Required Minimum Distributions Reminder for Deferred Compensation 457(b) Plans for Tax-exempt Co-ops

The Internal Revenue Code (IRC) requires plan participants to receive a certain portion of their Executive Compensation 457(b) Plan account each year based on the life expectancy of the participant (or the joint lives of the participant and beneficiary) when they either (a) are no longer employed and reach age 70½, or (b) retire after reaching age 70½. These withdrawals are called required minimum distributions (RMD).

The RMD rules apply to deferred compensation plans sponsored by tax-exempt co-ops which are governed under the IRC Section 457(b). These plans include:

• Executive Compensation 457(b) Plans;
• Global Executive Compensation Plans; and
• Governmental Deferred Compensation 457(b) Plans.

Take time to verify any action required
You can help your former employees and directors participating in your co-op’s 457(b) Plan by checking their ages and contacting them if they reach age 70½ in 2016. Participants should contact their personal financial and/or tax advisors for help in determining the amount of the RMD.

Generally, RMDs must be withdrawn by December 31 of each tax year until the account has been paid out. However, a participant’s initial RMD can be deferred until April 1 of the year after they reach age 70½. If they delay taking the RMD until April 1 of next year, they will be taking two RMDs during the same tax year. The combined amount may put them in a higher tax bracket, which would potentially increase their tax obligation.

Important reminder: Failure of the participant to take a withdrawal of the minimum amount required could result in a penalty equal to 50% of the difference between the RMD amount and any amount distributed or withdrawn from an individual’s account.

In the event of the death of participant
If a participant dies before the full value of the account has been paid, the election made by the participant on their beneficiary election form along with the plan document materials, will determine payment of RMD to the participant’s beneficiaries. If there is no designated beneficiary living when the participant dies, their estate shall be paid the amount in the account in the form of a single cash payment.

Tip: Some participants do not turn in their beneficiary election form when they begin participating in the 457(b) Plan. Be sure to check your files to confirm that you have the beneficiary election form for each plan participant.

Not sure of your co-op’s tax status? If your co-op files IRS Form 990, Return of Organization Exempt from Income Tax, your co-op is tax exempt. Your accounting department can tell you if your co-op files this form.

Questions? Please contact the Deferred Compensation Program team by email at deferredcomp@nreca.coop or by phone at 703.907.6375.