SERVICE PROVIDES ALTERNATIVE METHOD FOR MEETING DISTRIBUTION REQUIREMENTS APPLICABLE TO IRAs AND TAX-SHELTERED ANNUITIES.

Notice 88-38

This notice provides individuals with an alternative method for satisfying the requirements for minimum distributions from individual retirement accounts and annuities (IRAs). This notice also provides a transition rule concerning active participant status for purposes of determining whether a deductible contribution to an IRA may be made.

REQUIRED DISTRIBUTIONS FROM IRAS

Section 408 of the Internal Revenue Code of 1986 (Code) requires individuals who attain age 70-1/2 to receive minimum distributions from their IRAs under rules similar to the rules of section 401(a)(9) of the Code. Section 1.408-8, A-1 of the proposed Income Tax Regulations (52 Fed. Reg. 28070 (1987)) provides that the IRA holder must satisfy the minimum distribution requirements separately for each IRA. Section 408 of the Code also requires beneficiaries of an IRA holder to receive minimum distributions after the death of the IRA holder. These regulations apply separately with respect to each IRA; thus, an individual may not reduce the minimum distribution required from one IRA even though he or she has received more than the minimum amount from another IRA.

Under the alternative method provided in this notice, individuals must still calculate the required minimum distribution separately for each IRA. However, such amounts may then be totalled and the total distribution taken from any one or more of the individual IRAs. Thus, contrary to the rule in the regulation, the alternative method would allow an individual to satisfy the minimum distribution requirement by taking from one IRA the amount required to satisfy the minimum distribution requirement for other IRAs. The alternative method is available to individuals who must receive minimum distributions either because they have attained age 70-1/2 or because they are beneficiaries of IRA holders who have died. For example, an individual who holds one IRA directly and another IRA as a beneficiary may satisfy the minimum distribution requirements by taking from the IRA held directly the amount required to satisfy the minimum distribution requirement for the IRA held as a beneficiary.

Section 1.403(b)-2 of the proposed Income Tax Regulations provides that, generally, for purposes of applying the minimum distribution requirements that are described in section 401(a)(9) of the Code, section 403(b) tax-sheltered annuity contracts will be treated as IRAs described in section 408 of the Code. Accordingly the alternative method described in this notice also applies to holders of section 403(b) annuity contracts or custodial accounts. Distributions from such 403(b) contracts or accounts, however, will not satisfy the distribution requirements from IRAs, nor will distributions from IRAs satisfy the distribution requirements from 403(b) contracts or accounts. The alternative method may not be used to satisfy the minimum distribution requirements applicable to qualified plans under section 401(a) or qualified annuity plans under section 403(a).

EXAMPLE

An individual (X), born July 15, 1918, has three IRAs. X became 70-1/2 on January 15, 1987. Thus, X's required beginning date is April 1, 1988. On December 31, 1986 the account balance of IRA A, a rollover, IRA was $100,000; the account balance of IRA B was $10,000; and the account balance of IRA C was $1,000. The designated beneficiary of IRA A is X's brother, whose age as of his birthday in 1987 was 61. The designated beneficiary of IRA B is X's spouse whose age as of his birthday in 1987 is 80. The designated beneficiary of IRA C is X's mother, whose age as of her birthday in 1987 is 90.

The amount of the minimum required distribution from IRA A is $3,952.57 ($100,000 divided by 25.3, the joint life and last survivor expectancy of X and X's brother). The amount of the minimum required distribution from IRA B is $588.24 ($10,000 divided by 17.0, the joint life and last survivor expectancy of X and her spouse). The amount of the minimum required distribution from IRA C is $83.29 ($1,000 divided by 15.8, the joint life and last survivor expectancy of X and her mother). The total required distribution that must be withdrawn from any one or more of X,s accounts by April 1, 1988 is $4,604.10, the sum of the minimum required distributions from the three IRAs.

On April 1, 1988, X withdraws $1,000 from IRA C and $3,604.10 from IRA B. X withdraws nothing from IRA A. X has met her distribution requirements with respect to IRAs A, B and C for the 1987 distribution calendar year. In determining the December 31, 1987 account balances used in calculating minimum required distributions for IRAs B and C for the 1988 distribution calendar year, the amount actually distributed from each IRA by April 1, 1988 is subtracted from the December 31, 1987 account balance of such IRA in accordance with the provisions of proposed regulation section 1.408-8, A-5.

APPLICABILITY OF ALTERNATIVE METHOD

The alternative method contained in this notice may be used until further guidance is issued. Such further guidance will be applied prospectively and will in no case limit use of the alternative method for minimum distributions required in 1988 (including distributions to be made by December 31, 1988).

TRANSITION ROLE NOT AVAILABLE FOR DISTRIBUTIONS MADE AFTER DECEMBER 31, 1987

The Proposed regulations under section 401(a)(9) and section 408 of the Code include a transition rule for satisfying the IRA minimum distribution requirements with respect to distributions made in 1987. IRA holders are reminded that such transition rule is no longer available for distributions made after December 31, 1987. Thus, individuals who attained age 70-1/2 in 1987 must determine the amount of the minimum distribution required by April 1, 1988 without regard to the transition rule. Similarly, the transition rule is not available for determining minimum distributions required by December 31, 1988 even by an individual who used the transition rule in 1987. Individuals adopting the alternative method contained in this notice for determining minimum required distributions should note that such method differs from the aggregate method in the 1987 transition rule.

ACTIVE PARTICIPANT STATUS FOR PRE-1987 ACTIVITIES

Section 219(g) of the Code limits deductions for contributions to IRAs by individuals who are active participants in certain plans. This rule is effective for taxable years of individuals which begin after December 31, 1986.

Notice 87-16, 1987-5 I.R.B. 40, provides the following rule for determining active participant status under a discretionary profit- sharing plan. If, with respect to a particular plan year, no forfeitures, employer contributions or employee contributions have been allocated to an individual's account by the last day of the plan year, such individual is not considered an active participant for the taxable year in which such plan year ends. If, however, after the end of such plan year, the employer contributes an amount for such plan year, an individual to whose account an allocation is made is considered an active participant for the taxable year in which the contribution is made.

A special rule for plan years beginning in 1986 and ending in 1987 is contained in Q & A 11 of Notice 87-16 for purposes of determining whether an individual is an active participant in 1987. Such plan year is treated as two short plan years, the first of which ends December 31, 1986. In addition, amounts allocated during the short 1987 plan year that are attributable to services performed in 1986 or to compensation that would have been paid (but for a deferral election) or was actually paid before January 1, 1987 because of activities in 1988 are treated as allocated on December 31, 1986. Thus, an individual is not an active participant in such a plan for 1987 if no amounts are allocated to his or her account for 1987 with respect to 1987 services or compensation.

A similar rule will apply to plan years of discretionary defined contribution plans ending on or before December 31, 1986. Thus, an individual will not be an active participant in 1987 solely because of amounts contributed or allocated in 1987 with respect to a plan year ending before January 1, 1987 if such contributions or allocations relate solely to services performed or to compensation that would have been paid (but for a deferral election) or was actually paid before January 1, 1987.

RELIANCE

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of this notice is Carol Gold of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 2 p.m. and 4 p.m. Eastern Time, Monday through Friday on (202) 566-6783/6784 (not a toll-free call). Ms. Gold's telephone number is (202) 566-3148 (also not a toll-free call).