Compliance January 28, 2020

Post-SECURE Act, IRS Provides RMD Relief

The SECURE Act extended the age at which RMDs take effect from 70 1/2 to 72, but financial institutions may not have had time to change their notice systems.

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The Internal Revenue Service (IRS) has provided regulatory relief to financial institutions that were expected to provide required minimum distribution (RMD) statements to individual retirement account (IRA) owners by January 31.

The relief is tied to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which extended the age at which RMDs take effect by 18 months, or from age 70 1/2 to age 72.

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The regulatory relief is detailed in IRS Notice 2020-6, which acknowledges “the short amount of time after the enactment of the SECURE Act that financial institutions have had to change their systems for furnishing the RMD statement.” Technically, Notice 2020-6 clarifies that if an RMD statement is (errantly) provided for 2020 to an IRA owner who will turn age 70 1/2 during the year, the IRS will not consider the statement to be incorrect. Importantly, the IRS explains, this is only the case if the financial institution notifies the IRA owner no later than April 15 that no RMD is due for 2020.

By way of background, the SECURE Act was enacted on December 20, 2019, after being folded into a bigger federal appropriations bill. It established that the new required beginning date for an IRA owner or retirement plan participants to begin making withdrawals is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 70 1/2.

Under the SECURE Act, this amendment became effective for distributions required to be made after December 31, 2019, with respect to individuals who will age 70 1/2 after that date. As a result of this change, IRA owners who will attain age 70 1/2 in 2020 will not have a required beginning date of April 1, 2021. In turn, this means that these IRA owners (who, prior to enactment of the SECURE Act, would have been required to take minimum distributions from their IRAs for 2020) will have no required minimum distribution for 2020.

The IRS encourages all financial institutions, in communicating these RMD changes, to remind IRA owners who reached age 70 1/2 in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020. 

When it comes to compliance with the broader SECURE Act in 2020, sources say, the increase in the age for RMDs, the elimination of the ability of certain beneficiaries to stretch IRA payments over their lifetime, and the exception to the 10% early distribution penalty for distributions for birth or adoption of a child are the most urgent for plan sponsors to address.

Ask the Experts January 28, 2020

Must Plan Sponsors Allow All Reasons for Hardships?

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.

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“Some of the expenses for which distributions are deemed to be made on account of an immediate and heavy financial need under new hardship withdrawal rules appear to be difficult to administer in practice, particularly the new expense related to federally declared disasters.Must a 403(b) plan sponsor adopt the entire list of expenses for permissible hardship, or can sponsors pick and choose from the list?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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Good question! The IRS helpfully addressed this question in the preamble to the final hardship regulations released in September. (84 Fed. Reg. 49651) Specifically, the preamble provides:

“Two commenters asked whether a plan must include every one of the seven expenses in the §1.401(k)-1(d)(3)(ii)(B) list of deemed immediate and heavy financial needs and cover every individual described in the list (for example, a primary beneficiary under the plan, in the case of certain expenses) in order to be considered as using the safe harbor standards for hardship distributions. Under the IRS’s pre-approved plan program for qualified plans, certain section 401(k) plans that provide for hardship distributions will not be approved unless the distributions are made under circumstances described in the safe harbor standards in the regulations under section 401(k). For this purpose, a plan making hardship distributions for some but not all the safe harbor expenses, or for expenses of some but not all the categories of individuals described in §1.401(k)-1(d)(3)(ii)(B), is considered to be using the safe harbor standards for hardship distributions.”

Although there are certain special rules under the regulations for 403(b) plans, the “safe harbor” expenses apply to 403(b) plans in the same manner as to 401(k) plans. Therefore, a 403(b) plan may permit hardship distributions on account of some, but not all, of the expenses which are deemed to be on account of an immediate and heavy financial need and still be considered within the safe harbor standards.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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