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

The Internal Revenue Code requires retirement and nonqualified deferred compensation 457(b) plan participants who have reached a certain age and separated from service to receive required minimum distributions from their accounts each tax year. These 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

Actions Required for 2021
As the plan administrator, you can help 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 2021. Participants should be advised to contact their personal financial and/or tax advisors for assistance in determining the amount of their required minimum distribution for the current tax year.

Effective January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, allowed 457(b) plans to increase the age for mandatory distributions from age 70½ to age 72 for individuals who did not take their initial required minimum distributions by December 31, 2019. However, the change ONLY applies to 457(b) plans with updated plan documents reflecting the age 72 provision.

Ongoing distributions: Generally, required minimum distributions must be withdrawn by December 31 of each tax year until the account has been paid out.
Initial distributions: A participant’s initial required minimum distribution can be deferred until April 1 of the year after they reach the starting age and are separated from service. However, if the participant delays taking the initial distribution until April 1 of next year, they will need to take two mandatory distributions in one year—one for 2021 and another for 2022. The combined amount may put them in a higher tax bracket and result in a potentially increased tax obligation.

Important reminder: Failure to take a distribution of the full minimum amount required could result in an IRS penalty equal to 50% of the shortfall.

457(b) Plan Administration Reminders

If your co-op wishes to revise the required minimum distributions plan provision: Delaying the start of required minimum distributions from age 70½ to age 72 is voluntary for 457(b) plans based on the SECURE Act provisions. If your co-op wishes to revise starting age for mandatory distributions, please contact NRECA’s Deferred Compensation Program team. We can provide you with a sample plan document, board resolution and instructions for adopting the change.
Keep your plan up to date: It’s generally a best practice to readopt your plan every 5-8 years to keep the plan provisions current. If your co-op’s plan document is dated 2013 or earlier, you may wish to consider readoption at this time.
Verify and update current beneficiary designations: Out of date beneficiary designations can cause plan balances to pass to unintended recipients or to pass to the estate of the participant if a beneficiary is deceased. Balances that pass to the estate will be subject to your state’s probate process.

Questions?
Please contact the Deferred Compensation Program team by email: deferredcomp@nreca.coop, or by phone at 703.907.6375 to discuss the topics in this article or to discuss amending your plan.

The preceding summary of legislation is not intended to constitute legal advice. Please consult your co-op’s legal advisor for guidance.