SECURE Act - What are the required minimum distributions and new withdrawal options?
Some of the SECURE Act’s most significant changes are to the Tax Code’s required minimum distribution rules.
This is the first in a series of articles describing key provisions of the SECURE Act, with a focus on the legislation’s effect on required minimum distributions and other distributions and withdrawals. Recently signed into law as part of the Further Consolidated Appropriations Act, 2020, the SECURE Act makes numerous changes (including a variety of enhancements) affecting qualified retirement plans, 403(b) and 457(b) plans, individual retirement accounts, and other employee benefits. Employers should understand these changes to prepare themselves for the resulting effect on retirement plan administration and financial planning.
Some of the changes under the SECURE Act are effective immediately, while others are effective in plan or tax years beginning on or after January 1, 2020. The Act provides for a remedial plan amendment period that does not end until the last day of the 2022 plan year (the 2024 plan year for governmental plans). Therefore, plan sponsors generally have sufficient time to amend plan documents to comply with any required or optional changes. Nevertheless, employers must modify certain aspects of plan administration (and potentially financial planning decisions) now to align with the SECURE Act’s more immediate changes.
Required minimum distributions
Some of the SECURE Act’s most significant changes are to the Tax Code’s required minimum distribution rules.
Prior to the passage of the SECURE Act, the age at which minimum distributions were required to begin was 70½. The Act amended Section 401(a)(9) of the Tax Code to increase the age to 72. This is a requirement for defined benefit plans and defined contribution plans, including 401(k), 403(b), and 457(b) plans, and applies to individuals who turn 70½ after December 31, 2019.
However, plan sponsors may still choose to require distributions at an earlier age (e.g., at normal retirement age). Coordination with plan record keepers and changes to the special tax notice under Code Section 402(f) will be required in order to ensure that distributions for participants who turn 70½ in 2020 are treated appropriately for rollover purposes.
Additionally, current law allows designated beneficiaries of deceased participants or IRA owners to “stretch” distributions over the beneficiary’s remaining life expectancy. The SECURE Act generally requires that all distributions after a defined contribution plan participant’s or IRA owner’s death be made within 10 years. The 10-year rule generally does not apply to an “eligible designated beneficiary,” which is defined as the participant’s or owner’s surviving spouse or minor child, a disabled or chronically ill person, or anyone not more than 10 years younger than the participant or IRA owner.
Those individuals can spread payments beyond 10 years, except that the 10-year rule applies to minor children beginning on the date they reach the age of majority. Special rules apply to collectively bargained employees.
This required change affects defined contribution plans, including 401(k), 403(b), and governmental 457(b) plans and applies to participants or IRA owners who die after December 31, 2019 (December 31, 2021 for governmental plans).
Changes to distribution and withdrawal rules
The SECURE Act makes it easier for participants to access their defined contribution plan accounts in certain circumstances, while making it somewhat harder in others. This includes prohibition of credit card loans and qualified disaster distributions. The SECURE Act prohibits plan loans made through a credit card or “other similar arrangement” in defined contribution plans, including 401(k) and 403(b) plans. Few plans currently allow participants to take loans in this manner, but those that do should immediately suspend that practice.
A separate portion of the legislation that included the SECURE Act provides temporary relief from the 10% additional tax on early distributions under Code Section 72(t) for “qualified disaster distributions.” The relief applies to distributions of up to $100,000, but is limited to distributions made within 180 days after the legislation’s enactment.
The legislation authorizes the repayment of such distributions within three years to an eligible retirement plan to which a rollover contribution could be made. The maximum plan loan amount for individuals whose principal residence is in a qualified disaster area also may be increased from $50,000 to $100,000, and the repayment period for such loans may be extended.
This optional feature affects defined contribution plans, including 401(k) and 403(b) plans and governmental 457(b) plans but only until June 17, 2020.
Employers electing to add one or both of these distribution options must act quickly. Because of the limited time within which these additional distributions are permitted, such employers should prepare and distribute participant notices as soon as possible.
