401(K): NEW MORTALITY TABLE MAY LEAD TO LOWER RMDS UNDER 401(K) PLANS

Summary: A new IRS mortality table effective on and after January 1, 2022 may lower the amount of required minimum distributions (“RMDs”) under 401(k) retirement plans for many participants required to receive such distributions in 2022 and beyond. This comes about due to a directive from the Trump Administration requiring the IRS to update the outdated 2012 mortality table. The new table is based on more recent data reflecting the general trend toward longer life expectancies.

DISCLAIMER: This article is intended as general information on the topic of the new mortality table required for calculating RMDs on and after January 1, 2022. It is not intended to address details of RMDs, 401(k) plan distributions generally, RMDs under other retirement plans or individual retirement accounts (“IRAs”), or previous or related IRS or other official guidance on this topic. As always, be sure to consult with your own ERISA/tax attorney or other professional advisor for individualized advice with respect to your, or your 401(k) plan’s, unique situation.

Background. Tax-qualified retirement plans, including 401(k) plans, provide that participants who attain age 72, and not actively employed, must accept a portion of their plan account balances by no later than their “required beginning date.”

• For non-working participants, the “required beginning date” is usually the first day of the month after the participant becomes age 72 years old (prior to January, 1, 2020, this the age of 70.5).
• The first RMD must be paid out no later than the April 1st following the end of the calendar year in which the participant attained age 72.
• The annual RMD amount is calculated as a percentage of the account balance as of December 31 of the previous year, beginning with the year prior to the year in which the participant attains age 72.
• The required percentage increases with age, reflecting the participant’s reduced life expectancy, using a formula based on the IRS table. This table estimates the maximum number of years (i.e. “distribution periods”) a participant’s account may need to make RMDs to the participant and, if applicable, his or her surviving spouse.
• Generally, longer life expectancies result in longer distribution periods, translating to less money distributed per period.

OBSERVATIONS: The purpose of the RMD rules is to ensure that people use the lion’s share of their retirement plan money during their lifetimes, as opposed to letting 401(k) and similar plans become estate planning vehicles.

Furthermore, since contributions (other than Roth 401(k) contributions and other after-tax contributions) are made with pre-tax dollars — and interest on 401(k) contributions accumulates tax-free over the course of many years — the Federal government has a vested interest in collecting as much tax revenue as possible, since the tax code effectively bargained away a large amount of potential tax proceeds in exchange for the policy goal of providing retirement incentives.

Theoretically, the new mortality table should have little effect on tax collections, since, although participants will be taking less money per year, they will be taking money out over a longer period of years.

Updated Mortality Table. The new mortality table was published in the Federal Register on November 12, 2020. As previously stated, the new table is effective on and after January 1, 2022.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k)-retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.