IRA or another qualified plan, the election ceased to be valid. Consequently, RMDs would need to commence in the following year.
The case at hand involved a 75-year-old retired participant who had not been taking RMDs. The participant had worked for a large, heavy equipment company for decades and had accumulated a large balance in the 401(k) plan. The individual had been retired for 9 years and had a valid TEFRA 242(b)(2) election on file with the plan. Therefore, no RMDs were required.
Eligible plan participants who made valid TEFRA Section 242(b)(2) elections can avoid modern-day RMD requirements. Such elections were required to be made no later than December 31, 1983.