Tag Archives: minimum required distributions

Required minimum distributions beginning in 2020

Required minimum distribution (RMD) is the minimum amount that U.S. tax laws require to be withdrawn by participants every year. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in late December 2019, changed the retirement age at which RMDs are required from 70½ to 72 years for individuals who will reach age 70½ after December 31, 2019.

In general, if a participant reached the age of 70½ in 2019, the prior rule applies and the participant must take the first RMD by April 1, 2020. If the participant reaches age 70½ in 2020 or later, the first RMD must be taken by April 1 of the year after reaching 72. For all subsequent years, including the year in which the participant was paid the first RMD by April 1, the RMD must be taken by December 31 of that year.

Participants should remember that if they are active and participating in a retirement plan sponsored by their employers and don’t own more than 5% of the company, RMDs typically do not apply to that particular account until they retire. However, there could be exceptions to this rule for plans that require RMDs for active participants based on age only or for participants who die before RMDs begin.

The RMD age change should not be confused with a change in the latest Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act waives RMDs during 2020 for individual retirement accounts (IRAs) and retirement plans, including beneficiaries with inherited accounts. This waiver also includes RMDs for individuals who turned 70½ in 2019 and took their first RMD in 2020.

RMDs were introduced so that participants wouldn’t be able to avoid paying taxes forever. They would have to withdraw from their accounts or else they could face a penalty. Failure to take RMDs on time could result in a 50% tax penalty. In other words, the plan participant who should have received the RMD is liable for an excise tax under Internal Revenue Code Section 4974 equal to 50% of the amount of the RMD not received. Also, the plan sponsor could face plan disqualification—that means the plan loses its tax-exempt status and the many advantages that come along with that status. 

There are some positives that come with this retirement age change:

  • People can plan their taxes in a better way. They can defer taxes on any income and gains that the assets in their retirement accounts will generate. This will let their savings sit for a longer time.
  • People can minimize their annual tax impacts.
  • People can reap benefits due to the delay in forced distribution or mandatory distribution. In other words, they don’t need to worry about the reinvestment of an unwanted RMD amount, and this means no depletion of their account.
  • People who have sizable retirement account balances will find the later RMDs attractive because they don’t have to withdraw their money.
  • People can easily remember their time of RMD withdrawals. Calculation of RMD becomes simpler because no one has to track the 70½ age marker. Instead, they just have to wait for their 72nd birthday to be RMD-eligible.

However, there are also some items to note about RMDs and the change in RMD age:  

For participants:

  • People can face alternate tax withholding requirements if they withdraw more than what is required due to the RMD age change. They are required to pay 20% withholding in federal income tax on the amount above the RMD. The only way to avoid this tax on the overage is to roll over the excess to another qualified retirement plan or IRA. Therefore, this age change isn’t happy news for people who might have to withdraw more than required.
  • People’s retirement funds can be affected if they make changes in their lifestyle spending. Making those changes can seem attractive, and people may even consider it a good decision. But this can affect retirement planning and funds if not handled wisely. A delay in RMD could lead to changes in retirement planning, which might further lead to changes in lifestyle spending.

For plan sponsors:

  • Plan procedures need to be changed. Various forms and letters describing details of participants’ RMDs are sent to them every year. These plan procedures need to be updated so that they have the correct RMD information. In simple terms, all documents and procedures related to the plan need to be amended. Failure to update the documents may result in penalties and plan disqualification.
  • Participants must be given notices in a timely manner.  Once all the documents are updated, it’s the employer’s responsibility to ensure the participants receive information in a timely fashion to avoid any penalty. If the new rules are not properly implemented, it could result in plan administration errors. Employers and sponsors should work with administrators to ensure proper handling to avoid any such delays or errors. They must take care of errors while calculating the RMDs such as missing accounts, using the wrong balance, incorrect Internal Revenue Service (IRS) tables, incorrect ages, or missing RMD altogether.  Advisers also need to review their technology and planning processes and change them accordingly if needed. These mistakes may seem common, but they bring huge penalties if not corrected quickly.

Ultimately, the change in the RMD starting age won’t affect the population that is  already taking the RMD and will continue doing so regardless of their age. But one cannot ignore the fact that, while the RMD age change might seem small, it will bring lots of changes in paperwork and retirement income planning for people who are affected.

COVID-19 and minimum required contributions for single employer defined benefit plans

The COVID-19 pandemic has precipitated short-term and long-term economic responses that will continue to unfold. In the meantime, employers have many questions regarding Internal Revenue Service (IRS) minimum required contributions (MRCs) for their defined benefit plans.

In this article, Milliman actuary Esther Peterson summarizes the components that feed into the MRC calculation and considers how potential consequences may trickle down into the MRC calculation for future plan years.

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.

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 a 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 childcare
    • 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. This 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 Internal Revenue Code (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 as 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 whether 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 CARES 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 U.S. Department of Labor (DOL) will have additional authority to postpone certain deadlines that apply to ERISA-covered plans for a public emergency declared by the U.S. Department of Health and Human Services (HHS), 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 whether the postponement authority for DOL extends to Treasury or the Internal Revenue Service (IRS) for compliance deadlines under IRS authority.

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.