We have received several inquiries from the pension funds we represent about the two recent laws that affect public pension plans. Some of these changes may not be available to every plan and others, while legally available, may not be permitted by the language of the plans. Careful consideration of potential benefits to members and existing plan language will provide guidance on whether changes are advisable.
Required Minimum Distributions May be Delayed to Age 72
In December 2019, Congress passed the SECURE Act, which makes many changes to private pension plans, particularly IRA’s, but has less impact on public plans. Required minimum distributions (“RMDs”) may now be delayed until the later of separation from service or age 72. Formerly, the stated age was 70 ½. Public plan sponsors have until the 2021 plan year to amend their plans to accommodate this change.
New RMD Deferral and Loans Allowed for
Defined Contribution Plans, IRAs and 457(b) Plans
In March 2020, Congress passed the CARES Act, which is intended to provide liquidity to members of the public who are facing financial difficulty due to the Covid-19 pandemic. In addition to the grants to individuals and forgivable loans to small businesses, airlines and others, it provides access to certain pension funds through loans and repayable withdrawals. It also permits retirees from certain public pension plans to defer RMDs for the year 2020.
These rules apply to all qualified trusts, which would be any plan qualified under IRC 401(a). Since a participant in a defined benefit plan does not generally have any separate account from which to borrow or receive a distribution, while such is technically permitted, it is not really workable. In other words, the deferral of RMDs and loans are only applicable to defined contribution plans, IRAs and 457(b) plans. Thus, defined benefits must still be paid and no deferral is allowed. Likewise, DROP accounts, which are part of a defined benefit plan, are not eligible for an RMD deferral.
For plans that do not permit loans or in-service distributions, the plans would have to be amended in order for section 2202 of the CARES Act, which permits loans and distributions under certain conditions, to apply to their members. The distributions may be repaid only if they are coronavirus related. The member can certify that the distribution is coronavirus related and the plan does not have to investigate whether this certification is true. If they are related, the member has three years to repay a withdrawal and 5 years to repay a loan without tax or penalty. The repayment is treated as a tax-free rollover for coding purposes in the case of a distribution which is not a loan. While the loan or distribution must occur in 2020, the plan sponsor has until the first plan year ending in 2024 to affect an amendment.
If you need assistance navigating potential changes to the pension plan affecting your members, please contact the attorneys at Donnelly + Gross.
DONNELLY + GROSS
We continue to closely monitor the situation and update this information to provide the latest workplace and legal developments related to Covid-19. We expect your questions and our answers will change as the situation develops. For answers to your specific questions and for the newest developments, please visit our website at www.donnellygross.com/covid-19-resources/ and contact us at Donnelly + Gross at 352-374-4001 or directly by email:
We are here to support you.
*This publication is for general information only and intended for clients and friends of Donnelly + Gross. It should not be relied upon as legal advice as the law related to each situation varies. Moreover, workplace law related to Covid-19 is dynamic and changing daily. The sharing of this information does not establish a client relationship.