As summarized in our January 7 Client Advisory, the SECURE Act includes many changes that affect the design and administration of retirement plans. One of those changes is the increase to the trigger age for required minimum distributions (“RMDs”) from age 70½ to age 72. The change is effective for distributions required to be made after December 31, 2019 with respect to participants who attain age 70½ after December 31, 2019. Employers who sponsor tax-qualified retirement plans (defined contribution and defined benefit), 403(b) plans or 457(b) plans should be contacting their plan recordkeepers and third-party administrators now to coordinate successful implementation of the new RMD trigger age. Read on for what successful implementation will entail.
Background and Effect of the Change. Before the SECURE Act, distributions from retirement plans had to be made or commence by April 1 following the later of: (i) the calendar year in which the participant attained age 70½, or (ii) the calendar year in which the participant retired. (For participants who are 5% owners, distribution had to be made or commence no later than April 1 of the calendar year in which they attain age 70½). After enactment of the SECURE Act, this continues to be the rule for all participants who attained age 70½ on or before December 31, 2019 (i.e., no change for participants who attained age 70½ on or before December 31, 2019). The increase to the RMD trigger age is effective only for participants who attain age 70½ after December 31, 2019.
Example: A terminated 401(k) plan participant who will attain age 70½ on December 10, 2020 will not be required to receive or begin receiving distribution of her vested account balance by April 1, 2021; she will be able to defer the RMD until April 1, 2023 (i.e., April 1 following the calendar year in which she will attain age 72, which is 2022).
Implementing the New RMD Trigger Age. Although the deadline for plan amendments to reflect the new RMD trigger age is a ways off (see below), updates to plan administration cannot wait because the change affects participants who attain age 70½ this year. Retirement plan sponsors should be contacting their plan recordkeepers and third-party administrators now to coordinate successful implementation of the new RMD trigger age. Successful implementation entails updating:
- Plan procedures and automated systems for notifying participants of an upcoming RMD date
- Any notices and communications the plan sponsor and the plan recordkeeper or third-party administrator provides to participants that include information about RMDs to disclose the new RMD trigger age and the participants to whom it applies (e.g., the “Section 402(f)” notice regarding rollover options, distribution forms, and SPDs)
- Distribution coding and reporting for participants who attain age 70½ in 2020 (or in any subsequent calendar year) to ensure that distributions made during or after the year they attain age 70½ and before the year they attain age 72 and that would be eligible rollover distributions (e.g., a lump sum distribution) are treated as eligible rollover distributions and subject to mandatory 20% federal income tax withholding (and, if applicable mandatory state income tax withholding) to the extent not rolled over
Taking steps now to update these items will help ensure successful implementation of the new RMD trigger age and avoid plan administration errors.
Plan Amendments. The deadline for adopting plan amendments to reflect this change is generally the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for plans with calendar year plan years). Governmental plans and certain collectively bargained plans have until the last day of the first plan year beginning on or after January 1, 2024.
