Tag Archives: IRA

RMDs 2020: To infinity and beyond!

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed and signed into law on December 20, 2019, is the first piece of legislation to affect required minimum distributions (RMDs) since the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), which eliminated RMD requirements for 2009.

Beginning in 2020, there are two significant mandatory RMD changes to qualified plans and traditional IRAs:

  • A mandatory increase—to age 72 from age 70-1/2—for the required beginning date for mandatory distributions (effective for distributions required to be made after December 31, 2019, for employees or participants who attain age 70-1/2 after December 31, 2019).
  • A requirement that defined contribution (DC) plan (and IRA) distributions generally be made to non-spouse beneficiaries within 10 years of the death of the account holder (effective for RMDs to beneficiaries who die after December 31, 2019).

These changes do not affect participants currently in pay status. For example, if a participant born prior to June 30, 1949, turned 70-½ prior to December 31, 2019, that person is required to continue RMDs and must have the first RMD for 2019 paid no later than April 1, 2020. RMDs will also continue in 2020 and 2021.

Note that, if an active participant turned 70-½ in 2019 but was not required to take an RMD under the plan document; then that person’s RMD must follow the law and the Internal Revenue Service (IRS) regulations in effect prior to the enactment of SECURE and RMDs will begin in the year of retirement regardless of age. Participants who turn 70-½ in 2020 or later are under the new age 72 regulation.

While not related to SECURE, note that the life expectancy tables used to calculate the RMDs have changed. The revised life expectancies are longer; therefore, the amounts participants and beneficiaries are required to receive, as RMDs will be lower. This change will not go into effect until 2021 at the earliest and is likely to result in a lower tax liability for RMD recipients (except for Roth accounts, for which distributions are tax-exempt).

These changes are mandatory under SECURE and are required to be implemented effective January 1, 2020. Milliman is currently reviewing procedures, and updating our recordkeeping systems to account for the legislative change.

The SECURE Act does give plan sponsors a two-year delay in amending the plan document. Amendments are not required before the last day of the plan year that begins on or after January 1, 2022.

Please contact your Milliman consultant for additional details.

Required minimum distributions: IRS proposes updated tables

The Internal Revenue Service (IRS) has issued a proposed rule that would amend the life expectancy and distribution period tables used to calculate required minimum distributions (RMDs) from qualified retirement plans, profit-sharing and stock bonus plans, IRAs and annuities, 403(b) and 457 plans, and certain other tax-favored employer-provided retirement arrangements. The IRS proposes to apply the updated tables after it issues the rule in final form and no sooner than for distributions beginning on or after January 1, 2021. Therefore, RMDs for 2020 are generally not affected and cannot be calculated using the new proposed tables.

The proposed updated tables reflect longer life expectancies for males and females than under current tables, thereby resulting in smaller RMDs and longer payout periods.

For more perspective, read this Milliman Client Action Bulletin.

Employers helping former employees deal with rollover fees

Many defined contribution plan participants are incurring excessive fees when they roll over their account balances into their IRAs. Sponsors can help former employees maintain their savings by retaining the account balances within their qualified plans. In this article, Milliman consultant Doug Conkel discusses what plan sponsors are doing to help their former employees make better decisions with their plan balances.

Here is an excerpt:

Plan design thoughts

Like other transformations within the defined contribution (DC) market, the genesis of these changes is linked to creating a defined contribution plan with some attributes passed down from the “pension plan era.” Participants and sponsors alike are considering changes that shift the plan design discussion from retirement accumulation topics to the “de-accumulation” or payout phase. So what plan design changes are they making?

Partial lump-sum distributions. Many sponsors have modified their plans such that former participants can request a partial lump-sum distribution of their account balances. This enables former participants to satisfy a one-time expense while leaving a portion of their account balances in the plan.

Installments. Years ago, many sponsors simplified their distribution options by removing installments, based on the conclusion that “a participant can set up installments outside the plan (usually an IRA or annuity).” However, now some sponsors have come to realize the issues noted above with outside accounts and some participants are requesting in-plan installments. Some sponsors are again electing to liberalize the distribution options by allowing former participants to elect installment payments from the plan, which gives participants flexibility and allows them to keep their accounts in the plan….

Education and communication

Guidance on comparing fees. A plan that is run in an unbiased environment is able to provide guidance to participants to help them understand the fees they pay under the current plan provisions and how they might compare those fees to individual retail arrangements. The participant fee disclosure rules introduced a few years ago provide participants with the information they need to access their current plan’s total fees. The plan’s annual notice provides the investment expense ratios from which participants can calculate a weighted expense ratio using their personal account. Plus, using their quarterly statements, a participant can also determine the amount of direct expenses (if any) being deducted from the account. These two key pieces of information yield the total cost of a participant’s account within the qualified plan. If participants can obtain the same information about proposed IRAs or new employers’ retirement plans, they should be able to perform an apples-to-apples comparison of the fees. A best practice in the future would be to provide some guidance to former plan participants to assist them in making this comparison so they can then make informed decisions.