Just before the COVID-19 crisis struck the U.S. and commanded all our attention, Congress had passed legislation that was a pretty big deal for retirement savers. Effective January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) made significant changes to the rules governing retirement plans and IRAs to help individuals save more for retirement. One of the ways the SECURE Act accomplishes this initiative is by allowing retirement plan participants and IRA owners to keep their savings tax-deferred for longer by increasing the starting age for required minimum distributions (RMDs).
RMD Rules Refresher
The RMD rules are designed to ensure that tax-deferred retirement savings are distributed and enter the tax stream during the saver’s lifetime. These rules dictate when a plan participant must begin taking distributions from their retirement accounts and how much they must take each year. If a plan participant fails to take an RMD, they are subject to a 50% excess accumulation tax on the portion of the amount that was required to be distributed but remained in the plan. Failure to distribute an RMD is also a plan qualification failure that plan sponsors must monitor to preserve the tax-favored status of their qualified retirement plan.
SECURE Act Increases RMD Age
Before the SECURE Act, plan participants generally had to begin taking annual distributions from the plan at age 70½. The plan has until April 1 of the year following the year the participant reaches age 70½ to distribute the first year’s RMD. Some 401(k) plans allow participants who are still employed after that age to delay starting their RMDs until the participant separates from service (so long as the participant does not own more than 5% of the company). After the first year’s RMD, each subsequent year’s RMD must be distributed by December 31.
Americans are living longer now than they were when the RMD rules were originally enacted. The SECURE Act has updated the rules to account for this by delaying the start of required distributions. The new RMD starting age is 72. The deadline for taking the first distribution is still April 1 of the year following the year the individual reaches RMD age, and all other RMD rules still apply.
This age change is effective beginning in 2020 for anyone who had not yet reached age 70½ by December 31, 2019. Those that had reached age 70½ or older by December 31, 2019, must follow the rules for starting RMDs at age 70½.
But No RMDs Are Due in 2020
Implementing the age change from 70½ to 72 in 2020 with no notice or time to adjust systems and processes was already creating challenges for plan sponsors and recordkeepers trying to identify participants who must take an RMD in 2020. Then, the RMD rules changed again just a few months into 2020. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide economic relief in the wake of the pandemic and business closings. The CARES Act waives RMDs for 2020 to help participants avoid locking in investment losses caused by the recent market volatility. RMDs due for and in 2020 are waived. This includes RMDs due by April 1, 2020, for 2019 that hadn’t been taken yet, RMDs due by December 31, 2020, and RMDs due by April 1, 2021 for 2020. The waiver also applies to beneficiary payments due in 2020 and extends the five-year payment option to six years for beneficiaries who elected that option following the death of an account owner within the past five years.
Plan Sponsor Action Steps
Although no plan distributions will be recognized as “RMDs” for tax purposes in 2020, plan sponsors still must decide how to operate their plans in 2020. A plan sponsor could choose to:
- make no RMDs in 2020 unless a participant requests a distribution,
- make RMDs in 2020 unless a participant opts out of receiving one, or
- process RMDs under typical procedures.
Due to system and timing constraints, your plan’s recordkeeper may be dictating which options are available to your plan. If RMDs are not processed as usual, the plan will probably need to be amended to incorporate the waiver.
Plan amendments for this are due by the end of the 2022 plan year.Make sure you promptly review any RMD reports or communications from your plan’s recordkeeper this year so you can ensure you are operating your plan appropriately. Even if your plan appropriately. Even if your plan processes RMDs in 2020, individuals who receive an RMD may choose to roll over the distribution within 60 days to the plan or an IRA. You may want to educate your participants in RMD status about their options, although the law does not require a specific notice.