Tag Archives: SECURE Act

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Required minimum distribution (RMD) is the minimum amount that U.S. tax laws require to be withdrawn by participants every year.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.

Overview of the SECURE Act’s interim final rule

The Department of Labor’s Employee Benefits Security Administration has published an interim final rule (IFR) describing calculation methodology and model language to “obtain relief from liability” in the presentation of “Lifetime Income Illustrations” applicable to ERISA-covered defined contribution (individual account) plans, the intent of which is likely a regulatory safe harbor.

The IFR includes several assumptions that plan administrators and providers of lifetime income models and illustrations can use to adhere to the lifetime income disclosure requirement of Section 203 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 at least once every 12 months. This Milliman Benefits Alert provides more perspective.

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.

Key nondiscrimination provisions of SECURE

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law as part of the Further Consolidated Appropriations Act, 2020. Most SECURE provisions are for defined contribution (DC) pension plans. However, the SECURE Act also provides relief for the nondiscrimination and minimum coverage requirements applicable to closed defined benefit (DB) pension plans. This is good news for plan sponsors who wish to continue providing accruals in closed DB plans. The relief generally falls into one of two categories: (1) deemed compliance, and (2) additional testing flexibility under the coverage and nondiscrimination regulations for those situations that will require continued testing.

Below are some key provisions related to the nondiscrimination testing requirements under Treasury Regulation 1.401(a)(4) that are modified by the SECURE Act:

  • A closed DB plan can be aggregated with a DC plan for testing on a benefits basis without satisfying a gateway requirement.1 Prior to the enactment of the SECURE Act, the high cost to meet a gateway could lead to premature plan freezes. The closed group needs to meet the following requirements for testing relief:
    • For the plan year in which the closed group closes and the two succeeding plan years, the plan meets the coverage and nondiscrimination requirements of 410(b) and 401(a)(4)
    • After the date the closed group was closed, any plan amendment that modifies the closed group or the benefits does not significantly discriminate in favor of highly compensated employees (HCEs)
    • The closed group was created before April 5, 2017, or the plan has been in effect for at least five years as of the date the closed group is created and there has not been a substantial increase in the coverage or value of the benefit, right, or features (BRFs)
  • Matching and nonelective contributions in a 401(k) or a 403(b) plan can be used in the general test;2 further, matching contributions can be treated as if they are nonelective contributions.
  • DC plans with different plan years are allowed to be aggregated with a DB plan.
  • DC plans with different BRFs are allowed to be aggregated with a DB plan.
  • A closed DB plan is deemed to satisfy the nondiscrimination requirements for BRFs under 1.401(a)(4)-4 if the plan meets the requirements as noted above.
  • A closed DB plan is deemed to satisfy the requirements for minimum participation3 under §401(a)(26) if the plan amendment was adopted prior to April 5, 2017:
    • To cease all benefit accruals
    • To provide future benefit accruals only to a closed group

Prior to the SECURE Act, the Internal Revenue Service (IRS) had provided regulatory guidance that was meant to alleviate some of the difficulties in satisfying these technical tests. While plan sponsors appreciated the effort, the regulatory guidance was temporary and limited, which is why the SECURE Act addressed these issues. During the last few years, plan sponsors had implemented some or all of following changes to their DB plans to meet the nondiscrimination and minimum coverage requirements:

  • Provided additional nonelective contributions under the DC plan at a potentially significant cost to employers in order to continue DB accruals
  • Extended participation in the DB plan for some non-HCEs who were previously not eligible under the plan
  • Froze accruals for participants who are HCEs
  • Froze accruals for all participants under the plan

Plan sponsors can elect to apply the relief provisions of the Secure Act retroactively for plan years beginning after December 31, 2013. However, in certain situations, the plan document must be formally amended. Plan sponsors may amend their plans to provide previously eliminated BRFs or to provide benefit accruals to a closed group if a sponsor is forced to change a plan because of prior testing limitations that were relieved as a result of the SECURE Act.

1 The minimum aggregate allocation gateway, as described under Treasury Regulation §1.401(a)(4)-9(b)(2)(v)(D), requires each benefiting non- HCE to receive aggregate benefits from the combined DB/DC plan at a minimum level determined by the highest benefiting HCE as follows:
Highest value of combined DB/DC benefits for a HCE Minimum value provided to each non-HCE benefiting under the combined DB/DC plan
Less than 15% 1/3 of the value to the highest benefiting HCE
15% to 25% 5%
25% to 30% 6%
30% to 35% 7%
35%+ 7.5%
A plan is permitted to treat each non-HCE who benefits under the DB plan as having the same value of benefits under the DB plan by replacing the individual DB benefit by the average of benefits for all non-HCEs. The individual DC benefit value (if any) is then added to the average DB value for non-HCEs to determine whether the gateway requirement above has been passed.
2 The nondiscrimination regulations outline “safe harbor” formulas for providing benefits in a DB plan, or participant allocations in a DC plan. If the benefits or allocations are not provided using a safe harbor approach, then the benefits or allocations are subject to the general test in order to demonstrate that the benefits do not discriminate in favor of HCEs.
3 Minimum participation rules under §401(a)(26) require a DB plan to benefit the lesser of 50 employees or 40% of all employees within a controlled group. 

New opportunities for individual annuities inside retirement plans under SECURE Act

In this article, Milliman actuary Ian Laverty takes a deep dive into changes stemming from the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and provides additional insight into the new law, particularly as it relates to individual annuity contracts. The changes made by SECURE that open up opportunities for individual annuity carriers relate to two primary topics: fiduciary responsibility and portability.

SECURE Act considerations for defined benefit plan sponsors

The Setting Every Community Up for Retirement Enhancement (SECURE) Act will lead to technical and administrative actions that defined benefit (DB) pension plan sponsors should explore. In this article, Milliman’s Vanessa Vaag and Mary Hart summarize mandatory and voluntary changes arising from the SECURE Act related to human resource administration and DB plan calculations that plan sponsors must address.