IRS Proposes Updated Tables for Calculating Required Minimum Distributions

The IRS has proposed regulations that would lengthen distribution periods under the required minimum distribution (RMD) rules applicable to qualified retirement plans (including 401(k) plans), and other tax-advantaged retirement arrangements. Under the RMD rules, plans generally must commence minimum distributions no later than the participant’s required beginning date (or a specified number of years after the participant’s death). (For qualified plan participants who are not 5% owners, the “required beginning date” is April 1 following the later of the calendar year in which the participant attains age 70-1/2 or the calendar year in which the participant retires.) Minimum distribution amounts are determined using life expectancies, or distribution periods based on life expectancies, set out in tables in the regulations. The three current tables were issued in 2002, using mortality rates for 2003. Pursuant to Executive Order 13847 (see our Checkpoint article), the Treasury Department and the IRS have determined that the tables should be updated to reflect longer life expectancies.

The proposed regulations include new life expectancy and distribution period tables that would apply to distribution calendar years beginning on or after January 1, 2021. Also included is a table of the mortality rates used to calculate the other tables. The new tables reflect life expectancies that are generally between one and two years longer than those under the current regulations, resulting in smaller required distributions. For example, a 70-year-old retiree with $250,000 in retirement plan assets would be required to withdraw $9,124 (3.65% of plan assets) under the current Uniform Lifetime Table. Using the updated table, the required distribution amount would be $8,591 (3.44% of plan assets), or $533 less. The proposed regulations also include transition rules that might apply if the participant or the participant’s spouse died before January 1, 2021. Those transition rules would allow a one-time “reset” of the relevant life expectancy under the Single Life Table—applying the new table for distribution calendar years beginning on or after January 1, 2021—in certain specified situations. Comments on the proposed regulations are requested and due no later than January 7, 2020, and a public hearing has been scheduled for January 23, 2020.

EBIA Comment: Under the proposed regulations, individuals would have the option to withdraw smaller amounts from their 401(k) plan balances each year, providing them with additional flexibility when drawing down assets in retirement. The Treasury Department estimates that roughly 4.6 million individuals—more than 20% of those required to take minimum distributions—take no more than the minimum, so the effects of this change will be widely felt when finalized and implemented. For more information, see EBIA’s 401(k) Plans manual at Section XII.I (“Required Minimum Distributions”).

Contributing Editors: EBIA Staff.