Ask the Experts May 12, 2020

The RMD Waiver for RMDs Already Distributed

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

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“I read that the CARES Act waives all required minimum distributions (RMDs) for retirement plans such as our 403(b) plan for 2020. But what about participants who turned 70 ½ in 2019 and already took their required distribution prior to the CARES Act being issued? I know that their initial distribution could have been delayed until April 1, but all of our participants took theirs well before the deadline.”

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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With the caveat that, as with many provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act—a massive piece of legislation that was enacted extremely quickly—it is probably going to take some clarifying guidance to provide a definitive answer in this regard, here is what the relevant section of the legislation says (boldface text reflects the Experts’ emphasis):

“(a) IN GENERAL.—Section 401(a)(9) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

(I) TEMPORARY WAIVER OF MINIMUM REQUIRED DISTRIBUTION.—

(i) IN GENERAL.—The requirements of this paragraph shall not apply for calendar year 2020 to—

(I) a defined contribution plan which is described in this subsection or in section 403(a) or 403(b),

(II) a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A), or

(III) an individual retirement plan.

(ii) SPECIAL RULE FOR REQUIRED BEGINNING DATES IN 2020.—Clause (i) shall apply to any distribution which is required to be made in calendar year 2020 by reason of—

(I) a required beginning date occurring in such calendar year, and

(II) such distribution not having been made before January 1, 2020.“

So, clause (ii) of this provision specifically addresses distributions with a required beginning date in 2020, such as the initial RMDs you described in your question that were due April 1. If the distribution had a required beginning date in 2020 and was not made before January 1, then the minimum distribution rules shall not apply for such distributions.

Unfortunately, this means that, for your participants who were particularly timely with their RMDs and took them prior to January 1, 2020, the new waiver does NOT apply to them, and they will be taxed on the RMD they took in 2019, though it was not technically due until April 1. For those participants who took their RMDs on or after January 1, however, it would appear that the waiver DOES apply to them, even if the distribution was taken prior to the enactment of the CARES Act.

However, the CARES Act is silent on the issue about how this RMD that is not actually an RMD anymore can be remedied, so we will need IRS guidance on the issue. The last time a waiver occurred, in 2009, the IRS allowed for rollover of the distribution, though it should be noted that the situation in 2008 is not quite the same as the current one. In 2009, 2008 RMDs with a required beginning date in 2009 were NOT waived. Rollovers of such distributions are generally limited to direct rollovers or an indirect rollover within a 60-day window. However, the IRS recently extended the indirect rollover deadline in separate guidance, for distributions received on or after February 1 of this year, such that rollovers of such amounts may be made anytime through July 15.

In addition, presumably, these distributions could be treated as COVID-19 distributions for those who are individuals qualified to receive such distributions under the CARES Act, which would mean that such individuals would have a full three years from the time of distribution to repay the former RMD back to the retirement plan from which it came, or roll over the distribution to another retirement plan or IRA.

At first glance, this particular provision of the CARES Act would seem to be a bit unfair to similarly situated participants (i.e., those who were more timely about taking their RMDs are facing taxation, whereas those who delayed benefitted). However, absent future guidance in this regard, this appears to be how the CARES Act applies to this situation.

 

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.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.
Compliance May 11, 2020

Second ERISA Lawsuit Targets ADP Multiple Employer Plan

The second suit, filed on behalf of participants rather than plan sponsors, largely mirrors the first in its allegations of prohibited transactions, excessive fees and other fiduciary breaches

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Last week, McCaffree Financial Corp., a participating employer in the ADP TotalSource Retirement Savings Plan, filed an excessive fee lawsuit on behalf of the multiple employer plan and a class of similarly situated participating employers against ADP. Also named as defendants are ADP TotalSource Group, the plan’s administrative committee and its members, and NFP Retirement in its capacity as the plan’s investment adviser.

This week, a second lawsuit has emerged representing the interests of a proposed class of plan participants. The second suit largely mirrors the first in its allegations of prohibited transactions, excessive fees and other fiduciary breaches, but it is even more comprehensive and stretches beyond 150 pages.

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The first lawsuit, which includes plan sponsors and fiduciaries as plaintiffs, alleges the ADP defendants “have allowed unreasonable recordkeeping/administrative expenses to be charged to the plan; failed to adequately monitor the plan’s recordkeeper and its affiliates, who the ADP defendants have permitted to design an investment menu unreasonably favorable to them despite the recordkeeper’s clear conflicts of interest; and, along with NFP Retirement, selected, retained and/or otherwise ratified high-cost and poorly performing investments, when more prudent alternative investments were available.”

The new lawsuit repeats those claims, though it includes a far greater amount of generalized exposition about the duties allegedly owed by fiduciaries to participants and beneficiaries under the Employee Retirement Income Security Act (ERISA). For example, approximately 11 pages are dedicated to describing in general terms how prudent fiduciaries negotiate reasonable recordkeeping fees, monitor all sources of revenue paid to plan recordkeepers, and regularly monitor plan fees and compare them to competitive market rates. Significant space is also dedicated to detailing in general terms ERISA’s self-dealing and prohibited transactions provisions.

In this respect, the lawsuit resembles the numerous others that have been filed by the highly active law firm Schlichter, Bogard & Denton. In previous conversations with PLANSPONSOR, the firm’s ERISA litigation leader, Jerry Schlichter, has clearly signaled an intent to continue with this litigation push and to use these lawsuits as a means to create reform in the employer-sponsored retirement plan industry. While few debate the need to ensure retirement plan participants get a good deal on investments, administration and recordkeeping, defense attorneys and industry analysts debate the broader impact of so much ERISA-focused litigation. Some believe that fully prudent and responsible plan sponsors’ legitimate fear of becoming a target of litigation has stifled innovation and the willingness to adopt new solutions that could serve participants well.

This new lawsuit includes 12 formal counts that cite a variety of ERISA’s specific provisions. One new area being explored relative to some earlier suits is the notion that the defendants allegedly breached their fiduciary duties and engaged in prohibited transactions by allowing the plan’s service providers to collect and use confidential plan participant data for profit. In some recently resolved lawsuits, Schlichter’s firm has had success securing settlements that prohibit such data-based cross selling.

NFP has declined to comment about the new complaint, while ADP provided the following statement: “We were made aware of this filling recently and are currently reviewing it. However, it is not uncommon to see similar complaints filed following an initial claim. TotalSource works diligently to fully and properly discharge all of its fiduciary and other duties. We are confident that the ADP TotalSource Retirement Savings Plan offers an excellent retirement savings vehicle for our TotalSource clients and their employees. As this is a matter of litigation, we cannot provide any further information at this time.”

The full text of the second complaint is available here.

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