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Compliance Newsletter August 2023

Limited RMD Relief

The IRS has issued Notice 2023-54, which extends relief for certain required minimum distribution (RMD) rules that were changed under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE), proposed RMD regulations issued in February 2022, and the SECURE 2.0 Act of 2022 (SECURE 2.0).

Background

The SECURE Act and SECURE 2.0 raised the age used in determining the required beginning date (RBD) of the RMD for a retirement plan participant or IRA owner (referred to collectively as the employee) from 70 ½ to 72, 73, or75, depending on an individual’s date of birth.

Also, part of the RMD changes within the SECURE Act included extending the 5-year rule to 10 years for a defined contribution retirement plan or IRA. In other words, with some exceptions, once the employee dies, the remaining account balance must generally be paid within 10 years to the designated beneficiary.

The SECURE Act also established the definition of an eligible designated beneficiary (EDB),which includes the employee’s surviving spouse, the employee’s children, a disabled or chronically ill beneficiary, or an individual not more than 10 years younger than the employee. EDBs may receive RMDs for their lifetime; however, at their death, the designated beneficiary for the EDB must receive the remaining account balance generally by the end of the 10thyear following the EDB’s death.

Proposed regulations issued on February 24, 2022, clarified that if the employee dies on or after the employee’s RBD, the beneficiary must continue to receive annual RMDs at least as rapidly each year, with full distribution made no later than the 10thcalendar year following the employee’s death. This is also true for payments to a beneficiary of an EDB following the EDB’s death.

IRS Notice 2022-53 (2022 Notice) issued in October of last year provided excise tax relief for certain beneficiaries that should have received RMDs from a retirement plan or IRA under the 10-year rule described above.

10-year Rule Tax Relief

In response to comments, the IRS is extending the waiver announced in the 2022 Notice of the excise tax that a beneficiary may ordinarily be subject to if certain RMD payments were missed.

The excise tax waiver is in effect if the following is true for a beneficiary of an employee:

  • The employee died in 2020,2021, or 2022,
  • The employee died after their RBD, and
  • The beneficiary is not taking a lifetime or life expectancy payment of the RMD (available to EDBs only).

The beneficiary of an EDB may also be subject to an excise tax waiver if the following is true:

  • The EDB died in 2020, 2021, or 2022 and
  • The EDB was taking a lifetime or life expectancy payments.

Additionally, a defined contribution plan that failed to make either of the RMDs outlined above will not be treated as having failed to satisfy the Internal Revenue Code merely because that distribution was missed in 2020, 2021, or 2022.

Required Beginning Date and Rollovers

The IRS also received feedback that due to the short timeline given to update automated payment systems for retirement and IRA providers, payments could be issued to employees and beneficiaries born in 1951 that are not truly RMDs. As a result, an employer or plan administrator will not be treated as failing to satisfy withholding, direct rollover, or notice requirements related to mischaracterized RMDs made between January 1, 2023, and July 31, 2023, to employees and beneficiaries born in 1951.

Additionally, the 60-day rollover period individuals normally receive after payment of an eligible rollover distribution has been extended to September 30, 2023, for employees born in 1951 who received a mischaracterized RMD from January 1, 2023, through July 31, 2023. This relief also includes the employee’s surviving spouse who would have received an eligible rollover distribution had the RBD age been updated for the new rules.

For IRA owners and their spouses, the 60-day rollover extension described above is available even if they already received their one-rollover-per-year limit within the last twelve months. However, making a rollover of the mischaracterized RMD amount will count as a rollover for purposes of this limit and no new rollovers will be allowed for the next twelve months.

Final RMD Regulations

The IRS also included an announcement that they intend to issue final RMD regulations that will apply no earlier than the 2024 distribution calendar year. We will continue to monitor all developments and provide additional updates as new information becomes available.

PBGC Final Rule for Terminating Single-Employer Plans

Pension Benefit Guaranty Corporation (PBGC) has issued a final rule that clarifies policies around lump sum payments, forms of benefit, and the valuation of plan assets when it acts as a trustee for the termination of single-employer plans.

PBGC will typically act as a trustee of a qualified defined benefit plan that terminates due to either a distress situation or an involuntary termination. In those situations, lump sum payments are not allowed unless the benefit is valued at $5,000 or less or if a participant has made mandatory contributions and wants to receive those contributions as a lump sum.

The final rule clarifies that:

  • Lump sum payments are not allowed, even if an election is made before plan termination, but not yet paid out.
  • The de minimis amount used for lump sums (currently $5,000) will refer to the statutory provision that provides the dollar amount going forward. Therefore, the lump sum dollar limit will increase to $7,000 after December 31, 2023.
  • The de minimis benefit of a married participant who dies after the plan termination date will be paid to the surviving spouse and not as a qualified preretirement survivor annuity.
  • Benefits paid to estates will be paid only as lump sums, as annuities are typically not an appropriate benefit election for an estate.
  • The form of benefits in pay status cannot be changed once the plan becomes trusteed by PBGC. This also applies to benefits that include mandatory employee contributions.
  • Fair market value or fair value must be used for valuing assets that are allocated to participant benefits and used in determining plan sponsor liability and net worth.

The final rule will be effective for plan terminations initiated on or after August 10, 2023.PBGC, though, already follows many of the policies and practices in the final rule and will continue to do so in the meantime.

Disaster Relief for Vermont

In response to flooding in Vermont, the Internal Revenue Service (IRS) extended various deadlines for impacted businesses and taxpayers. Pension Benefit Guaranty Corporation (PBGC) also offers deadline relief according to a one-time announcement published in the Federal Register on July 2, 2018.

Impacted Areas

Individuals who reside or have a business in any of Vermont’s 14 counties may be eligible for deadline relief.

Deadline Relief

Certain deadlines are extended until November 15, 2023 if they fall on or after July 7, 2023 and before November 15, 2023.

Below is a partial list of retirement-impact tax filing and payment deadlines that may be extended:

  • Retirement plan loan repayments under Internal Revenue Code section 72(p)(2)
  • Required minimum distributions under Internal Revenue Code section 401(a)(9)
  • The 10% additional income tax continues to not apply even if the following is missed during the relief period:
    • Substantially equal payments made over the participant’s life or joint lives of the participant and designated beneficiary
    • Deadline for using a distribution from an IRA for a first-time home purchase by the close of the 120thday after the distribution is received
  • Prior tax year contribution deadlines for retirement plans
  • Indirect rollover distribution deadlines
    • 60-day rollovers
    • Rollover of qualified loan offsets
  • Refunds as a result of
    • Excess deferrals
    • ADP/ACP non-discrimination testing
    • Eligible automatic contribution arrangement (EACA) withdrawals
    • Excess IRA contributions
  • Deadline for recontributing qualified reservist distributions
  • Form 5500 and Form 8955-SSA filing Form 5498 for IRAs
  • PBGC premium payments
  • PBGC deadlines that are based on the Form 5500 deadline
  • Single Employer Plan Termination Forms 500 and 501

Additional Resources

For any questions related to IRS deadlines and other disaster-related issues, the IRS has a toll-free number at 1-866-562-5227. For PBGC disaster-related questions, call 1-800-736-2444 ext. 4136.

GAO Makes 403(b) Recommendations to the DOL

The U.S. Government Accountability Office (GAO) recently analyzed the U.S. Department of Labor (DOL), Securities and Exchange Commission (SEC), and Internal Revenue Service (IRS) documentation from five selected states that were identified as taking actions to improve participant outcomes. The resulting GAO report recommended that the DOL update its educational materials to include information applicable to 403(b) plan sponsors and participants.

Overview The GAO is an independent, non-partisan agency that provides Congress and federal agencies with analysis directed toward saving money and improving government efficiency. It was recently tasked with reviewing the following regarding 403(b) plans and 403(b) plan participants:

  • Federal agency oversight
  • Actions by selected states that could improve participant outcomes
  • Options identified by stakeholders and experts that could improve outcomes

As a result of their analysis, the GAO observed that the DOL offers more detailed information for 401(k) plans than for 403(b) plans. As a result, the GAO recommended that the DOL make updates to educational materials to include 403(b) specific information, including materials that could help 403(b) plan participants understand plan fees.

DOL Response

The DOL stated that it would review its publications for any necessary changes. In the meantime, 403(b) plan interested parties, such as plan sponsors and participants, may continue to reference the DOL webpage dedicated to 403(b) plans. The DOL noted that ERISA-covered 403(b) plan interested parties may find the 401(k) publications helpful.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, a member of the Principal Financial Group®, Des Moines, IA 50392.

Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com, Principal®, Principal Financial Group® and the Principal logo design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and service marks of Principal Financial Services, Inc., in various countries around the world.

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