Incorrect coding after 1035 on inherited non-qualified annuity with RMD

Home Fairmark Forum Retirement Savings and Benefits Incorrect coding after 1035 on inherited non-qualified annuity with RMD

This topic contains 15 replies, has 2 voices, and was last updated by  DTASFAB 4 months, 2 weeks ago.

Viewing 15 posts - 1 through 15 (of 16 total)
  • Author
    Posts
  • #1867

    DTASFAB
    Participant

    When my father died in 2012 at age 71, he left me a non-qualified annuity at MetLife worth about $49,000 with a $16,000 tax basis. We did a non-qualified lifetime stretch and I’ve been taking RMDs each year based on my life expectancy. The total value grew to as high as about $92,000 at the peak of the market, and now it’s somewhere around $76,000. The RMDs have been consistent each year, so far always being over $1,000 and under $2,000, usually with a slight increase each year due to market growth and increase in my age.

    In October/November 2017, I was sick of the poor service and high fees at MetLife, so I 1035’ed the whole thing to Nationwide. I had already taken the 2017 RMD in the summer of 2017 when it was still at MetLife. Some insurance companies (like Fidelity) wouldn’t even touch it because it was inherited.

    Nationwide was willing to take it, but they messed it up. It seems they coded it as a non-qualified annuity in my name only, with no mention of inherited status, stretch, or my father’s name anywhere. There’s no indication that I’m required to take an RMD, but I know that I am. I took my 2018 RMD in August, but the Nationwide transaction details list it as “Individual Post-Tax Voluntary.”

    My financial advisors at Morgan Stanley know about it, but they haven’t been able to get Nationwide to correct the mistake. What should I do? Does it matter if they correct it before the end of the year? I don’t need the headache of the IRS poking around asking questions.

    • This topic was modified 5 months, 2 weeks ago by  DTASFAB.
    • This topic was modified 5 months, 2 weeks ago by  DTASFAB.
    #1870

    Alan S.
    Participant

    Since there has been an obvious breakdown in communications between Nationwide and Metlife, it seems odd that you cannot even get them to look into the need to re title the inherited annuity. Perhaps Morgan Stanley has dropped the ball as well. Have you called Nationwide directly? You should have plenty of documentation of the title on the Metlife annuity to provide Nationwide including a 2017 1099R with Code 6, but do you also have documentation that Nationwide considers this a 1035 and received the correct basis info? Possible additional consequences will be the coding on your 2018 1099R from Nationwide, as the lack of death code 4 in Box 7 would mean that the taxable portion of the distribution would be subject to the 10% penalty. 1099 forms will be issued in a couple weeks, so I would call Nationwide without delay. Once an incorrect 1099R is issued and you do not report per the 1099R, the IRS will contact you.

    • This reply was modified 5 months, 2 weeks ago by  Alan S..
    #1872

    DTASFAB
    Participant

    We have confirmed that Nationwide has the correct tax basis information and other details regarding the titling of the account/contract. Morgan Stanley is very aware of this and they know what they have to do, which is to get Nationwide to look at the original 1035 transfer documents and fix their error. The MetLife documents they sent to Nationwide and CC’ed to me at the time of the 1035 were all 100% correct.

    The problem is that the Morgan Stanley guys have been taking some time off around the holidays, and when they’re in the office, they’re busy making sure their other clients have actually taken their RMDs. The other problem is that Nationwide is employing monkeys who randomly punch buttons on their computer keyboards and even when escalating the issue to mid-level service reps, the problem still hasn’t been fixed.

    I will contact Nationwide myself later this week, after the new year (since December 31 is likely to be a madhouse for them), and escalate it as high as possible. If I don’t have any luck dealing directly with Nationwide myself, I will demand that the guys at Morgan Stanley escalate it up their internal chain so we can get more assistance from higher up in the company (on the Morgan Stanley side).

    My main concern is that something would have to be done by this Monday, the 31st. But from your post, it seems as long as the problem is fixed before the 1099-R is generated in late January or February, I should be fine. Thanks for your help.

    #1873

    Alan S.
    Participant

    Yes, but the date transfer to their tax reporting unit or firm will probably take place around the 10th since the 1099R forms must be mailed by 1/31. So it leaves a narrow window to intercept and amend the data. Seems like it should take someone at Nationwide less than 10 minutes to review the documents and see that the account was mistitled. Contributing to this error could well be that the PLR allowing 1035 exchanges of inherited annuities was just issued in 2013, and account techs probably still see very few of these, so force of habit is probably a factor.

    #1900

    DTASFAB
    Participant

    I just called and they are saying the contract is coded properly in their system, but what I see when I log into my account at nationwide.com is not as comprehensive as what they have on their back end. They told me the August 2018 distribution will in fact have the death code on the 1099-R that is to be issued in the coming weeks and I have nothing to worry about.

    HOWEVER, I asked them what divisor they used to calculate the 2018 RMD amount, and they said 44.6, which we talked about on the previous forum. My father died in 2012 and I was 34 the following tax year in 2013, and according to Table I on 590-B, my life expectancy that year was 49.4 years.

    According to both you Alan, and my CPA who has been doing my taxes every year since 2012 (and also filed my father’s final 2012 return after his death), the beneficiary uses the life expectancy in the year following death (in this case 2013) and subtracts one full year for each subsequent tax season. In other words, my 2013 life expectancy of 49.4 years is set in stone for the rest of my life, and the divisor in all subsequent years should always end in .4 as a result of subtracting exactly one full year from the previous life expectancy divisor. Therefore, the 2018 divisor should have been 44.4, not 44.6, despite the life expectancy for a 39 year old in Table I being 44.6 years.

    Was I confused about this rule? Does it only apply to inherited traditional IRAs and not to inherited non-qualified annuities?

    A Nationwide inquiry was opened and I was told I would receive a call back within three hours of when the investigative department opens the inquiry, which may or may not happen today.

    • This reply was modified 5 months, 2 weeks ago by  DTASFAB.
    #1905

    Alan S.
    Participant

    Yes, the 1.0 reduction applies for each year but Nationwide used the single life divisor for your actual age in each year. Two of those years had only a .9 reduction and that is why their divisor is now .2 higher than the correct divisor. I am sure they will agree if they actually review the situation. However, since this is not a qualified plan, there is no IRS potential penalty for any shortfall. Will be interesting to see what they propose to do about this since the first distribution shortfall was in 2014. For 2018 the shortfall in distribution would only be about $10.

    #1906

    DTASFAB
    Participant

    Your wording is interesting. If there’s no IRS penalty for any shortfall, why am I even taking RMDs? How are they actually “required?”

    I’ve been taking the correct required minimums based on my own calculations, so there have been no historic shortfalls over the past several years on this specific annuity. I’m not sure if MetLife was calculating the RMDs correctly, but I always took a few dollars extra each year either way.

    For calculating my first Nationwide distribution in 2018, I used 44.4 and then added an extra $2 on top of that. If Nationwide had originally coded the contract properly, they should have informed me of an RMD amount of $1,860.01 based on a 12/31/2017 value of $82,584.43. I actually took $1,862.00.

    #1908

    Alan S.
    Participant

    They are required per the tax code Sec 72(s). There is just no excess accumulation penalty, but the code says that the contract will not be considered an annuity if these provisions are not required in the contract. If not an annuity then all amounts in excess of the basis will be taxable. You are doing a better job than Nationwide so there is no problem. If Metlife messed up in 2014, I would not worry about that now.

    #1980

    DTASFAB
    Participant

    I made a post about 45 minutes ago, but it’s not showing up.

    #1981

    DTASFAB
    Participant

    I will try again.

    Schwab says: “Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year.”

    Fidelity says: “[U]se your own age and the IRS Single Life Expectancy Table for calculating the first year RMD. For each year after, you would subtract one year from the initial life expectancy factor.”

    IRS says: “Determine beneficiary’s age at year-end following year of owner’s death… Reduce beginning life expectancy by 1 for each subsequent year.”

    Am I correct that Schwab is technically correct in their wording, but ONLY because of the possibility that Table I could potentially be revised from year to year? In other words, in my specific situation, the 2013 edition of Table I listed the life expectancy of a 34 year old to be 49.4 years. Therefore, by subtracting 1 for each subsequent year, my life expectancy is now 43.4 for the 2019 tax year.

    HOWEVER, we have to keep in mind that Table I in 2019 is still the same as Table I in 2013. Hypothetically, if the 2019 Table I life expectancy for a 34 year old were arbitrarily increased to 49.8 (it wasn’t, but this is hypothetical), my 2019 RMD divisor would be 43.8 rather than 43.4? Is that the “reevaluation” Schwab is talking about? If this is the case, it’s extremely confusing, because it can lead people to believe they just go by Table I each year, regardless of the beneficiary’s age in the year following the year of the decedent’s death. Fidelity and the IRS site are much more straightforward in my opinion, but NONE of them clarify this rule completely free of ambiguity.

    #1986

    Alan S.
    Participant

    Schwab wouldn’t base a response on future possibilities. More likely, the situation Schwab is addressing is for a sole SPOUSAL beneficiary as that is the only situation for which that response would be correct. The 1.0 reduction is referred to a “non recalculation” and the table reentry for sole spousal beneficiaries is called “recalculation” by the industry. Schwab indicates reevalution which to me equates to recalculation.

    Fidelity and the IRS are saying the same thing in different ways. Your 2019 divisor should be 43.4, 2018 should have been 44.4. Hasn’t Nationwide admitted to this error yet?

    #1989

    DTASFAB
    Participant

    The Schwab website is clearly wrong, because the wording I copied was from their “Traditional-Non-spouse inherits” tab, but I’m not really concerned about Schwab.

    No, Nationwide hasn’t confirmed anything, because apparently their communication is about as efficient as their tax compliance. The person to whom they’ve referred me hasn’t responded to any messages yet. I’ll call again today.

    #1991

    DTASFAB
    Participant

    They have finally admitted the error, corrected the 2019 RMD amount, and tagged the contract with a note to calculate the RMD amount manually in all subsequent years. They also confirmed once again that my 2018 1099-R is going to be coded correctly as a required death distribution.

    #1992

    Alan S.
    Participant

    They probably realized their error right away, but the extra time to respond was probably applied to determining what to do about their error. Since technically an RMD shortfall is simply added to the next year’s RMD, they should calculate any shortfalls for each year since they acquired the account and add that shortfall to your 2019 RMD. But since there is no penalty I would not worry about whether they add the prior shortfall or not.

    #1993

    DTASFAB
    Participant

    There has never been a shortfall in the actual distributed amounts. MetLife never made this error, and the first year Nationwide held the contract and I had to request a distribution from Nationwide was 2018.

    They never even notified me of any 2018 RMD because they initially had the contract coded as a standard non-inherited non-qualified after-tax annuity.

    I took the 2018 distribution in the correct amount and that distribution has since been recoded correctly as a death distribution.

    The 2019 RMD amount has been adjusted upward by approximately $9 to reflect the change in the divisor from 43.6 to 43.4. I will wait until the stock market recovers a little more to take the 2019 RMD, maybe at the end of this month.

Viewing 15 posts - 1 through 15 (of 16 total)

You must be logged in to reply to this topic.