Required Minimum Distributions:
Age Ain’t Nothing but a Number…Unless the IRS is Asking by Adrienne I. Moore, J.D.
In the world of qualified plans, as in life, certain ages will always be significant. 21 – the oldest possible age requirement for eligibility to participate in a plan. 59½ – the youngest age a plan can use to allow in-service distributions for 401(k) accounts. 70½ – the age at which certain participants must start taking required minimum distributions (“RMDs”).
A plan may, but is not required to, allow participants who attain age 70½, and are still working, to defer receiving RMDs. Two groups of participants over age 70½, however, must start taking RMDs. These two groups are retired participants and owner participants. Owner-participants must start taking RMDs at age 70½, regardless of employment status.
When Must Distributions Be Made?
A participant’s first RMD must be distributed no later than the April 1 following the end of the calendar year in which the participant attains age 70½. If your participant attains age 70 on January 15, 2018, he will be 70½ on July 15, 2018, and his first RMD must be distributed no later than April 1, 2019. If a participant attains age 70 on July 15, 2018, then he will be 70½ on January 15, 2019, and his first RMD would need to be distributed no later than April 1, 2020. Note that April 1 is just the latest date and the participant entitled to an RMD may take it by December 31 of the year during which he or she attains age 70 ½.
The law builds in this buffer period for the first distribution to allow both the Plan Sponsor and the affected participant some time to figure out what needs to be done. After that first year, all distributions must be made by the end of each calendar year. This means that, if our participant’s first distribution must occur by April 1, 2019, his second distribution must occur by December 31, 2019. It is a good practice to notify participants of the upcoming RMD when they attain age 70 and again six months later. With proper notice, many participants may elect to take the first distribution before the end of the first year to better spread their tax burden.
Your third-party administrator often will provide you with a list of participants who are affected by RMDs and may have sample communications for you to use.
Determining the Amount to Distribute
Ever wonder how the RMD is calculated? The distribution amounts are determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. Now, let us explain in English.
What is the adjusted account balance? The adjusted account balance for defined contribution plans is the account balance as of the last valuation date in the calendar year immediately preceding the year for which the distribution is being taken. If your plan is a calendar year plan, the last valuation date of the preceding calendar year will always be December 31. Be careful on the first distribution! If the first distribution must occur by April 1, 2019, that distribution actually relates to the 2018 calendar year. The appropriate valuation date, then, is December 31, 2017. For the required minimum distribution due by December 31, 2019, the appropriate valuation date is December 31, 2018.
What is the applicable distribution period? The applicable distribution period is dictated by the IRS based on the participant’s age as of his or her birthday in the calendar year for which the distribution is taken (not necessarily as of age 70½). You can find the Uniform Lifetime table in IRS Publication 590, Appendix B, Table III (found here). Using the Uniform Lifetime table, the applicable distribution period for a 70-year-old participant (which is usually the age for the first RMD) is 27.4 years.
With this information, you are ready to calculate the RMD. If the participant’s account balance on December 31, 2017, was $191,800, the RMD for 2018 (the April 1, 2019, distribution) is $7,000 ($191,800 / 27.4 = $7,000).
Quick Reminders
RMDs are not eligible for rollover. Also, if a participant’s account is subject to RMDs, these distributions must be processed before other distributions. The result is that, if a participant wants to roll his or her account balance to an Individual Retirement Account, you will first need to distribute the RMD before allowing a rollover of the remaining balance. Finally, if a participant is not responsive to your requests, you may force the RMD by the deadline. Failure to distribute an RMD is an operational failure under Internal Revenue Code § 401(a)(9) and the participants are subject to a 50% excise tax on any late distributions.
Adrienne I. Moore, J.D., is an Associate Attorney with Ferenczy Benefits Law Center in Atlanta, Georgia, where she works on all types of qualified retirement plans and related issues.
She analyzes operational and ERISA compliance plan issues, advises clients with respect to corrective procedures, prepares corrective filings for submission to the Internal Revenue Service and the Department of Labor, and assists various plan service providers with reporting and disclosure requirements in their client service agreements.
