Poested By: IceMiller Legal Counsel
Authors: Audra J. Ferguson-Allen, Robert L. Gauss, Lisa Erb Harrison, Tara Schulstad Sciscoe, Christopher S. Sears, Lindsay Knowles
May 7, 2018
We have highlighted some FAQs regarding Required Minimum Distributions (“RMDs”). This is intended to provide our governmental clients with a broad overview of the general requirements of Internal Revenue Code (“Code”) § 401(a)(9). If you have questions or concerns about RMDs as they relate to your plan or how to locate missing plan participants, please contact Audra Ferguson-Allen, Robert Gauss, Lisa Harrison, Lindsay Knowles, Tara Sciscoe, Chris Sears, or the Ice Miller LLP Employee Benefits attorney with whom you most closely work.
Question 1: What are Required Minimum Distributions?
Answer 1: RMDs are the minimum amounts a retirement plan participant must withdraw, annually, beginning with the later of the year he or she reaches 70½ years of age or the year in which he or she retires. Retirement plan participants are responsible for taking the correct amount of RMDs on time every year from their accounts. The Internal Revenue Service (“IRS”) imposes a significant penalty on the payee for failure to take RMDs. In addition, Code § 401(a)(9) requires qualified plans to provide for compliance with the RMD rules.
Question 2: What types of retirement plans require minimum distributions?
Answer 2: All qualified retirement plans, including governmental plans, must comply with Code § 401(a)(9) in order to maintain qualified status. Code § 401(a)(9) and the applicable regulations contain complex rules regarding both the timing and form of distributions from qualified plans. There are special rules depending on whether the qualified plan is a defined benefit plan or a defined contribution plan. In addition, Code § 401(a)(9) prescribes both document compliance requirements and operational compliance requirements. Plan sponsors can use the Employee Plans Compliance Resolution System (“EPCRS”) under Rev. Proc. 2016-51 to voluntarily correct the mistake of not making RMDs to affected participants and beneficiaries.
Question 3: How is the required minimum distribution calculated?
Answer 3: Code § 401(a)(9) provides rules for distributions during the life of the participant in § 401(a)(9)(A) and rules for distributions after the death of the participant in Code § 401(a)(9)(B). The participant’s entire interest in a qualified plan must be distributed, beginning not later than the participant’s Required Beginning Date (“RBD”), in accordance with regulations, over the life of the participant or over the lives of the participant and a designated beneficiary (or over a period not extending beyond the life expectancy of the participant and a designated beneficiary). Code § 401(a)(9)(A)(ii).
Question 4: When is the RBD?
Answer 4: The answer depends on (1) who is receiving the benefit and (2) whether the participant has commenced the benefit in a manner that complies with Code § 401(a)(9).
- For a participant, the required beginning date is April 1 of the calendar year following the later of the calendar year in which the participant attains age 70½ or the calendar year in which the participant retires. Code § 401(a)(9)(C).
- If a participant dies before his/her RBD and payments have not commenced, and the surviving spouse is the designated beneficiary, the benefits must commence to the surviving spouse beginning by the later ofDecember 31 of the calendar year after the calendar year of the participant’s death or December 31 of the year the participant would have attained the age of 70½. Code § 401(a)(9)(B)(iv)(I); Treas. Reg. § 1.401(a)(9)-3, Q&A-3(b).
- If a participant dies before his/her RBD and payments have not commenced, and if the participant does not have a designated beneficiary or the designated beneficiary is not an individual, the participant’s remaining benefit must be distributed in accordance with the 5-Year Rule. Code § 401(a)(9)(B)(ii) and Treas. Reg. § 1.401(a)(9)-3, Q&A-4. The 5-Year Rule provides that the participant’s remaining interest must be fully distributed by December 31 of the calendar year containing the fifth anniversary of the participant’s death. However, certain qualifying individual trusts are treated as “individuals” for this purpose. Treas. Reg. § 1.401(a)(9)-2, Q&A-5.
- If a participant dies before his/her RBD and payments have not commenced, and there is a designated beneficiary, the default rule is the participant’s remaining benefit generally must be distributed over the designated beneficiary’s lifetime or a period not to exceed his/her life expectancy (“Life Expectancy Rule”) or the plan may provide for distributions in accordance with the 5-Year Rule. For joint and survivor benefits to a non-spouse beneficiary, additional limitations under Treas. Reg. § 1.401(a)(9)-6, Q&A-2(c) should be considered.
- If distributions have already begun (in a manner that complies with Code § 401(a)(9)) and the participant dies prior to full distribution of his or her benefits, then the participant’s remaining interest must be distributed at least as rapidly as it would have been distributed had the employee lived long enough to have the entire interest distributed. Code § 401(a)(9)(B)(i); Treas. Reg. § 1.401(a)(9)-2, Q&A-5.
Question 5: What happens if a participant or payee does not take an RMD by the required beginning date?
Answer 5: An excise tax is imposed on a payee under any qualified retirement plan if the amount distributed during the payee’s tax year is less than the RMD for the tax year. Code § 4974(a). The amount of the excise tax is 50% of the amount by which the RMD exceeds the actual amount distributed during the calendar year. Treas. Reg. §54.4974-2, Q&A 1.
The IRS is authorized to waive the 50% tax if the payee establishes that the failure to make the RMD is due to reasonable error and reasonable steps are being taken to remedy the shortfall. Code§ 4974(d); Treas. Reg. §54.4974-2, Q&A 7(a).
Question 6: How can a qualified retirement plan comply with Code § 401(a)(9) requirements with regard to participants and beneficiaries for whom the plan does not have current contact information?
Answer 6: Under EPCRS, reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address. In general, such actions include, but are not limited to, a mailing to the individual’s last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of a commercial locator service, a credit reporting agency, or internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A plan will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits are provided to the individual at that time. Rev. Proc. 2016-51 § 6.02(5)(d). Also note the EPCRS guidance indicates that not only do reasonable actions need to take place with respect to locating missing members/beneficiaries, but if later located, the benefits for the member/beneficiary must be provided/reinstated.
Additionally, an October 19, 2017 IRS EP Examinations Memorandum provided guidance for Employee Plans (“EP”) examiners, explaining that EP examiners shall not challenge a qualified plan for violation of the RMD standards for the failure to commence or make a distribution to a participant or beneficiary to whom a payment is due, if the plan has taken the following steps:
- searched plan and related plan, sponsor, and publicly-available records or directories for alternative contact information;
- used any of the search methods below:
- a commercial locator service;
- a credit reporting agency; or
- a proprietary internet search tool for locating individuals; and
- attempted contact via United States Postal Service (“USPS”) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone number).
Separately, your state may allow the plan to use its unclaimed property process without relinquishing assets from the plan to the state’s unclaimed property fund. If so, this is another good means for searching for missing participants/beneficiaries.
Question 7: Can a participant take his/her RMD from one retirement plan instead of separately from each plan in which the participant participates (i.e., aggregation)?
Answer 7: If a member is a participant in more than one plan, the plans in which the member participates are not aggregated for purposes of testing RMDs. Each plan must separately meet the Code § 401(a)(9) requirements. Treas. Reg. § 1.401(a)(9)-8, Q&A-1. With regard to defined contribution plans, if a member has multiple accounts under a plan, those accounts must be aggregated for purposes of Code § 401(a)(9). Treas. Reg. § 1.401(a)(9)-8, Q&A-2. However, if a member’s account is used in part for the purchase of an annuity, the annuity must separately satisfy the requirements of Treas. Reg. § 1.401(a)(9)-6. If a defined benefit plan has benefit structures that are separately identifiable and separately distributed, they can be treated as separate plans for compliance purposes. Treas. Reg. § 1.401(a)(9)-8, Q&A-2(a)(2); see also Treas. Reg. § 1.401(a)(9)-8, Q&A-2(b).
Question 8: How are RMDs taxed?
Answer 8: RMDs are taxed as regular income (subject to basis recovery rules). A qualified plan may not treat a RMD as an eligible rollover distribution. Treas. Reg. § 1.401(a)(9)-7 (with respect to lump sum payments).
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.