Younger RMD Age?

Can a plan have a younger RMD age than the age required by law? The RMD is age is the latest age at which a participant must begin taking distributions, but is there a reason a 401(k) plan couldn't use a younger age than required? 

Put another way, can a 401(k) plan require a participant that turns age 72 during 2023 to begin RMDs by 4/1/2024? 

Yes, a plan sponsor may write a plan’s governing document to provide an involuntary distribution on a specified time after the participant reached normal retirement age.

For some individual-account retirement plans, especially a plan under which the only form of distribution is a single sum, there can be reasons a plan designer might want an account emptied before any amount would be treated as a § 401(a)(9)-required distribution.

What are you trying to actually trying to accomplish? Force terminated folks out? Force older active employees to take distributions? 

Some plans can be amended to force distributions at normal retirement age, regardless of balance. 

We're trying to determine if the plan must change the RMD age this year or if they can wait and do it in the future. i.e., can they continue to use age 72 this year?

I've seen, back when the RMD was based on 70-1/2, plans defining (as Peter states above) an RMD of 69-1/2.  Although I'm unsure why, I think it was originally done to make sure they don't fail to comply with the 70-1/2 date.  As I read it, there is no requirement to change to 72 or anything else.

I don't think you need to change either but the question then becomes is it eligible for rollover and subject to the 20% mandatory withholding if before the date stated in the regs?

This is just off the top of my head, but I think the answer to both of those is "yes". The plan's decision to call something an RMD doesn't make it an RMD if it's not actually required under 401(a)(9).

One reason some plan designers provide an involuntary distribution a little sooner than the time needed to meet § 401(a)(9)’s condition for tax-qualified treatment is that 100% of a single-sum distribution would be rollover-eligible.

How is this different than allowing in-service distribution after NRA? Just curious.

Some plans provide an involuntary distribution after normal retirement age.

The short answer to the question is yes. A plan can force distributions after the later if NRA or age 62. 

As pointed out, the distribution is ‘probably’ not an RMD for those who aren’t at the RBD under the law. So using 4/1 isn’t really relevant and you could use any date, such as last day of PY in year after stating age 72. Not a major hurdle - it’s an eligible rollover distribution subject to 20% withholding if not rolled over. I say probably because even though the (a)(9) regs allow a plan to disregard the non-5% owner exception and just use an age, I don’t expect them to expand that to using an earlier age. 

Another issue is what the terms of the plan provide. If the plan uses age 70 1/2 and doesn’t use the non-5% retirement exception, then no issue. But if the current plan incorporates by reference (a)(9) or uses the retirement exception, then you may have an anti-cutback issue - at least in one jurisdiction. The right to defer payments until the RBD under the plan terms may be a protected benefit. This article does a good job explaining the case and why many think it’s an erroneous decision. 
 

https://www.groom.com/resources/court-extends-anticutback-protection-to-post-normal-retirement-age-pension-distributions/

In the article G8Rs links to (thank you!), Groom cites Westlaw for the remarked-on court decision. Later, West/Thomson Reuters reported it as 562 F. Supp. 3d 890 (C.D. Cal. Mar. 3, 2022).

As a district court’s decision, it is not precedent anywhere, not even in the Central District of California.

A plan sponsor considering whether to provide an involuntary distribution earlier than a § 401(a)(9) required beginning date should get its lawyer’s or other practitioner’s advice.

Further, it’s not easy to document such a provision if the plan sponsor uses an IRS-preapproved document and that format is not designed to facilitate the choice.

Before SECURE 2022, I had been evaluating, for some clients depending on particular circumstances, a full or partial involuntary distribution about a year sooner than § 401(a)(9)’s applicable age. Internal Revenue Code of 1986 § 402A(d)(5), added by SECURE 2022 § 325, removes, beginning with 2024, a key reason. Before that change, a Roth IRA need not impose an involuntary distribution before the holder’s death, but a Roth subaccount under a § 401(a)-(k) plan requires a § 401(a)(9) minimum even during the participant’s life.

On the surface, it seems like an attractive plan design feature to have a mandatory lump sum distribution at a retirement age that is earlier than the RMD age in an attempt to avoid all of the complexity in determining the benefits payable under 401(a)(9).  Practically speaking, there is no foolproof way of completely avoiding the RMD rules in a 401(k) plan.

Consider, we cannot prohibit an eligible participant from making deferrals based on age, which means dollars can flow into the plan in each year for an active participant who is RMD eligible.  If these dollars are credited to the participant at the end of the plan year, then the dollars could be part of the calculation of an RMD (for example, where the participant terminates in the following plan year, or elects to begin taking RMDs, or elects to take an in-service distribution). 

For a really large plan, especially a MEP or PEP, forcing RMDs earlier than required for deceased participants is attractive. Managing all of the different types of beneficiaries and timing requirements can become a challenge in a really large plan. So many participants fail to designate a beneficiary, and that results in a lost participant account. The big question is whether a plan document dictating an RMD earlier than 401(a)(9) causes the amount to be ineligible for rollover. That surely can't be ok, as it is not in the best interest of the participant/beneficiary. If the RMD is paid our earlier than required by 401(a)(9) it seems appropriate to apply mandatory withholding and assume the entire payment is rollover eligible. Appreciate further feedback and comments on this.

Paul I, thank you for your smart look into ERISA § 202(a)(2).

When (before SECURE 2022) I had been evaluating an involuntary distribution before a required beginning date, the plan sponsor’s motive was not to avoid the work of determining any § 401(a)(9) requirement, but to help inattentive or misinformed participants move a Roth subaccount into a Roth IRA before some portion became a § 401(a)(9) amount no longer rollover-eligible.

And the participants we were seeking to help were not working, but had plan accounts after retirement.