RMDs 2020: An unexpected update

In January, I published a blog about the updates to required minimum distribution (RMD) rules that are due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

As we are all keenly aware, things have changed dramatically since January. In that January blog, we mentioned that SECURE contained the first RMD changes since the Worker, Retiree, and Employer Recovery Act (WRERA) of 2009. On March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes, among many other relief items, a change very similar to the WRERA waiver of RMDs in 2009.

Below is an excerpt from the Milliman Benefits Alert sent to clients recently:

“Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b) and governmental 457(b) plans. Applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.

  • 2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the IRC Section 402(f) notice requirements (rollover rights explanation).”

The main difference from the WRERA RMD waiver is that the CARES Act allowed for a waiver of all 2019 RMDs due to be paid in 2020. However, because of the timing, most of these RMDs have already been distributed from retirement plan accounts, as the deadline for distribution was April 1, 2020.

If sponsors elect to apply the waiver, they will need to amend their plan documents for this and all other CARES Act provisions by the end of the plan year starting on or after January 1, 2022.

Recruiting essential workers during COVID-19

Essential businesses like the healthcare industry are experiencing increased staffing needs as a result of the coronavirus pandemic. One source of trained and experienced professionals being recruited to fill those needs are former employees who are currently retired.

However, these professionals are less likely to come out of retirement if their monthly pension payments are suspended as required by some pension plans. In order to remove that obstacle, employers should seek to amend their plan to remove or modify this provision for those rehired during the crisis. It would make the road to re-employment smoother for these retirees.

Milliman’s Vicki Mazzie highlights several issues for plan sponsors to consider in her article “Impact of COVID-19 on your pension plan: Rehiring retirees in healthcare and other essential businesses.”

Reducing staff? Your defined benefit plan can help ease the pain

The effect of COVID-19 has been devastating for some businesses. In a relatively short amount of time, we’ve seen thriving businesses brought to their knees—some closing temporarily or for good. Others, anticipating a longer recovery period, are considering some difficult changes such as laying off workers.

If your company is being forced to downsize or temporarily close, don’t forget that you can leverage your defined benefit plan during these difficult times. You can make the transition for your employees more palatable by:

  • Offering an early retirement window:During an early retirement window, you are able to offer enhanced benefits to encourage retirement. Consider offering medical benefits to bridge the gap and to make the offer even more worthwhile. Although an early retirement window reduces active participant cost, it can increase the cost of pensions paid over time (but is less problematic with well-funded plans).
  • Lowering Normal Retirement Age:Amending the plan to lower the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere. This should be carefully considered as you could risk losing high-quality workers to competitors, and a lower Normal Retirement Age becomes a permanent feature of the plan.

It’s possible you will need to consider more drastic action and close your doors permanently. If you are unable to fund, manage, or administer the plan, a plan termination is the likely scenario. In these unprecedented times, remember your defined benefit plan can ease the pain as you make difficult decisions such as workforce reductions.

As you consider taking action and want to discuss how you could leverage your defined benefit plan, contact your Milliman consultant.

This blog post is the second of a three-part series on workforce management during the coronavirus pandemic.

Estimated cost of retiree pension risk transfer climbs from 104.6% to 105.2% in February

Milliman today announced the latest results of its new Milliman Pension Buyout Index (MPBI). As the Pension Risk Transfer (PRT) market continues to grow, it has become increasingly important to monitor the annuity market for plan sponsors that are considering transferring retiree pension obligations to an insurer. The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a PRT annuity de-risking strategy.

During February, the estimated cost to transfer retiree pension risk to an insurer rose slightly for the month, with costs ticking up from 104.6% of a plan’s total liabilities to 105.2% of those liabilities. This means the estimated retiree PRT cost for the month is now 5.2% more than those plans’ retiree accumulated benefit obligation (ABO). February’s increase is the result of discount rates decreasing 19 basis points, compared to a 25 basis point drop for annuity purchase rates, so that the relative cost of annuities climbed slightly.

Plan sponsors considering de-risking strategies amidst the recent market volatility can use the Milliman Pension Buyout Index to better understand cost trends in the market, so as to approach any PRT decisions at the best possible time.

Plan sponsors should note that the MPBI is an average cost estimate, and individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Furthermore, specific characteristics in plan design or participant population can affect the cost of a pension risk transfer.

To view the complete Milliman Pension Buyout Index, click here.

CARES Act summary

The following is a summary of the retirement plan provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Defined contribution (DC) plan provisions

Distribution and loan relief to “qualified individuals” means either:

  • Participants (or their spouses or dependents) who have been diagnosed with coronavirus disease (SARS-CoV-2 or COVID-19)
  • Participants who have experienced adverse financial consequences due to the virus resulting from:
    • Being quarantined, furloughed, or laid off
    • Having their work hours reduced
    • Being unable to work due to lack of child care
    • Closing or reducing hours of a business they owned or operated

Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b) and governmental 457(b) plans. Applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.

  • 2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the IRC Section 402(f) notice requirements (rollover rights explanation).

Single-employer defined benefit (DB) plan provisions

All single-employer funding obligations due during calendar year 2020 can be delayed until January 1, 2021. Accrued interest must be added to the delayed payment(s). There is no distinction to which plan year the DB plan contributions are due.

A plan sponsor may elect to use the single employer DB plan’s funded status for the 2019 plan year to determine if benefit restrictions must be administered. Benefit restrictions prevent the plan sponsor from paying “accelerated forms of distribution” such as lump sums.

The CARES Act is silent on RMDs for defined benefit pension plans.

Plan compliance / federal forms and notice distributions

Plan amendments deadline for adopting any of the relief provided under the Act would be no earlier than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans).

The Department of Labor will have additional authority to postpone certain deadlines that apply to ERISA-covered plans for a public emergency declared by the Department of Health and Human Services, which would include the current public emergency for COVID-19. We believe this will apply to ERISA compliance deadlines, such as Form 5500, Annual funding notice, quarterly (or other periodic) participant statements, and others. This is not an exhaustive list. We note that it is unclear if the postponement authority for DOL extends to Treasury/IRS for compliance deadlines under IRS authority.

How is COVID-19 affecting multiemployer plans?

The coronavirus’ effect on the economy and financial markets have major implications for multiemployer plans. In this Multiemployer Alert, Milliman actuaries Ladd Preppernau and Carrie Vaughn present several questions and answers that sponsors must consider about their plans in light of the current pandemic.