Required Minimum Distributions Reminder for 457(b) Plans for Tax-exempt Co-ops
The Internal Revenue Code (IRC) requires plan participants who meet certain requirements to receive required minimum distributions. Under the required minimum distribution rules, participants in a nonqualified deferred compensation 457(b) plan who either (a) are no longer employed and reach age 70½, or (b) retire after reaching age 70½, must receive a certain portion of their plan accounts each year based on the life expectancy of the participant (or the joint lives of the participant and beneficiary). Participants who continue working beyond age 70½ have the option to begin taking required minimum distribution prior to separation from service.
The required minimum distribution rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, defined benefit plans, and the following 457(b) plans:
- Executive Compensation 457(b) Plans
- Global Executive Compensation Plans
- Governmental Deferred Compensation 457(b) Plans
Take time to verify any action required
You can help your former employees and directors participating in your cooperative’s 457(b) Plan by checking their ages and contacting them if they reach age 70½ in 2019. Participants should contact their personal financial and/or tax advisors for help in determining the amount of their required minimum distribution.
Generally, required minimum distributions must be withdrawn by December 31 of each tax year until the account has been paid out. However, a participant’s initial required minimum distribution can be deferred until April 1 of the year after they reach age 70½. If they delay taking the required minimum distribution until April 1 of next year, the participant will be taking two required minimum distributions during the same tax year. The combined amount may put them in a higher tax bracket, and result in a potentially increased 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a penalty equal to 50% of the difference between the required minimum distribution amount and any amount distributed or withdrawn from an individual’s account.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 plan document, or in some cases the beneficiary election form, will determine payment of the required minimum distribution 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.
Looking ahead
As an early heads-up for all co-ops and participants, on November 7, 2019, the IRS proposed changing the mortality tables which are used to calculate life expectancy and required minimum distributions. The industry generally applauds the change because if it becomes final, the new rule would allow calculating required minimum distributions using a longer life expectancy, which in turn could reduce annual distributions and corresponding taxes. It is currently slated to become effective January 1, 2021 and would impact all plan types that have required minimum distributions, including 457(b) plans. NRECA will keep co-ops and participants posted on any further developments.
Questions?
Please contact the Deferred Compensation Program team by email at deferredcomp@nreca.coop or by phone at 703.907.6375.