Changing tax rules on emptying retirement accounts have raised alarms for employers anxious to update their payment processes before the year’s end.
Lawmakers twice over the past eight months have modified the rules regarding required minimum distributions (RMDs)—annual payments made to retirement-age participants who need to start cashing out their accounts. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect Jan. 1, allowed participants to leave their nest eggs alone until after they turn 72. The $2 trillion stimulus package waived RMDs during the pandemic.
The changes are stirring concerns for companies, particularly since they had just days after the SECURE Act became law to rectify or cancel scheduled RMD payments to staff who reached the prior age requirement (70½) before the end of last year.
Clearing up questions about pending RMD transactions as employers fine-tune their payment and notification systems would alleviate unnecessary aggravation this fall, Lisa Tavares, a partner at Venable LLP’s Washington office, said.
“If we get into October and don’t have guidance, it puts things behind,” she said.
The IRS in January gave plan sponsors until April 1 to issue corrected benefit statements, and until June 1 to file updated records regarding RMD payments due in 2020. IRS officials recently billed RMD guidance as one of the post-virus relief projects they’re determined to wrap up.
Postponing RMD payments by 18 months is fine, so long as the IRS forgives “foot faults” companies might make as they scramble to rearrange their payment processes, Jennifer Rigterink, an associate at Proskauer Rose LLP in New Orleans, said.
“People would like clarification that generous transition relief will be available for any errors made while getting up to speed,” she said.
Rigterink said clients have also asked about how the RMD rules would affect plans with the 70½ year-old requirement already built-in that don’t otherwise allow distributions to retirement-age employees who are still on the job.
Anti-cutback rules prohibit employers from rescinding accrued benefits. That could cause problems for plan sponsors that effectively block 70½-year-old workers from being able to claim RMDs by raising the distribution age to the SECURE-mandated 72.
“Further guidance from the IRS (such as explicitly confirming anti-cutback relief for this scenario) would be helpful,” Rigterink wrote in an email.
Treasury officials didn’t immediately respond to repeated requests for comment about the regulatory agenda.