The Four Cs of Required Minimum Distributions

Required minimum distributions (RMDs) should always be top of mind for plan administrators, not just at year end. Although administrators aren’t legally required to calculate RMDs, strong administrators will support their participants in staying compliant with the RMD rules. Fortunately, there are strategies that make RMD tracking and calculations easier.

If you need a refresher on what RMDs are and how they work, skip down to our FAQ section. But otherwise, let’s dig into the following four RMD strategies for plan administrators:

1. Communicate
2. Calculate
3. Compel
4. Comply

Communicate

The best thing a plan administrator can do for participants is to communicate well. Plan administrators should:

Educate participants about RMD rules.

Help participants better understand RMDs and their obligations. They’ll want to know:

• When their first withdrawal will be due
• Whether you will be calculating RMDs for them or whether they’ll have to calculate them on their own
• How RMDs are calculated
• How RMDs from the employer-sponsored plan might affect distributions from other retirement accounts they have
• Consequences of missing RMDs
• Distribution options and timing of payments
• How RMDs might affect their taxes

Consider communicating this information in multiple formats — written format, webinars, live seminars — so that you reach as many participants as possible.

Notify participants when they reach retirement age.

You can (and should) inform all participants about when RMDs kick in, but it’s smart to send targeted communications to participants who are nearing retirement age, letting them know that distributions may soon be required.

Send annual reminders to RMD-eligible participants.

Consider sending annual reminders to participants who are of RMD age so that they are reminded to calculate their RMD for that year and set up the necessary withdrawals.

Keep contact information up to date.

Proactively update your participants’ contact information. This ensures the communications you work so hard to prepare are being seen by the right people.

Calculate

Although it’s not required, many administrators voluntarily calculate RMDs for their participants. Fortunately, calculating RMDs isn’t as difficult as you might think. You’ll need to know:

• The prior year’s December 31^st account balance
• Age of the participant
• Participant’s marital status (and age of their spouse)
• If the account is inherited

If you don’t perform the RMD calculation for plan participants, consider linking them to a calculation worksheet (like this one from the IRS) or an online calculator (like this one from the SEC) so that they can calculate RMDs themselves.

Compel

Empower your participants to take action. You can do this in a few ways:

• Encourage them to set up automatic withdrawals. You can even offer pre-selected options — monthly withdrawals, or quarterly withdrawals, for example — and then apply those options based on that year’s RMD calculation.
• Encourage participants to consolidate accounts so that they don’t miss RMDs from an overlooked balance.
• Have escalation policies for what happens if a participant doesn’t acknowledge that they received communications.
• Ask participants to update withholding preferences, contact information, and beneficiary information on an annual basis.
• Highlight what could happen if RMDs aren’t satisfied.
• Send multiple reminders to make RMDs before the December 31 deadline.

Comply

As a plan administrator, you’re not unfamiliar with compliance requirements. But related to RMDs specifically, there’s little administrators need to do. You are not required to calculate RMDs on behalf of your participants (although you may choose to do so), but there are a few small things you’ll need to do to maintain compliance:

• Make distribution payments timely: If you withhold funds from participants after they’ve requested a disbursement, your plan may get disqualified. Your participants may wait until the end of December to make those requests, so be ready to process their requests timely.
• Report RMDs on Form 1099-R: All distributions (not just RMDs) should be reported in Box 7 of each participant’s 1099-R.
• Ensure written materials use IRS language: The plan document and communication with participants should use language that matches the IRS. The plan may be in jeopardy if plan participants are given false or misleading information.
• Make information easily accessible: Even if you choose not to calculate RMDs for your participants, you must at minimum make year-end balances available to your participants.

Focus on the Four Cs

By focusing on the four Cs — Communicate, Calculate, Compel, and Comply — plan administrators can support participants and help them meet RMD requirements. Read our FAQ section for more information about RMDs, and reach out to your Meaden and Moore advisor if you have additional questions.

RMD FAQs

What are RMDs?

RMDs are the minimum amounts an individual is required to pull from their retirement accounts each year.

Who is required to take RMDs?

Individuals generally must take RMDs once they are both (1) retired, and (2) at least age 73 (or age 75 for those born after 1960), with one exception: Anyone who owns at least 5% of the company sponsoring the retirement plan must begin taking RMDs at age 73 regardless of their retirement status.

What types of retirement plans require RMDs?

RMDs are required for traditional IRAs and IRA-based plans like SEP IRAs, SIMPLE IRAs, and SARSEPs. They’re also required for employer-sponsored qualified retirement plans, like 401(k)s, 403(b)s, and 457(b)s.

Are RMDs required or ROTH accounts?

No, RMDs are not required for ROTH accounts unless they were inherited.

When do people need to start taking RMDs?

RMDs are typically required to be taken by the end of the calendar year. However, participants can delay taking their first RMD until the April 1^st that follows the calendar year in which they turn 73.

How are RMDs calculated?

RMDs are based on the prior year’s December 31 balance. This balance is divided by the life expectancy factor published by the IRS in Publication 590-B.

Are inherited IRAs subject to RMDs?

Inherited IRAs are subject to RMDs, but they’re calculated differently: the entire balance of the inherited IRA must be drawn down within 10 years of the account owner’s death (with a few exceptions). But there is no requirement that these amounts be taken out equally over that 10-year period.

What happens if participants don’t take their RMDs?

Account owners who fail to take required withdrawals will be assessed a 25% penalty on the shortfall, which will fall to 10% if they rectify the mistake within two years.

Are RMDs required for each retirement account?

Yes, RMDs should be calculated for each retirement account separately. However, participants with multiple IRAs can take the total calculated balance from any of their IRAs. The same can be said for 403(b) accounts. For all other types of accounts — 401(k)s and 457(b)s — the RMD you calculate form that account must be pulled from that specific account. For more information, contact us today.