SECURE Act related

Hello

Doing a little reading of the new ACT and wanted to see what others think:

RMD related: Have a DB plan and the owner will turn 70 1/2 in 2020, does that mean, the RMD is not due until the calendar year he turn 72 i.e. 2021?

In-service age of 59 1/2: As the new ACT lowered the in-service distribution age to 59 1/2 under defined benefit and money purchase plans (target benefit plans too), can we restart designing the DB plans with normal retirement age less than 62?

Thank you

Re the RMD beginning date, this article (which will be included in today's BenefitsLink newsletter) might be of interest:

https://www.beneficiallyyours.com/2019/12/30/the-required-minimum-distribution-date-for-retirement-benefits-the-cuban-missile-crisis/

Very interesting, thank you

On 12/31/2019 at 12:14 PM, Jakyasar said:

Hello

Doing a little reading of the new ACT and wanted to see what others think:

RMD related: Have a DB plan and the owner will turn 70 1/2 in 2020, does that mean, the RMD is not due until the calendar year he turn 72 i.e. 2021?

In-service age of 59 1/2: As the new ACT lowered the in-service distribution age to 59 1/2 under defined benefit and money purchase plans (target benefit plans too), can we restart designing the DB plans with normal retirement age less than 62?

Thank you

Direct answers to your questions:  

Yes, the DB RMD will be in 2021.

NRA less than 62?  No change there yet; IRS rules have not changed.

Here is a nice piece from Prudential back in 2015 the explained the "new rules", which won't change until IRS changes them specifically.

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Pension plan sponsors must justify the reasonableness of normal retirement ages under age 62

Plan sponsors that have submitted determination letter requests using the most recent version of Form 5300 (Rev.
December 2013) may have noticed a new line item 5 that relates to the plan’s normal retirement age (NRA). If the plan is
             • Any type of defined benefit plan, including a cash balance or pension equity plan (PEP); or
            • A defined contribution money purchase plan or target benefit plan,
it must indicate if the plan’s NRA has been below age 62 at any time after May 22, 2007.

If the answer is “yes”, the next question is whether the employer (or trustees in the case of multiemployer plan) has made a good faith determination that this NRA reasonably represents the typical retirement age for the industry in which the covered workforce is employed. If such a determination has been made, a special statement must be attached to the Form 5300 submission. Governmental plans are exempt from this requirement.

The Form 5300 Instructions require the attached statement to be “a signed statement that this is a good faith determination of the typical retirement age for the industry in which the covered workforce is employed.”

Acceptable NRAs

In 2007, the IRS published final rules confirming that defined benefit and defined contribution pension plans may make payments to participants who have reached NRA and have not separated from service with the employer. These rules were generally effective May 22, 2007. They also provided that an NRA of age 62 or later is  always acceptable.  Originally, the IRS indicated that if a plan sets the NRA between age 55 and age 62, the plan sponsor must simply apply a good faith analysis to determine if that age is reasonable under the specific facts and circumstances. However, an NRA that is lower than age 55 was generally presumed to be unreasonable, unless the plan sponsor could demonstrate otherwise.

Two years later, the IRS took a more conservative position, requiring independent data to justify all NRAs below age 62.

This position was reinforced in 2012 when the IRS announced that effective May 1, 2012, any pension plan with an NRA earlier than age 62 that uses a master and prototype document or a volume submitter document, may not rely on the related opinion or advisory letter. To obtain approval of that NRA, the sponsoring employer must request a determination letter using Form 5300.

Determining and documenting a pre-age-62 NRA

While the Form 5300 Instructions do not provide specific guidelines for making the good faith determination that supports the signed statement that must be attached when a non-governmental pension plan provides a pre-age-62 NRA, IRS Notice 2007-69 did require private letter ruling requests for the approval of pre-age-55 NRAs to include the following information:
               • A description of the industry in which the covered workforce is generally employed;
               • Identification of the source and date of compilation of data that was used to determine the typical retirement age in the industry;
              • A presentation and analysis of the data the plan sponsor used to determine the typical retirement age; and
              • A description of any other relevant information.

I respectfully disagree that there has been no change to the age 62 for normal retirement age. There is a provision at the very end of Division M that specifically lowers thd age to 59 1/2.

My understanding is that pension plans can allow an in-service distribution at age 59.5, but that the normal retirement age rules still apply as described above in Larry’ post. 

Agree.

H. R. 1865—562 signatory operator or a related person to a signatory operator (as those terms are defined in section 9701(c) of the Internal Revenue Code of 1986).’’.

SEC. 104. REDUCTION IN MINIMUM AGE FOR ALLOWABLE IN-SERVICE DISTRIBUTIONS. (a) IN GENERAL.—Section 401(a)(36) of the Internal Revenue Code of 1986 is amended by striking ‘‘age 62’’ and inserting ‘‘age 591⁄2’’. (b) APPLICATION TO GOVERNMENTAL SECTION 457(b) PLANS.— Clause (i) of section 457(d)(1)(A) of the Internal Revenue Code of 1986 is amended by inserting ‘‘(in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 591⁄2)’’ before the comma at the end. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to plan years beginning after December 31, 2019.

Does anyone know the answer to the question regarding anyone whose first RMD is due for the 2020 distribution year?  Does that person have to take an RMD?  Assume they are 5% owner and 70.5 but not 72.  I assume the answer is no, but I know enough to know that the details are critical.

The new rule, to start RMDs at 72 instead of age 70.5, are only changing the age, like this: If you turn 70.5 after 12/31/2019, then your first RMD year is the year you turn age 72.

The rest of the rules that apply, such as being a 5% owner, or being retired, are unchanged.

The RBD is also not changed. The first RBD should be April 1 of the year you'll be age 73 with another RMD due by the end of that same year.

1 minute ago, austin3515 said:

Does anyone know the answer to the question regarding anyone whose first RMD is due for the 2020 distribution year?  Does that person have to take an RMD?  Assume they are 5% owner and 70.5 but not 72.  I assume the answer is no, but I know enough to know that the details are critical.

Turned 70.5 on or before 12/31/2019, 70.5 applies 

Otherwise, 72 applies

If you were born born between July 1, 1948 and June 30, 1949, then you turned 70.5 in 2019 and your first distribution calendar year is 2019. RBD is 4/1/2020.

If you were born between July 1, 1949, and December 31, 1949 then you will turn 72 in 2021 and your first distribution calendar year is 2021. RBD is 4/1/2022.

The only people whose RBD will be 4/1/2021 are non-5% owners who were born 1948 or earlier (age 72 during 2020) and terminate employment during 2020.

CB Zeller, this is insanely awesome...  Can someone point me to the actual rules that specify this with special effective dates, etc.?

1 hour ago, austin3515 said:

Does anyone know the answer to the question regarding anyone whose first RMD is due for the 2020 distribution year?  Does that person have to take an RMD?  Assume they are 5% owner and 70.5 but not 72.  I assume the answer is no, but I know enough to know that the details are critical.

The dates are important, and while I think you can figure out your answer from the other responses (look at RatherBeGolfing's response for the easiest rule to apply), it's not completely clear the dating applicable in this situation.  Did he turn 70.5 in 2019 or 2020?  That will give you the applicable rule.  2019, he has to start RMDs now.  2020, he goes to 72.

The point I'm trying to make is, where is the rule itself?  I have yet to see the text of the rule itself which should include effective dates, etc.

Find HR 1865. Go to Division O, section 114.

BILLS-116hr1865enr.pdf

Page 623

SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING DATE FOR MANDATORY DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C)(i)(I) of the Internal Revenue Code of 1986 is amended by striking ‘‘age 70-1/2’ and inserting ‘‘age 72’’.
(b) SPOUSE BENEFICIARIES; SPECIAL RULE FOR OWNERS.—Subparagraphs (B)(iv)(I) and (C)(ii)(I) of section 401(a)(9) of such Code are each amended by striking ‘‘age 70-1/2’’ and inserting ‘‘age 72’’.
(c) CONFORMING AMENDMENTS.—The last sentence of section 408(b) of such Code is amended by striking ‘‘age 70-1/2" and inserting ‘‘age 72’’.
(d) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70-1/2 after such date.

https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf

Page 623

We'll have the chauffer deliver a copy to you.

So what happens to a working non-5% owner who attains age 70.5  prior to 13/31/2019 but doesn't separate service until after 1/1/2020? 

Does that mean they have a 2020 RMD due by 4/1/2021 even though they are not yet 72 because they attained age 70.5 before 12/31/2019? Or do they come under the new rule and don't need a 2020 RMD because they are not yet age 72?

Answers to second paragraph: Yes. No.

9 minutes ago, Lou S. said:

So what happens to a working non-5% owner who attains age 70.5  prior to 13/31/2019 but doesn't separate service until after 1/1/2020? 

Does that mean they have a 2020 RMD due by 4/1/2021 even though they are not yet 72 because they attained age 70.5 before 12/31/2019? 

Yes. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70-1/2 after such date.

Ok, thanks both. I can see some confusion ensuing in the transition period. Fortunately it's a short transition period.

3 hours ago, austin3515 said:

The point I'm trying to make is, where is the rule itself?  I have yet to see the text of the rule itself which should include effective dates, etc.

Here it is for the research challenged ? :

SEC. 114. INCREASE IN AGE FOR REQUIRED BEGINNING
DATE FOR MANDATORY DISTRIBUTIONS.
(a) IN GENERAL.—Section 401(a)(9)(C)(i)(I) of the
Internal Revenue Code of 1986 is amended by striking
‘‘age 701⁄2’’ and inserting ‘‘age 72’’.
 

Effective dates are always in a separate section, and here that is (Sec 114(d)):

(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions required to be
made after December 31, 2019, with respect to individuals
who attain age 701⁄2 after such date.
 

I've attached the complete PDF of the SECURE act for those who would like to have an easy copy.

Secure Act Language.pdf

So, just to circle back on the 59-1/2 thing for pension plans, the American Miners Act was rolled up along with SECURE and it amended IRC 401(a)(36) to allow for in-service distributions as early as 59-1/2 from "pension plans".   1.401-1(b) breaks down plans into pension, profit sharing or stock bonus and plans such as MP and Target plans are pension plans.    So 59-1/2 is available to MP and TB plans, right?

I don't think this should be controversial, but I'm getting questioned on it because NAPA's summary specifically says DB and 457(b).  I'm thinking this is just because there aren't a lot of MPs and TBs any more.    

Moves the voluntary in-service distribution age under IRC Section 401(a)(36) for defined benefit plans and 457(b) plans from age 62 to age 59 1/2.  

20 hours ago, shERPA said:

So, just to circle back on the 59-1/2 thing for pension plans, the American Miners Act was rolled up along with SECURE and it amended IRC 401(a)(36) to allow for in-service distributions as early as 59-1/2 from "pension plans".   1.401-1(b) breaks down plans into pension, profit sharing or stock bonus and plans such as MP and Target plans are pension plans.    So 59-1/2 is available to MP and TB plans, right?

I don't think this should be controversial, but I'm getting questioned on it because NAPA's summary specifically says DB and 457(b).  I'm thinking this is just because there aren't a lot of MPs and TBs any more.    

 

 

You are correct; applies to MP and Target plans as well.

Keep in mind also that the extended amendment deadline was for the items in the SECURE Act. This change from 62 to 59.5 was is the American Miners Act. Unless guidance is provided otherwise, your normal amendment deadline rules apply for this change, which would be the end of the plan year in which the plan operated using an in-service age under age 62.