RMDs in the DB World

Required minimum distributions (RMDs) for defined benefit plans have quite different rules than those for defined contribution plans and IRAs. 

In the April 29 ASEA webcast “RMDs in the DB World,” ASEA Executive Director Martin Pippins, MSEA and Charles Brown, MSEA, FCA, QPA, QKA, of Economic Group Pension Services, Inc., examined the RMD rules for pension plans, as well as recent changes affecting them.

“Really we’re talking about working owners,” who must take RMDs while they are working, said Brown of the effect of RMD rules on DB plans. And, he noted, some of them don’t even want the distributions. Of them, Brown said, “People who don’t want the money are affected the most” by the RMD rules for DB plans.   

Annuities

Brown emphasized the importance of annuities in fulfilling the RMD rules for DB plans. Most RMD payments in the case of DB plans are in the form of annuities, he said, and noted that there are rules for such payments:

• Annuity payments must commence no later than the required beginning date (RBD).
• The form of payment must be: (1) allowed under terms of the plan; (2) meet the requirements of Internal Revenue Code Section 401(a)(9) and the regulations implementing it; and (3) be paid in the interval of the elected benefit.
• Monthly annuities must be paid monthly, not once per year.
• The interval—that is, time between payments—can’t be more than one year and must be uniform for entire distribution period.
• Payments must be non-increasing, although certain exceptions are allowed.
• Payments may include a certain period, but cannot extend beyond the payee’s life expectancy.
• Modifications are allowed per Treas. Reg. §1.401(a)(9)-6, Q&A 13. 

Vesting

A key difference between RMDs concerning DB plans and those related to DC plans is delays in vesting, said Brown.

A DB RMD is based on vested accrued benefit at beginning of the distribution calendar year, he explained. RMDs can be delayed for older owners by keeping their benefit nonvested. When designing a plan to delay vesting, said Brown:

• Use a vesting schedule.
• Exclude service that took place before the effective date, but be aware of predecessor plan rules that may prohibit this.
• Remember that normal retirement age matters; 100% vesting occurs then.
• Use a minimum years of participation definition.

Fixing Problems

Brown warned of the potential for triggering the excise tax under Internal Revenue Code Section 4974 that is the penalty for missing an RMD. “This is the thing that’s really big,” he remarked.

However, Brown noted, errors under Internal Revenue Code Section 401(a)(9) do not necessarily result in an excise tax. He noted that if the RMD is paid after the RBD but by Dec. 31, there probably will be no excise tax levied; similarly, if the DB RMDs are paid as partial distributions, it is possible that no excise tax will be imposed.

The IRS Employee Plans Compliance Resolution System (EPCRS) can be used to fix RMD failures, Brown observed. The missed amount plus earnings at the plan’s interest rate should be distributed, he said, and one should then choose between the IRS Voluntary Correction Program (VCP) and Self-Correction Program (SCP).

Brown added that one also must determine how to handle the 50% excise tax abatement. One can choose to use Form 5329, which is said is inexpensive because there is no fee involved in filing, but runs the risk of an abatement not taking place, and using the VCP, which does entail a fee but “guarantees abatement.”

Recent Changes

Pippins said that there have been two big changes lately—raising the age by which an RMD must take place from 70½ to 72, and the provisions in the Coronavirus Aid, Relief and Economic Security (CARES) Act concerning waivers of RMDs. However, he said, that waiver does not apply to DB plans.

There is a limited waiver of 2019 RMDs, Pippins said. If a participant turned 70½ in 2019 and has an RBD of April 1, 2020—

• but did not yet take the distribution, then no distribution has to be taken in 2020 (for the 2019 distribution year).
• and did take a distribution in 2019, there is no relief.
• and took a distribution after Dec. 31, 2019, the RMD is subject to the waiver for 2020 and the rollover and re-contributions rules in IRS guidance.

As for rollovers and recontributions of RMDs, said Pippins, if a “waivable” distribution was taken in 2020 (for either the 2019 or 2020 distribution year), it is not treated as an RMD and may be recontributed or rolled over. He added that “we are hoping for additional guidance from IRS” on this.

Available on Demand

The webcast “RMDs in the DB World” is available on demand through April 29, 2021. For more information, click here.