The rules require that distribution from the plan begin by April 1 of the year following the latter of the year during which the plan participant either turns age 70 or retires. For IRA owners and those who own 5% or more of the plan sponsor company, distribution must start the year after the participant turns age 70.

In general, to compute the minimum amount of distribution, a plan sponsor needs to consult the Uniform Lifetime Table published by the IRS. The table contains a list of ages and a life expectancy for each. Then, simply divide the life expectancy opposite the employee's age into the balance in his or her account as of the previous December 31. Of course, this is only the minimum distribution amount; more can always be paid out. Further, if the employee's spouse is more than 10 years younger than the employee, a different table needs to be consulted.

The final regulations

Needless to say, anything that takes nearly 150 pages to explain cannot be that simple. In addition, covering all of the changes would take up the entire contents of this newsletter. Nevertheless, the IRS has made a good effort to simplify the minimum distribution rules and, simplified or not, failure to follow them could result in a hefty 50% surtax penalty on top of regular income taxes. To avoid that penalty, here are four things that every wise 401(k) fiduciary should know about the minimum distribution rules:

1. If your plan only provides lump sum distributions, most of the minimum distribution rules will not apply to you. Most plan participants have taken a lump sum distribution by age 70 1/2 so you really only need to focus on those who have left balances in the plan. Since the elimination of the rule that distribution options under the plan cannot be eliminated, there is little reason not to restrict 401(k) plan distributions to lump sums. Employees who want distributions over time can always roll their 401(k) distributions into IRAs.

2. If your 401(k) plan provides for distributions over time, as a plan administrator you will need to become familiar with the Uniform Lifetime Table and the joint and last survivor table found in the final regulations. You will want to be sure that the plan is paying out at least the minimum amount to plan participants once they reach age 70 1/2. As set forth above, failure to pay out the minimum distribution amount could subject the participant to confiscatory taxation.

3.The recent final minimum distribution regulations allow distributions to be paid in smaller amounts and over a much longer time period than was previously available. The wise fiduciary will counsel plan participants, especially those with large balances, to seek professional tax and estate planning help at the time of distribution. The present rules allow some significant tax savings over time.

4. Plans must generally be amended in 2003 to comply with the new minimum distribution rules. Fortunately, the IRS has provided a snap-on amendment for this purpose that can be found in Revenue Procedure 2002-29.

-- Knight, Jay Adams