Required minimum distributions (RMDs) for participants: FAQs

As the plan sponsor, you are responsible for ensuring that RMDs are met every year. This includes participants that have left the company or retired and may still have money in the plan. Failure to make required distributions is a violation of plan rules and could result in an IRS penalty and plan disqualification.

In general, most participants must take an RMD annually beginning in the year they reach RMD age. On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of RMD age.

Effective January 1, 2020, RMD rules are now as follows:

For a participant who was born:

AND

The RMD age is:

On or before 6/30/1949

 

Is NOT a 5% owner

The later of retirement or age 70½

IS a 5% owner

70½ (CANNOT be delayed)

On or after 7/1/1949

 

Is NOT a 5% owner

The later of retirement or age 72

IS a 5% owner

72 (CANNOT be delayed)

Below you’ll find answers to common questions about RMDs:

An RMD is calculated by dividing the account balance at the end of the previous calendar year by the participant’s life expectancy, as defined by the IRS*. Most participants will use the IRS Uniform Lifetime Table to determine the RMD.

Example: Brian is a retired, unmarried 401(k) participant who turned 72 in the second half of the year in 2021. At the end of last year, his account balance was $262,000. To calculate his RMD for this year, he divides $262,000 by his distribution period (or life expectancy) of 25.6 years. His RMD for this year is $10,234.38.

However, if a spouse is more than 10 years younger and is the sole beneficiary, the IRS Joint Life and Last Survivor Expectancy Table is used, which results in a smaller RMD than the one determined with the Uniform Lifetime Table, even though the participant was the same age.

Example: Jessica is a retired 401(k) participant who turned 72 in the second half of the year in 2021. Her husband, Jeff, who is more than 10 years younger and will turn 59 in 2021 is the sole beneficiary of her 401(k) account. At the end of last year, her account balance was $262,000. To calculate her RMD for this year, she divides $262,000 by the joint distribution period of 27.7 years. Her RMD for this year is $9,458.48.

On November 12, 2020, the IRS released new life expectancy tables that are used to calculate RMDs. However, the new tables are not effective until 2022. The new life expectancy tables generally reflect longer life expectancies than the current tables. This will result in generally reduced RMDs, which will allow participants to retain larger amounts in their retirement plans to account for the possibility they may live longer.

Each year, Capital Group, home of American Funds, runs a report reflecting participants who have reached RMD age or will be reaching the required age this year but have not set up automatic minimum distributions. These participants will be notified and given a description of the RMD rules.

You can also find out at any time which participants are or will be turning RMD age by the end of the year by running a Required Minimum Distribution Participant Listing report.

  1. Click on Reports, and then click Standard Reports in the row directly below the tab.
  2. Click on the Distributions & Loans tab in the top row.
  3. Select Required Minimum Distribution Participant Listing from the list to see an overview, a sample or to order a report.

Participants have two options:

  • Set up automatic minimum distributions. Participants can sign up for the automatic minimum distribution feature to have their RMD taken care of every year. All your participants have to do is fill out an Automated Minimum Distribution Request form. Once the form is completed and returned to us, all future RMDs will be calculated and sent to the participant or electronically deposited into a bank account.

    Participants can download the form from the website by logging in to their accounts, selecting Plan Forms under Plan Information in My Accounts and clicking on Automated Minimum Distribution Request.

  • Calculate and request their RMD every year. Participants may choose to calculate the RMD themselves or with the assistance of a legal or tax professional. Employees who select this option must calculate their RMD annually and submit a Separation from Employment Withdrawal Request form each year. RMDs will not be sent automatically, and participants will not receive any reminders.

    This form is available on the Plan Service Center in the Employee forms section under Participants.

Remember, you need to make sure that participants take RMDs because the plan must comply with the RMD rules. Participants who fail to take an RMD or withdraw less than the required amount will be subject to a 50% federal excise tax on any amount that should have been withdrawn but wasn’t. For example, a participant with an RMD of $2,000 who only takes out $500 would be assessed an excise tax of $750 by the IRS.

For more information on these rules, please contact your legal professional or call us at (877) 872-5159.

* Please see IRS Publication 590-B, including Appendix B, Table II and Table III for details.

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