Tag Archives: required minimum distributions

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 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.

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.

Pension spring cleaning can start with required minimum distributions

One of the most daunting challenges a pension plan can face is distributing required minimum distributions (RMDs) at a terminated vested participant’s required beginning date (RBD). The RBD is akin to cleaning house for the Internal Revenue Service (IRS) because tax-deferred income must start being taxed by the statutory date. Ostensibly, this income will be taxed in full within the participant’s lifetime.

The fall is the perfect time to take stock of which participants (including alternate payees, spouses, and non-spouse beneficiaries) are required to commence payment by April 1 of the following year. Any corrective actions that need to be taken for those participants who missed their RBDs may be completed before filing Form 5500.

To read more about cleaning up with required minimum distributions, read Jennifer Godwin’s article here.