On the last day of August, the Trump administration signed an executive order proposing a number of changes which the administration says is intended to strengthen retirement security in America, specifically, by expanding access to multiple employer plans and reducing the costs and burdens associated with employee plan notices. However, tucked away at the end of this executive order is a proposal that, when implemented, could have a significant impact on plan participants — the revision of the required minimum distribution mortality and life expectancy tables. This post summarizes how this change could impact defined contribution plan participants.
As described in our previous post on this topic, calculating the amount of the required minimum distribution during a participant’s lifetime is relatively straightforward. The general rule is that required minimum distribution must begin on the April 1st following the year in which a participant turns 70½, or the date that the participant retires, whichever is later. (However, in the case of a 5% owner of the sponsoring employer, distributions must begin by the April 1st following the year in which the participant turns 70½).
Based upon the text of the executive order, it does not seem that it will have any impact on this age 70½ required starting date. Specifically, as drafted the executive order directs the Secretary of Treasury to “examine the life expectancy and distribution period tables on required minimum distributions.” However, the regulation does not discuss updating the age 70½ required beginning date, and therefore the text of this order does not indicate any change to this required beginning date.
Under the current rules, once distributions are required to begin, the amount of this required distribution is calculated by taking the account balance of the participant’s existing account and dividing by a distribution period derived from a mortality table provided by the Service. Generally, the Uniform Lifetime Table will be used, except if a participant is married to a spouse more than 10 years their junior, in which case the applicable life expectancy will be derived from the Joint and Last Survivor Table. During a participant’s lifetime, once distributions have begun they shall be recalculated anew each year. It does not appear that the executive order will impact the method for calculating required minimum distributions.
Here is an example of the required minimum distribution rules in action. Retiree X is a participant in a 401(k) plan and he is unmarried. Retiree X is 80 years old and has an account balance of $1,000,000 in his 401(k) account. According to the Uniform Lifetime Table, the current distribution period for an 80 year old is 18.7. Therefore, his distribution will be determined by dividing $1,000,000, his account balance, by 18.7, the distribution period. The product of this calculation, $53,476, is the amount of his required minimum distribution in the calendar year, leaving a sum of $946,524 following the required minimum distribution. In the following calendar year, this account balance of $946,524, plus any interest, will be calculated anew by dividing by the distribution period for an 81 year old, as provided in the Uniform Lifetime Table, and so on.
The Executive Order proposes to revise these mortality tables, which were last updated more than fifteen years ago, on April 17, 2002. Further, the executive order directs the Secretary of Treasury to consider whether updates to these tables should be made “annually or on another periodic basis.”
Even incremental changes to the mortality tables can have significant impacts on the size of a required distribution. Looking at the example discussed above, if the life expectancy for an 80 year old in the Uniform Lifetime Table was increased by half of a percent, to 19.2, the amount of the participant’s required distribution would decrease significantly – the required distribution would amount to $52,0833, a decrease of approximately $1,500 from the example above.
As of right now, the magnitude of the changes to the mortality table is unknown. However, depending on the size of the changes, they could have a major impact on the amount of required distributions that retirees are obligated to take from their defined contribution plans, a potential boon to those retirees who desire to further reduce required distributions and, hence, their tax burden.