Required Minimum Distributions Reminder for Deferred Compensation 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. The Setting Every Community Up for Retirement (SECURE) Act modifies the required beginning date for mandatory 457(b) plan distributions.
Before the SECURE Act, distributions from 457(b) plans had to commence by April 1 following the later of: (i) the calendar year in which the participant attained age 70½, or (ii) the calendar year in which the participant retired. After enactment, this continues to be the rule for all participants who turned 70½ on or before December 31, 2019. For those who turn age 70½ after December 31, 2019, if your plan document allows, the triggering age increases to the later of age 72 or severance of service.
The required minimum distribution rules generally 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
2020 EXEMPTION: The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a waiver for required minimum distributions in 2020 for 401(k) and governmental 457(b) plans. Note: The CARES Act waiver does not apply to Executive Compensation 457(b) Plans or Global Executive Compensation 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 are required to take a minimum distribution in 2020. 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Generally, required minimum distributions must be withdrawn by December 31 of each tax year until the account has been paid out.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 the triggering age. If the participant delays taking the required minimum distribution until April 1 of next year, they 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.
Questions?
Please contact the Deferred Compensation Program team by email at deferredcomp@nreca.coop or by phone at 703.907.6375.