What is the required beginning date (RBD) for required minimum distributions (RMDs)?
The required beginning date (RBD) is the IRS term for the deadline to receive the first required minimum distribution.
The answer to this question was actually quite clear before the Small Business Job Protection Act (SBJPA) of 1996 brought about a change. The revised RBD definition complicates plan design and adds complexity to tax planning for individuals when they reach age 70½.
Some Background on RBD
Historically, it has been defined differently and had much greater significance in performing the required minimum distribution calculations. Originally, RBD was December 31 of the year an individual turned 70½ or, if later, the December 31st of the year the individual separated from service. However, with some people turning 70½ or severing from service late in the year, the IRS realized that a grace period was needed to actually give those processing such distributions time to explain the process, execute appropriate distribution forms and actually process the first minimum distribution.
RBD Becomes April 1 Following the Year That Age 70½ Is Attained
For individuals attaining age 70½ late in the year, the deadlines were very tight. Thus, the IRS moved the RBD to the April 1 of the subsequent year. This made it much easier to have everyone properly paid the required minimum distribution. Of note in working with participants is explaining that RBD is the first day of April and, though close, RBD is not the April 15 tax deadline.
TEFRA 242(b) Election
There is also still in existence a rare exception called a TEFRA 242(b) election, which had to have been executed by December 31, 1983 in order for a participant who was still working to defer the required beginning date until after actual retirement. TEFRA also delegated to the IRS the writing of the required minimum distribution regulations. TEFRA is the acronym for the Tax Equity and Fiscal responsibility Act of 1982.
TRA-1986
After enactment of the Tax Reform Act of 1986, a uniform RBD definition of April 1 of the year after age 70½ is attained applied to all individuals in qualified plans and IRAs (with the exception of those who executed a TEFRA 242(b) election).
SBJPA Makes Further RBD Changes
SBJPA sought to bring back the simpler days of allowing a participant in a qualified plan who was working beyond age 70½ to wait until retirement before being required to begin minimum required distributions that existed prior to TRA-86. Thus, SBJPA changed the definition of RBD to the following:
• April 1st of year after age 70½ is attained applies for the following individuals:
• Owners of more than 5% of the business entity (5% owners).
• Individuals who are not 5% owners, but who separated employment with the employer prior to or during the year in which they attained age 70½.
• April 1st of the year after retirement occurs applies to those individuals who are not 5% owners and who continue to work for the employer after the year in which they attain 70½.
However, SBJPA did not change the RBD for IRAs, which remains at April 1 of the year following the year in which age 70½ is attained. Valid TEFRA 242(b) elections continue to apply.
Leaving aside the SBJPA transition rules, let’s look at the implications to the plan design, and, in particular for individuals who are not 5% owners and who continue to work.
Although SBJPA revised the legal definition of RBD, a plan document may offer a variety of definitions. For example, plan documents may define the RBD as either:
1. The April 1 of the calendar year following the calendar year in which the Participant attains age 70½. (An employer could select to maintain this definition in their plan.)
2. The April 1 of the calendar year following the calendar year in which the Participant attains age 70½ except that distributions to a Participant (other than a 5% owner) with respect to benefits accrued after the later of the adoption of this Plan or Effective Date of the amendment of this Plan must commence no later than the April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or the calendar year in which the Participant retires.
3. The later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70½ or retires except that distributions to a 5% owner must commence by the April 1 of the calendar year following the calendar year in which said Participant attains age 70½.
Except that (non 5% owner) Participants [ ] may [ ] may not elect to begin receiving distributions as of April 1 of the calendar year following the calendar year in which the Participant attains age 70½. Any distributions made pursuant to such an election will not be considered required minimum distributions. Such distributions will be considered in-service distributions and as such, will be subject to applicable withholding.
The first definition establishes 70½ as the RBD for all participants; 5% owners and non-5% owners.
The second definition adds the most administrative complexity, as the employer would have to segregate benefits that accrued before the adoption of the amendment from those that accrued thereafter when determining the RBD. Generally, we recommend that employers avoid the second option because of its administrative difficulties.
The third definition is essentially the SBJPA rule, but leaves the employer with the option of allowing non-5% owners to take distributions at age 70½. The principal argument for continuing to permit an age 70½ distribution is that non-5% owner participants who work beyond 70½ may count on such distributions to supplement their income. The problem with permitting such post age 70½ distributions is that the distribution will not qualify as a required minimum distribution.
Thus, such a distribution would be considered an eligible rollover distribution and would be subject to the mandatory 20% withholding, unless the participant established a schedule of payments over his or her lifetime or for at least 10 years. The plan document would also need an in-service withdrawal provision.
Interested in more information on Required Minimum Distributions? Click here to check out our Back-to-Basics eSeminar.
Bill Grossman, QPA |
