Does your client’s plan still require a minimum distribution after age 70½ (not 72)?

Does your client’s plan still require a minimum distribution after age 70½ (not 72)?

In BenefitsLink discussions, many commenters observe that a plan’s administrator must obey the plan’s governing documents, even if a document’s provision is more restrictive than what’s needed for the plan to tax-qualify.

Imagine this not-so-hypothetical.  A § 401(a) plan’s sponsor completed its cycle 3 restatement, using its third-party administrator’s current IRS-preapproved documents package.  Those documents state the plan’s minimum-distribution provisions with no update for the SECURE Act.  And instead of specifying the required beginning date by reference to Internal Revenue Code § 401(a)(9)(C), the basic plan document’s definitions section states: “‘Required Beginning Date’ means April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or the calendar year in which the Participant retires[.]”  Although the adoption agreement allows a user some choices about the required beginning date, all those choices refer to age 70½.  Nothing in the documents package suggests one must or may read 70½ as 72.  Assume the plan’s sponsor has made no governing document beyond using the IRS-preapproved documents package.

Imagine a severed-from-employment participant had her 70th birthday on June 1, 2021.

Must the plan’s administrator begin her distribution by April 1, 2022?

Or may the administrator interpret the plan not to compel a distribution until April 1, 2024?

Would you (or could you) interpret the plan’s governing documents so the required beginning date is no sooner than as needed to meet Internal Revenue Code § 401(a)(9)(C), and so turning on age 72?

If you might, what is your reasoning about why that’s a reasonable interpretation of the plan’s governing documents?

As long as the plan sponsor adopts (or intendeds to adopt) a SECURE amendment timely (or one is pushed out by the VS sponsor) then they can interpret the provision under the new rules even before amendment gets adopted.

CuseFan, thank you for helping.

To qualify for Internal Revenue Code § 401(a)’s tax treatment, § 401(b), the Treasury department’s interpretations of it, the Internal Revenue Service’s further extensions and implementations of it, and Congress’s off-Code enactments for other remedial-amendment periods set up some tax-law tolerance for administering a plan other than according to the plan’s governing documents if that administration will become consistent with a later amendment’s ratifying effect.

But that concept doesn’t help a fiduciary follow ERISA’s title I.  ERISA § 404(a)(1)(D) commands: “[A] fiduciary shall discharge his duties with respect to a plan . . . in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title [I] and title IV.”

While tax law might allow a plan’s sponsor to ratify, for tax treatment, administration that was contrary to the plan’s governing documents, ERISA’s title I has no related concept.  Rather, a fiduciary must administer a plan according to the documents that govern the plan, not a document that might be made later.

Yet at least one solution falls in with what you suggest.  If the governing documents grant discretion to interpret the plan, the administrator might interpret the text to refer not to a specified age, but rather to whatever Internal Revenue Code § 401(a)(9)(C) calls for as a condition of tax-qualified treatment at each time the administrator must apply the plan’s provisions.  In short, an administrator would read 70½ to mean 72.

Since the change in required beginning date is not a mandatory qualification requirement change, I would say that the current preapproved document package does not reflect amendments for the SECURE Act. Even if the preapproved plan sponsor is within the remedial amendment period, it would also be pivotal to see how the employer is operationally applying the required beginning date. To bolster the employer's position that it intends to use age 72 (and not age 70 1/2), it would be quite helpful to know how the employer has communicated the change to plan participants and to see whether the employer has actually implemented the change from an operational standpoint.

rocknrolls2, thanks.

Another part of the problem is that an employer/administrator might use, without editing (and even without reading), a summary plan description the plan-documents package’s software generated, and such an SPD might refer to age 70½.

But the software a recordkeeper or third-party administrator uses to perform its services an employer/administrator relies on to administer the plan might refer to age 72.

For an employer/administrator that relies on a service provider, there might be no expression of the employer’s or the administrator’s intent that is more than tacitly accepting a service provider’s expressions, which might be logically inconsistent.

Peter, 

2 points for you to consider. First, see Section 601 of the SECURE Act. It provides an extended date to adopt amendments, and you'll see references to ERISA in that section. So I think the plan can be operated using 72 prior to the amendment deadline without violating the failure to follow the plan terms. Second, the EE communication is vague. Technically under ERISA it's 210 days after the amendment is "adopted," and the Code doesn't have any specific communication deadline (but the 401(a) regs do require that a plan be communicated to participants). 

On a practical note I just don't see a big reason to procrastinate on this one. 

It was my understanding this is a simple amendment.   Depending on how a document was drafted and choices made to not pay RBDs for 2020 because of the Covid rules could require an amendment (not all case but some it could be needed) we advised all of our clients to decide what they wanted for their ESOPs and get the amendments in place.  In some cases there were two simple amendments that needed to be done so just get them both knocked out and be done with it. 

I will admit since ESOPs are still mostly attorney drafted and not some kind of pre-approved plan that changes the dynamics some.  

But we also told our clients this is the type of simple thing that could be forgotten about.   So just get it done now while the decisions were being made.   As far as I can tell regardless of the type of document the client is using this is a simple amendment to get drafted and put into place.

In short this debate might be interesting but given the ease to get this amendment is place it seems like the upside of doing it sooner than later would be a good deciding factor. 

G8Rs, thank you for your reminder about § 601 (title VI) of division O of the Further Consolidated Appropriations Act, 2020.  The only ERISA title I provision it mentions is ERISA § 204(g).  Even if SECURE’s § 601(a)(1) might treat a retirement plan “as being [or having been] operated [during the remedial-amendment period] in accordance with the terms of the plan [as amended by the end of the remedial-amendment period]”, I do not read § 601 to excuse an ERISA-governed plan’s fiduciary from ERISA § 404(a)(1)(D)’s command to administer the plan according to the documents that govern the plan.  A plan’s administrator decides today’s claim, right, obligation, or other question considering documents that exist today.  A fiduciary can’t consider a document that does not yet exist.  However, SECURE’s § 601(a)(1) might support (in some circumstances) an interpretation of existing documents.

I recognize it’s sometimes fussy to worry about following ERISA § 404(a)(1)(D).  For example, if a plan’s administrator delays an individual-account retirement plan’s involuntary distribution until after age 72 (rather than 70½), it’s unlikely doing so deprives a participant of a benefit she could have obtained.  There might be no loss that results from a fiduciary’s breach of its duty to administer the plan according to the documents that govern the plan.  Likewise, there might be no one who asserts that the fiduciary breached.  Nonetheless, a careful fiduciary observes its duty to follow the provisions the plan’s sponsor made.  For some, that’s so even when the risk of liability is none.

ESOP Guy, I too prefer not to procrastinate.  I prefer to write a plan’s restatement promptly after Congress enacts the statute, and before the plan’s change takes effect.  For clients using documents I wrote, I completed full plan restatements for all provisions of December 20, 2019’s SECURE Act in the first few days of January 2020.

But for a client that uses IRS-preapproved documents: “An Adopting Employer may rely on an Opinion Letter only if the requirements of this section 7 are met and the employer’s plan is identical (as described in section 8.03) to a Pre-approved Plan with a currently valid Opinion Letter.  Thus, the employer must not have added any terms to the Pre-approved Plan[,] and must not have modified or deleted any terms of the plan other than by choosing options permitted under the plan or by amending the document as permitted under section 8.03.”  Rev. Proc. 2017–41, 2017-29 I.R.B. 92 (July 17, 2017), at § 7.03(4) https://www.irs.gov/irb/2017-29_IRB#RP-2017-41 or https://www.irs.gov/pub/irs-irbs/irb17-29.pdf.

Even for an obviously not tax-disqualifying change, a practitioner might be reluctant to advise a plan’s sponsor to adopt an amendment unless one advises her client that the change might defeat reliance on the IRS’s preapproval letter, or that the change is within one of the seven kinds of changes that don’t defeat reliance, such as an “[a]mendment[] to the administrative provisions in the plan (such as provisions relating to investments, plan claims procedures, and employer contact information)[.]”  Rev. Proc. 2017–41, at § 8.03(7).  (I’d be at least reluctant to advise that replacing 70½ with 72, or replacing a narrative definition for required beginning date with a reference to Internal Revenue Code § 401(a)(9)(C), is a change to what the IRS calls an administrative provision.)

If a plan’s sponsor did not amend the plan (perhaps because the sponsor feared an amendment might defeat reliance on the IRS’s preapproval letter, or perhaps because no one suggested a change), the plan’s administrator might find an ambiguity in an IRS-preapproved document’s use of 70½, and might interpret such a document’s definition for a required beginning date to state the provision that results if the plan’s sponsor intended no more than a provision that minimally meets the tax-qualification condition of Internal Revenue Code § 401(a)(9).