Tag Archive for: 457

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The Dos and Don’ts of Aggregating Required Minimum Distributions

“I have a 72-year-old client who is retired.  He has numerous retirement savings arrangements, including a Roth IRA, multiple traditional IRAs, a SEP IRA and a 401(k) plan. Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common question involving required minimum distributions (RMDs) from retirement plans.

Highlights of Discussion

No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another. Participants in retirement plans, such as 401(k), 457, defined contribution and defined benefit plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one retirement plan, he or she must satisfy the RMD from each plan separately.

With respect to your client’s IRAs, however, there are special RMD “aggregation rules” that apply to individuals with multiple IRAs. Under the IRA RMD rules, IRA owners can independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).

RMDs from inherited IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.

Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs. RMDs from inherited Roth IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, considering only those inherited Roth IRAs owned as a beneficiary of the same decedent.

403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts. However, only amounts in 403(b) contracts that an individual holds as an employee (and not a beneficiary) may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

In most cases, individuals who are over age 72 are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to aggregate RMDs for IRAs and 403(b)s, but one must be careful to apply the rules for RMD aggregation correctly. Failure to take an RMD when required could subject the recipient to a sizeable penalty (i.e., 50 percent of the am

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Are Governmental Plans Exempt from ERISA?

“I have a colleague that says governmental retirement plans are exempt from ERISA and one that says they are not. Can you settle the argument? Are retirement plans maintained by governmental entities exempt from ERISA?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Wisconsin is representative of a common question on the Employee Retirement Income Security Act of 1974 (ERISA) and retirement plans maintained by governmental entities.

Highlights of the Discussion

  • Yes and no; both answers are partially correct. ERISA consists of five sections or “Titles:”
    • Title I: Protection of Employee Benefit Rights
    • Title II: Amendments to the Internal Revenue Code Relating to Retirement Plans
    • Title III: Jurisdiction, Administration, Enforcement; Joint Pension Task Force, Etc. and
    • Title IV: Plan Termination Insurance
  • Generally, governmental retirement plans are fully exempt from Titles I and IV of ERISA. Those titles cover fiduciary duties, reporting and disclosure requirements, and termination insurance from the Pension Benefit Guaranty Corporation [ERISA Secs. 4(b)(1) and 4021(b)(2)].
  • A few of the provisions of Title II of ERISA apply to governmental plans. Title II relates to the portion of ERISA that amended the Internal Revenue Code and includes certain plan qualification requirements like limits on plan contributions.
  • Governmental plans are subject to Title III of ERISA, which contains procedures for co-coordinating enforcement efforts between the Department of Labor and Treasury Department.
  • While governmental plans are exempt from the federal fiduciary requirements of Title I of ERISA, they are subject to any fiduciary requirements imposed by applicable state laws. For example, California Government Code Section 53213.5 applies fiduciary standards and responsibilities to plans of governmental entities that essentially mirror those fiduciary standards and responsibilities in Title I of ERISA. Similarly, Florida imposes a federal-like fiduciary standard on plan officials under Florida Statute 112.656.
  • Other state statutes have fiduciary provisions that may be different than federal fiduciary rules. A sponsor of a governmental plan must be familiar with the fiduciary standards of its state, as well as other state laws that may affect the operation of its plan.

Conclusion

As a rule, retirement plans of governmental employers are exempt from the federal fiduciary requirements imposed under Title I of ERISA, as well as the plan termination insurance requirements under Title IV.  However, it is important for plan sponsors and others who may have discretionary authority over governmental plans to consider any fiduciary requirements and other legal requirements under applicable state law.

 

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