Understanding RMDs: What Plan Sponsors Need to Know

As a plan sponsor, it’s critical to understand the rules surrounding Required Minimum Distributions (RMDs) because they directly impact compliance, participant education and operational processes. RMDs are mandatory withdrawals from qualified retirement accounts, and failure to handle them correctly can lead to penalties for participants and fiduciary risks for your plan.

In general, participants who turned age 73 in 2025 are mandated to take their first RMD from qualified retirement plans. This requirement stems from the SECURE Act 2.0, which raised the RMD age from 72 to 73 starting in 2023. For employees born in 1960 or later, the RMD age will increase to 75 in future years. Awareness of the shifts in these age thresholds is necessary for identifying which participants are affected in any given year. Please note that distributions from an IRA will not satisfy the requirement for an RMD from a qualified plan.

For qualified retirement plans, if the plan document allows it, most active employees have the option to delay RMDs until they retire. However, a 5% owner of the business must begin distributions at the appropriate age regardless of employment status. Plan sponsors should ensure these distinctions are clear. The 5% ownership threshold includes ownership attributed from other family members.

Your role is to make sure the plan complies with IRS rules. In terms of RMDs, your responsibilities will include:

• Identifying affected participants: Work with us to flag employees who have reached RMD age, as well as any 5% owners who haven’t retired.
• Communicating deadlines and amounts: Provide clear instructions to participants about when and how much they need to withdraw.
• Monitoring distributions: Confirm that you have methods in place for tracking and processing RMDs to avoid errors.

The timing of RMDs is critical. Missing these deadlines can trigger penalties:

• A participant’s first RMD is due by April 1 of the year after reaching RMD age.
• Subsequent RMDs must be completed by December 31 each year, creating the possibility of two distributions in the first year.

The RMD amount is calculated based on the prior year-end account balance divided by a life expectancy factor set by the IRS. Plan sponsors don’t calculate these amounts directly, but they should understand the process to answer participant questions and verify accuracy.

Failing to take an RMD can result in a 25% excise tax on the amount that isn’t withdrawn. For plan sponsors, improper handling of RMDs can lead to fiduciary concerns and potential IRS scrutiny.

While RMDs are technically a participant responsibility, they also represent a compliance obligation for your plan. By proactively identifying affected employees, confirming administrative processes, and communicating clearly, you reduce risk and support participants in meeting their distribution requirements.