A Complete Guide to Required Minimum Distribution (RMD) for Employers

As an employer, understanding Required Minimum Distribution rules is important, especially if you offer retirement plans like 401(k)s to your employees. While RMDs primarily affect employees, employers have specific responsibilities related to these distributions, such as ensuring that RMDs are taken correctly and timely.

This guide will explain what RMDs are, how they affect employees, and how employers should manage these withdrawals.?

What Is a Required Minimum Distribution??

A Required Minimum Distribution is the minimum amount an individual must withdraw from their retirement account (like an IRA or 401(k)) once they reach a certain age. The IRS requires these distributions to ensure that funds in tax-deferred accounts are eventually taxed. Required Minimum Distributions apply to different types of retirement accounts, including:?

• Traditional IRAs?

• 401(k)s?

• 403(b) plans?

• SIMPLE IRAs?

• SEP IRAs?

The Required Minimum Distribution is calculated using the account balance and the individual’s life expectancy factor, as determined by IRS tables.?

When Do Employees Need to Begin Taking Required Minimum Distributions?

As an employer, understanding the required minimum distribution age and when employees must begin RMDs is vital for guiding them through the process:?

Traditional IRAs and Most Retirement Plans:? –

• For employees who turned 72 before January 1, 2023: They are required to take their first RMD by April 1 of the year following their 72nd birthday. For example, if an employee turned 72 in 2022, their first RMD is due by April 1, 2023. Additionally, their second RMD must be taken by December 31, 2023.?

• For employees turning 72 on or after January 1, 2023: The new SECURE Act 2.0 increased the starting age for RMDs to 73. Therefore, employees who turn 73 on or after January 1, 2023, are required to take their first RMD by April 1 of the year following their 73rd birthday. For instance, if an employee turns 73 in 2023, their first RMD must be taken by April 1, 2025.?

Employer-Sponsored Retirement Plans :?

• Employees still actively working can defer RMDs until April 1 of the year after they retire, unless they own more than 5% of the company.?

Subsequent RMDs:?

• After the initial RMD, all future withdrawals must be made by December 31 annually to avoid penalties.?

Employer’s Role in Required Minimum Distributions?

As an employer offering a 401(k) or other retirement plan, you are responsible for certain administrative tasks related to RMDs:?

1. Ensuring RMDs Are Taken: Employers must ensure that RMDs are calculated correctly and distributed to eligible employees. Failure to do so can lead to penalties for both the employee and the employer.?
2. RMD Notification: Employers are generally required to notify employees when they reach the age at which RMDs are required. Many plans will include an automatic notification system to remind employees, but it is important to double-check that this is in place.?
3. Withholding Tax on RMDs: Employers are responsible for ensuring that the correct tax withholding is applied to the RMD. Since RMDs are taxable, they are subject to federal income tax withholding. If the employee does not provide withholding instructions, a default 20% withholding may apply for distributions from 401(k) plans. It’s essential to ensure that employees are informed of their withholding options.?
4. Plan Design Considerations: Employers should review their retirement plan’s design and administrative policies to ensure they comply with the IRS rules regarding RMDs. This may include choosing whether RMDs are automatically withdrawn, or if employees must request their withdrawals.?

How Required Minimum Distributions (RMDs) Are Calculated for 401(k) and IRA Accounts?

RMDs are calculated based on the account balance at the end of the preceding year and divided by a distribution period from IRS life expectancy tables. Here’s a concise breakdown of the relevant tables and how to use them:?

Step-by-Step RMD Calculation:?

Account Balance:?Determine the account balance as of December 31 of the previous year (e.g., for the 2024 RMD, use the balance as of December 31, 2023).?

Choose the Correct IRS Required Minimum Distribution Table:?

• Table I (Single Life Expectancy):?

• Used by non-spouse beneficiaries or if the IRA owner passes away after the required beginning date and there’s no designated beneficiary.?

• Example: If the beneficiary is age 57 in 2024, their distribution period is 29.8 years.?

• Table II (Joint Life and Last Survivor Expectancy):?

• Used if the spouse is the sole beneficiary and is more than 10 years younger than the IRA owner.?

• Calculate using both the IRA owner’s age and the spouse’s age as of their birthdays in the year the owner reaches age 73.?

• Table III (Uniform Lifetime Table):?

• Used by most IRA owners when the spouse is not the sole beneficiary or when the spouse is 10 or fewer years younger than the IRA owner.?

• Calculate using the IRA owner’s age as of their 73rd birthday.?

RMD Calculation:?

• Formula: RMD = Account Balance ÷ Distribution Period (from the table).?

• Example: If the IRA balance is $500,000 and the distribution period is 27.4 years, the RMD is $18,248.19.?

Special Considerations:?

• Inherited IRAs:?

• Different RMD rules apply for beneficiaries depending on their relationship to the deceased IRA owner.?

• Owner Death Before Required Beginning Date:?

• If the owner passes before their required beginning date, the 5-year or 10-year rule applies, and no life expectancy table is used for RMD calculations.?

This ensures compliance with IRS regulations, while allowing for tax-deferred growth in the IRA or 401(k).?

Special Rules for Different Types of Accounts?

Employers should be aware of specific rules that apply to different types of accounts:?

Traditional IRAs:?

• RMD Start: At age 72.?

• Calculation: Based on your account balance at the end of the previous year and the IRS life expectancy table.?

Roth IRAs:?

• RMD Start: No RMDs are required during the account holder’s lifetime.?

• Beneficiaries: After the account holder’s death, beneficiaries must take RMDs, but the rules differ for spouses and non-spouses.?

401(k) Plans:?

• RMD Start: At age 72, unless you’re still working for the same employer. If you’re still employed, RMDs are not required from your current employer’s plan.?

• Calculation: Like Traditional IRAs, the RMD is calculated based on your account balance and the IRS life expectancy factor.?

Roth 401(k) Plans:?

• RMD Start: Unlike Roth IRAs, Roth 401(k)s require RMDs to begin at age 72.?

• Calculation: Same as other 401(k)s, but withdrawals from a Roth 401(k) are tax-free.?

Inherited IRAs:?

• RMD Start: RMDs must begin immediately or by the end of the year after the original account holder’s death. The timing depends on the beneficiary type (spouse or non-spouse).?

• Rules: Non-spouse beneficiaries generally have to withdraw the entire balance within 10 years (if the account holder died after 2019).?

SEP IRAs and SIMPLE IRAs:?

• RMD Start: At age 72, similar to Traditional IRAs.?

• Calculation: Same rules apply for calculating RMDs based on account balance and life expectancy table.?

Annuities within Retirement Accounts:?

• RMD Start: The same rules apply, but there are exceptions for annuities with guaranteed lifetime withdrawal benefits.?

• Calculation: RMDs are calculated using the annuity’s balance and expected lifetime payouts.?

403(b) Plans:?

• RMD Start: RMDs start at age 72, with similar rules to 401(k)s. If you’re still working, you may delay RMDs from your current employer’s plan, but not from previous employers.?

Penalties for Missing RMDs?

Employers should also inform employees about the consequences of missing an RMD. The IRS imposes a severe penalty if the RMD is not withdrawn:?

• The penalty is 50% of the RMD amount that was not withdrawn. For example, if an employee was required to take an RMD of $10,000 and they missed it, they could face a penalty of $5,000.?

Employers can assist employees by ensuring RMD reminders are sent well in advance, and that the necessary withdrawals are taken on time.?

What Happens If an Employee Misses Their RMD??

Employees who miss their RMD are subject to a penalty from the IRS, but they can take corrective action. To request a penalty waiver, the employee must:?

1. File IRS Form 5329.?
2. Provide an explanation for missing the RMD.?
3. The IRS will review the explanation, and if it is accepted, they may waive the penalty.?

How Employers Can Help Employees with RMDs?

While the responsibility for taking RMDs falls on employees, employers can play an important role in guiding their employees through the process. Here are a few ways to help:?

1. Provide Clear Information: Ensure that employees know when they need to start taking RMDs and the rules that apply. Offer educational materials or seminars about RMDs and how they are calculated.?
2. Set Up Automatic Withdrawals: Consider setting up automatic RMD withdrawals from 401(k) accounts to prevent employees from missing out on these distributions.?
3. Review Plan Design: Regularly review your company’s retirement plan design to make sure it is compliant with IRS regulations regarding RMDs.?
4. Help with Tax Withholding: Ensure employees understand the tax implications of RMDs and the available options for withholding.?

Conclusion?

As an employer, you play a crucial role in ensuring that employees comply with Required Minimum Distributions. By providing the right resources, reminders, and assistance, you can help employees meet their RMD obligations and avoid costly penalties. Understanding the Required Minimum Distribution rules for different types of accounts, calculating RMDs correctly, and adhering to IRS regulations will keep your company’s retirement plan in good standing and benefit your employees.?

By offering clear communication and guidance, you can ensure that your employees stay on track with their Required Minimum Distribution, manage their retirement savings effectively, and avoid unnecessary tax penalties.?

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