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What is the formula for calculating an RMD?

What is the formula for calculating required minimum distributions (RMDs); and is it the same for IRAs as it is for qualified retirement plans?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor in New York is representative of a question we commonly receive related to RMDs.

For retirement plan participants and traditional IRA owners [including owners of simplified employee pension (SEP) and savings incentive match plans for employees (SIMPLE) IRAs] there is a common formula for calculating RMDs that applies to both IRAs and retirement plans:

Prior year-end account balance ÷ life expectancy = RMD

However, the definition of “prior year-end account balance” is different for IRAs than it is for qualified retirement plans. Note that an RMD for an IRA may not be satisfied from a retirement plan and vice versa.

For IRAs, the prior year-end account balance is the IRA balance on December 31 of the year before the distribution year (e.g., use the December 31, 2016, IRA balance for a 2017 RMD). Adjust this IRA balance by adding to the IRA balance any

  • Outstanding rollovers taken within the last 60 days of a year and rolled over after the first of the following year;
  • Outstanding transfers taken in one year and completed in the following year; and
  • Recharacterized conversions along with the net income attributable to the December 31 balance for the year in which the conversion occurred. (See Treasury Regulation Section 1.408-8, Q&As 6-8.)

For retirement plans, the prior year-end account balance is the retirement plan balance as of the last valuation date in the year before the distribution year. Adjust this amount by

  • Adding any contributions or forfeitures allocated to the account after the valuation date, but made during the valuation year; and
  • Subtracting any distributions made in the valuation year that occurred after the valuation date.

Furthermore, do not include the value of any qualifying longevity annuity contract (QLAC) that is held under the plan if purchased on or after July 2, 2014. (See Treasury Regulation Section 1.401(a)(9)-5, Q&A 3).

The life expectancy an account owner (either an IRA owner or retirement plan participant) uses to calculate his or her RMD is based on one of two tables provided by the IRS for this purpose. These tables can be found in Treas. Reg. 1.401(a)(9)-9 or in IRS Publication 590-B, Appendix B.  Most retirement account owners will use the Uniform Lifetime Table to determine RMDs during their lifetimes.

The Uniform Lifetime Table provides a joint life expectancy figure that is equivalent to the hypothetical joint life expectancy of the retirement account owner and a second individual who is 10 years younger. As previously stated, most retirement account owners will use the Uniform Lifetime Table, even if they have no named beneficiary.

The one exception to using the Uniform Lifetime Table applies if a retirement account owner has a spouse beneficiary who is more than 10 years younger than he or she. In this situation, the retirement account owner will use the Joint and Last Survivor Table. The result of using the actual joint life expectancy of the account owner and his or her spouse beneficiary who is more than 10 years younger is a smaller RMD for the individual.

Conclusion

While the formula for calculating an RMD from either an IRA or retirement plan appears simple on the surface, attention must be paid to the specific definitions for the numerator and denominator in order to arrive at the true minimum amount that must be distributed.

© Copyright 2017 Retirement Learning Center, all rights reserved
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December 2017 IRA and Retirement Plan Deadlines

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in California is representative  of a common inquiry involving December deadlines.

Highlights of Discussion

There are several IRA and retirement-plan related deadlines that occur in December as summarized next.

December 1, 2017 Deadline for calendar-year plans to provide plan participants with safe harbor, qualified default investment alternative (QDIA) and automatic enrollment notices.
December 15, 2017 ERISA extended deadline for distributing the Summary Annual Report to plan participants (for plans that filed Form 5500 with an extension)
December 29, 2017* Deadline for IRA owners and retirement plan participants to satisfying their second and subsequent years’ required minimum distributions for 2017
Deadline for making qualified nonelective contributions or qualified matching contributions to correct failed actual deferral percentage (ADP) or actual contribution percentage (ACP) tests in the previous plan year for plans using the current-year testing method
Deadline for removing an ADP or ACP excess contribution for the prior plan year with a 10% excess tax in order to avoid an IRS correction program
Deadline to complete a 2017 Roth IRA conversion or designated Roth in-plan conversion
Deadline to amend an existing 401(k) plan to a safe harbor design for 2018
Deadline to amend a 401(k) safe harbor plan to remove safe harbor status for 2018
Deadline to amend plan for discretionary changes implemented during the 2017 plan year

*Generally, December 31st.  However, December 31, 2017, falls on a Sunday.

Conclusion

December is a busy month for IRA and retirement-plan related deadlines. Have you marked your calendar?

© Copyright 2017 Retirement Learning Center, all rights reserved
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Allocating Revenue Sharing Payments

How should revenue sharing payments in a 401(k) plan be properly allocated to participant accounts?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor in Colorado is representative of a question we commonly receive related to 401(k) plans and revenue sharing.

Highlights of Discussion

Generally, revenue sharing is compensation from plan investments (typically, mutual funds) that a plan uses to offset plan expenses. For example, if a plan contracts to pay an annual fee of $20,000 to one or more service providers and receives revenue sharing (or credits) of $2,000 the amount paid by the plan is only $18,000. The next question is how revenue sharing dollars are equitably allocated among plan participants. Specifically, which participants receive a share of the revenue sharing offset and how much is received?

Plan fiduciaries must follow a documented, prudent process in determining how to handle revenue sharing payments if they exist. If the plan document specifies how revenue sharing is to be used, the fiduciaries have a duty to follow the terms of the plan, unless it would clearly be imprudent to do so.

If the document is silent on revenue sharing, plan fiduciaries could decide to use the payments to pay plan expenses and/or allocate the revenue sharing to the accounts of plan participants.

The three ways to allocate revenue sharing payments to plan participants are 1) pro-rata; 2) per capita or 3) equalization. A pro rata allocation would be a percentage of the payment per participant in proportion to their account balances. A per capita allocation would assign the same dollar amount to each participant account. Under revenue equalization, a fund’s revenue sharing would be allocated to those participants investing in the respective fund.  For example, participants who invested in a fund that paid more in revenue sharing than the record keeper charged in administrative fees would receive a credit to their plan accounts, while participants invested in funds with no revenue sharing would receive a debit for their share of the recordkeeping fee.

There is no specific guidance from the DOL on the preferred process for allocating revenue sharing—only that the process itself must be a prudent one. However, the industry has turned to Field Assistance Bulletin (FAB) 2003-03 (regarding the allocation of plan expenses) and FAB 2006-01 (regarding the allocation of mutual fund settlement proceeds) as stand in guidance based on similar concepts. The process for determining how revenue sharing is allocated must

  1. Be deliberative and documented;
  2. Weigh the competing interests of various classes of participants and the effects of various allocation methods on those interests;
  3. Be carried out solely in the interest of participants;
  4. Bare a reasonable relationship to the services being provided to the participants;
  5. Avoid conflicts of interest; and
  6. Include a rational basis for the selected method.

 

Conclusion

While there is no preferred method for allocating revenue sharing payments, plan fiduciaries must follow a documented, prudent process in determining how to handle such payments if they exist, taking into account several key considerations enumerated above.

© Copyright 2017 Retirement Learning Center, all rights reserved