Policy Update: Recent IRS Rule Changes on RMDs; DOL Reverses Final Rules for Financial Factors in Selecting Plan Investments

MAY 4, 2021

In March 2021, the IRS made note of recent rule changes to the responsibilities of retirement plan participants and beneficiaries, and the U.S. Department of Labor (DOL) also reversed course on a final rule that affects fiduciaries’ duties. Following are details on these latest updates from the IRS and DOL, and how they impact individual taxpayers, as well as organizations and their stakeholders.

On March 16, 2021, the IRS published a news release (IR-2021-57) to remind retirement plan participants in the U.S. of recent changes to the rules around required minimum distributions (RMDs). Although the IRS publication was intended as a reminder for individual taxpayers, it’s a good reminder for employers and plan sponsors as well.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the RMD age from 70½ to 72, effective after December 31, 2019. Therefore, a retirement plan participant who turned 70 on or after July 1, 2019, does not have to take their first RMD until April 1 the year after they turn 72.

For example, plan participants who did not reach age 70½ in 2019, and who reach age 72 in 2021, will need to take their first RMD by April 1, 2022, and a second RMD by December 31, 2022. However, if they want to avoid having both amounts included in their income for the same year, they can take their first RMD by December 31, 2021, instead of by April 1, 2022. After the first year, all future RMDs must be made by December 31.

In 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waived RMDs so that seniors and retirees (as well as beneficiaries who had inherited accounts) didn’t have to take money out of their IRAs and retirement plans that year. The waiver included individuals who turned 70½ in 2019 and didn’t take their first RMD in 2019. In summary, individuals who turned 70½ in 2019 (or earlier) were not required to take an RMD in 2020, but they will have to take it by December 31, 2021.

DOL Not Enforcing Recent Final Rules on Financial Factors in Selecting Plan Investments

In a notable turn of events, the U.S. DOL announced on March 10, 2021, that it will not enforce the recently published final rules on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” until it publishes further guidance. The final rules addressed the use of “non-pecuniary” factors such as environmental, social and governance (ESG) considerations in selecting plan investments, as well as fiduciary duties regarding proxy voting and shareholder rights.

The DOL reversed course after hearing from a wide variety of stakeholders, including asset managers, labor organizations, other plan sponsors, consumer groups, service providers and investment advisers. These parties have asked whether the final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries. In addition, stakeholders have expressed confusion about the use of ESG factors, and that the final rules have already had a chilling effect on ESG investing overall, even though integration of ESG factors is appropriate in certain investment decisions.