Plan Facts November 2016 newsletter

Transcription

1 Plan Facts newsletter Required Minimum Distribution (RMD) Refresher As we approach the end of the year, the deadline to distribute required minimum distributions (RMDs) from your defined contribution retirement plan ( plan ) draws near. This is an important aspect of plan operations that plan sponsors should monitor each year to ensure compliance with the tax code rules. Bell Bank helps you with this process by ing you a list of the individuals who are over age 70 ½ and still active. We also send a letter to those who are eligible to receive their RMD for the first time, and we work directly with participants to ensure their distributions are processed in a timely manner. RMDs are designed to ensure that plan participants tax-deferred savings enter the tax stream over their lifetime. The Internal Revenue Code (IRC) rules dictate when a plan participant must begin taking distributions from the plan and how much they must take each year. 1 If a plan participant fails to take an RMD, they are subject to a 50% excess accumulation tax on the portion of the required amount that should have been distributed but remained in the plan. Failure to distribute an RMD is also a plan qualification failure that plan sponsors must address to preserve the tax-favored status of their qualified retirement plan. This article provides a refresher on the RMD rules and what plan sponsors can do to help ensure that their plan s required distributions are made in a timely manner. STEP 1: Identify Plan Participants in or Nearing RMD Status The first step for plan sponsors is to identify which plan participants must take an RMD. Plan participants must generally begin taking distributions for the year they reach age 70½. 2 A plan participant reaches age 70½ six months following his or her 70th birthday. 2 Plan participants must then take an RMD each year thereafter. 3 Beneficiaries who inherit retirement savings from a deceased plan participant are also required to take distributions within certain timeframes. A plan s recordkeeper or TPA typically provides reports to assist plan sponsors in identifying which plan participants and beneficiaries are required to take an RMD. This report will be based on the demographic information the plan sponsor provides to the CONTENTS Required Minimum Distribution (RMD) Refresher 2017 Cost-of-Living Adjustments ( COLA ) Increases bellbanks.com/wealth Not FDIC insured May lose value Not financial institution guaranteed Not a deposit Not insured by federal government agency Page 1

2 Required Minimum Distribution (RMD) Refresher (continued) recordkeeper/tpa. Plan sponsors should review any reports received and compare them to their employee records to ensure all plan participants or beneficiaries who are required to take a distribution are identified. STEP 2: Pinpoint the Deadlines for RMDs The first year s RMD must be taken by April 1 of the year after the plan participant attains age 70½. 2 This is called the Required Beginning Date (RBD). For any plan participant who is older than 70½ and already taking RMDs, the deadline is December 31 of each year. 3 Only the first year s distribution can be delayed into the following year. The only other way the RMD deadline may be extended is if a plan participant is still employed beyond age 70½. In that case, the plan may choose to permit the plan participant to delay RMDs until the participant separates from service. If the plan has chosen this option, the RMD deadline is April 1 of the year following the year the plan participant leaves employment with the employer sponsoring the plan. 2 This delayed RMD option is not available to any plan participant who owns 5% or more of the employer. 2 Plan sponsors may want to make sure that plan participants are notified of the deadline for Uniform Lifetime Table 4 submitting distribution requests so that distributions can be processed by December 31. Age Distribution Period STEP 3: Calculate the RMD The RMD amount to be distributed each year is calculated by taking the plan participant s December 31 account balance from the prior year and dividing it by an applicable distribution period or life expectancy factor. 3 The life expectancy factor is generally based on the plan participant s life expectancy based on the IRS s Uniform Lifetime Table (an excerpt is included at right). 3 Look to the plan participant s age as of his or her birthday in the distribution year to find the applicable distribution period. 3 A plan participant whose spouse is more than 10 years younger and named as the sole beneficiary Example: Julie, who is retired, celebrated her 70th birthday on August 15, She reached age 70½ on February 15, Julie is required to take her first RMD for The deadline to take her first RMD is April 1, The deadline to take her second RMD (for the 2017 calendar year) is December 31, If Julie delays taking her first year RMD until early 2017, she will be required to take two RMDs in Because RMDs are generally included in the plan participant s taxable income, delaying the first year RMD into the second year will result in two taxable distributions in the same calendar year. Page 2

3 of the participant s retirement plan account may use the IRS s Joint Life and Last Survivor Expectancy Table to calculate RMDs. 3 This table takes into account the actual life expectancies of the plan participant and the spouse beneficiary using both of their ages. 4 Using this table to calculate an RMD will generally result in a lower distribution amount than using the Uniform Lifetime Table because the younger beneficiary has a longer life expectancy. Although plan sponsors are ultimately responsible for calculating RMDs, the plan s recordkeeper or TPA typically performs this service. Plan sponsors may want to spot check some of the calculations to make sure that the plan participant and beneficiary data used by their service provider is accurate. STEP 4: Determine Payment Options RMDs may be satisfied with a single payment or in multiple payments throughout the year according to plan policy. Any payments made in a year to a plan participant in RMD status must be first applied to the amount required to be distributed. 5 RMDs are not eligible to be rolled over to an IRA or another retirement plan. 5 This means that the plan participant will not be able to roll over any amounts from the plan until the RMD for the year is satisfied. If an individual participated in more than one retirement plan, a separate RMD must be taken from each plan. 6 Example: John, age 72 in 2016, has an account balance in his former employer s 401(k) plan. His December 31, 2015, account balance was $120,000. His wife Mary is his sole beneficiary and she is 71 in John s 2016 RMD is determined by dividing $120,000 by 25.6, the factor for his age from the IRS s Uniform Lifetime Table. His RMD for 2016 is $4, John must have this amount distributed from his 401(k) plan account by December 31, 2016, to avoid the 50% excess accumulation penalty tax. Plan sponsors may want to review their plan s payment options and any other services provided by their recordkeeper to assist with the RMD process. If the plan document permits lump sum payments only, then a plan participant must take a complete distribution of his or her plan account to satisfy the RMD rules. Bell Solution: If you have any questions about the RMD processes or communications, or you would like to discuss your plan s RMD payment options, contact your Bell relationship manager at Page 3

4 2017 Cost-of-Living Adjustments ( COLA ) Increases Each year in October, the IRS announces the cost-of-living adjustments (COLAs) for the following calendar year. These adjustments affect certain dollar limitations and thresholds for retirement and pension plans. Some years, the increase in the cost-ofliving index does not meet the statutory thresholds necessary to trigger updates for all the limits and thresholds. Increases for 2017 Some of the retirement plan limits will increase for These include the overall contribution limit that determines the maximum amount of contributions and forfeitures that can be allocated to a plan participant s account each year, 7 limit on compensation that can be considered for determining benefits, 7 and compensation amount for determining who is a key employee for top-heavy testing. 7 As we approach the end of the year, the deadline to distribute required minimum distributions (RMDs) from your defined contribution retirement plan ( plan ) draws near. This is an important aspect of plan operations that plan sponsors should monitor each year to ensure compliance with the tax code rules. In a separate pronouncement, the Social Security Administration announced that the taxable wage base, or the maximum amount of earnings subject to Social Security tax, will increase for In addition to affecting payroll taxes, this limit affects retirement plans that use the permitted disparity contribution allocation method (also known as Social Security integration). Bell Solution: Your Bell relationship manager can assist you with information about whether your plan is on track to meet the 2016 plan limits or how the 2017 COLAs may affect your plan operations. Call us at RMDs are designed to ensure that plan participants tax-deferred savings enter the tax stream over their lifetime. Page 4

5 2017 Cost-of-Living Adjustments ( COLA ) Increases (continued) COLA Chart The following chart is taken from the IRS COLA Increase Table, which can be found on COLA Chart Annual Compensation $270,000 $265,000 $265,000 Elective Deferrals $18,000 $18,000 $18,000 Catch-up Contributions $6,000 $6,000 $6,000 Defined Contribution Plan Limits $54,000 $53,000 $53,000 ESOP Limits $1,080,000 $1,070,000 $1,070,000 $215,000 $210,000 $210,000 HCE Threshold $120,000 $120,000 $120,000 Defined Benefit Limits $215,000 $210,000 $210,000 Key Employee $175,000 $170,000 $170, Elective Deferrals $18,000 $18,000 $18,000 Taxable Wage Base $127,200 $118,500 $118,500 Each year in October, the IRS announces the cost-of-living adjustments (COLAs) for the following calendar year. These adjustments affect certain dollar limitations and thresholds for retirement and pension plans. Footnotes 1 IRC Sec. 401(a)(9) and related Treasury regulations 2 Treasury Regulation 1.401(a)(9)-2 3 Treasury Regulation 1.401(a)(9)-5 4 Treasury Regulation 1.401(a)(9)-9 5 Treasury Regulation 1.402(c)-2 6 Treasury Regulation 1.401(a)(9)-8 7 IRS, Notice , 2017 Limitations, 8 Social Security Administration, Fact Sheet 2017 Social Security Changes, The Social Security Administration announced that the taxable wage base, or the maximum amount of earnings subject to Social Security tax, will increase for The information contained herein is for informational purposes only and does not constitute legal or tax advice. Contact a tax or legal professional prior to taking any action based upon this information. The information contained herein is based on authorities that are subject to change and is provided on an as is basis without warranty of any kind. Bell Bank does not assume any liability for any errors, omissions or damages resulting from the use of the information. This document may not be reproduced or distributed in any form or by any means without Bell Bank s written permission. Not FDIC insured May lose value Not financial institution guaranteed Not a deposit Not insured by federal government agency Page 5