Compliance Center: IRS Reminds Taxpayers About Retirement Plan Distribution Deadline

The Internal Revenue Service recently reminded taxpayers born before July 1, 1945 that they generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.

Known as required minimum distributions (RMDs), these payments normally must be made by the end of 2015. But a special rule allows first-year recipients of these payments, those who reached age 70½ during 2015, to wait until as late as April 1, 2016 to receive their first RMDs. This means that those born after June 30, 1944, and before July 1, 1945, are eligible for this special rule. Though payments made to these taxpayers in early 2016 can be counted toward their 2015 RMD, they are still taxable in 2016.

This is the second in a series of weekly tax preparedness releases designed to help taxpayers begin planning to file their 2015 return.

The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2015 RMD, this amount is on the 2014 Form 5498 normally issued to the owner during January 2015.

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2014 (born after June 30, 1943 and before July 1, 1944) and received the first RMD (for 2014) on April 1, 2015 must still receive a second RMD (for 2015) by Dec. 31, 2015. 

The RMD for 2015 is based on the taxpayer’s life expectancy on Dec. 31, 2015, and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. So for a taxpayer who turned 72 in 2015, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Find more information on RMDs, including answers to frequently asked questions, on IRS.gov.

Compliance Question of the Week

Can a federally chartered credit union recoup waived settlement costs and fees associated with a Member Business Loan (MBL) without those costs being considered a prohibited prepayment penalty?

Yes, as long as the recoupment period is reasonable in terms of the size and type of fees being waived.  In NCUA’s Opinion Letter 08-0731, the NCUA addressed this issue by first noting that the Federal Credit Union Act allows borrowers to repay a loan before maturity without penalty.  Therefore, an FCU is prohibited from charging a borrower a prepayment penalty if he were to pay off the loan before it is due.  However, in another analysis of non-member business loan waiver of appraisal and title fees, it was determined that these were not prohibited penalties since they were disclosed and agreed to by the borrower, and the recoupment period was a reasonable one or two years.

Related Links:

Legal Briefs

National Credit Union Administration (NCUA)

The video of the NCUA’s October board meeting is now available.

The NCUA rescheduled its closed board meeting from Thursday, November 19 to Wednesday, November 18, 2015. The open board meeting will still be held on Thursday, November 19 at 10 a.m. EST. The agenda for the closed meeting is available here and the agenda for the open meeting is available here.

The NCUA announced that it will host a panel discussion to help credit unions improve service to Hispanic members. The panel discussion will be held on Tuesday, December 1, 2015 from 2 – 3:30 p.m. EST. Credit unions that wish to participate can register here.

The NCUA announced that its new Consumer Assistance Center Portal is now open. Credit unions can request access to the portal and use it to help respond to consumer complaints.

Consumer Financial Protection Bureau (CFPB)

The CFPB released a “Planning for Retirement” tool aimed at helping consumers decide when the appropriate time is to claim Social Security benefits.

CFPB Director Cordray delivered prepared remarks at the American Bankers Association’s Annual Convention. Cordray’s message focused primarily on the importance of financial education.

Federal Reserve Board (FRB)

The FRB announced the annual indexing of two amounts used in determining reserve requirements of depository institutions. For net transaction accounts in 2016, the first $15.2 million, up from $14.5 million in 2015, will be exempt from reserve requirements.  A 3 percent reserve ratio will be assessed on net transaction accounts over $15.2 million up to and including $110.2 million, up from $103.6 million in 2015.  A 10 percent reserve ratio will be assessed on net transaction accounts in excess of $110.2 million.

The FRB released the November issue of FedFlash.

Federal Financial Institutions Examination Council (FFIEC)

The FFIEC issued a revised Information Technology Examination Handbook (IT Handbook). The booklet explains how IT risk management related to enterprise risk management and governance, including incorporation of cybersecurity concepts.

Federal Deposit Insurance Corporation (FDIC)

The FDIC released FIL-49-2015, an advisory to update its guidance on effective credit risk management practices for purchased loan participations. The bulletin reminds financial institutions to ensure that the loan policies address purchases, understand the limitations of the agreements, perform appropriate due diligence, and obtain board approval.

Federal Trade Commission (FTC)

The FTC released panel topics for its upcoming Debt Collection Dialogue on November 18, 2015 in Atlanta. The panel will include a discussion on state regulations and enforcement as well as federal regulations and enforcement.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of November 13, 2015. The last update prior to this was November 12, 2015.

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance News, Federal, NCUA.