RMDs -- October 19, 2022

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RMDs

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October 14, 2022:

Updated final regulations for required minimum distributions (RMDs) under Internal Revenue Code (IRC) Section 401(a)(9) will not apply before 2023, IRS has announced in Notice 2022-53. 

The regulations will implement two significant changes to the RMD requirements made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Div. O of Pub. L. No. 116-94), along with various other statutory changes. The act increased the RMD beginning age from 70-1/2 to 72 and set new limits on “stretch” distributions to defined contribution (DC) plan beneficiaries. 

The notice also provides relief for DC plans that failed to make RMDs in 2021 or 2022 to beneficiaries under a new 10-year payment rule and gives excise tax relief to affected individuals.

Final regulations delayed The SECURE Act’s changes to IRC Section 401(a)(9) took effect in 2020. In proposed regulations issued earlier this year, IRS indicated that the final regulations would apply to 2022 and later distribution calendar years. However, the new IRS notice says the final regulations won’t apply until at least 2023. The preamble to the proposed regulations explained that for 2021 distributions, plans and taxpayers should rely on existing 401(a)(9) regulations but take into account a good-faith interpretation of the SECURE Act. Compliance with the proposal will show good-faith compliance with the statute. This presumably continues to apply for 2022 RMDs.

Further delay possible. 

Congress is currently considering “SECURE 2.0” legislation that would increase the RMD beginning age to 75. If that change is enacted, IRS may need to make additional revisions, which could further delay the final regulations. 

Relief for unexpected IRS interpretation of new 10-year rule: The SECURE Act changed the requirements for DC plans paying benefits after a participant’s death. Distribution of a deceased participant’s benefit previously had to follow one of two rules, depending on whether the participant died before or after the required beginning date (RBD). If the participant died after the RBD, the beneficiary had to receive payments at least as rapidly as the participant had been receiving them. If the participant died before the RBD, the benefit had to be distributed within five years of the participant’s date of death; alternatively, the plan could allow payments to stretch over a period not exceeding the designated beneficiary’s life expectancy.

Now, DC plans generally must distribute benefits to a designated beneficiary within 10 years of the participant’s death, regardless of whether the participant dies before or after the RBD. Plans can still offer stretch payments as an alternative to the 10-year rule, but only to “eligible designated beneficiaries” (EDBs). The five-year rule still applies if the participant has no designated beneficiary or the beneficiary isn’t an individual. 

(These new rules also apply to IRAs but don’t apply to defined benefit plans.)

Proposal caught some plans and beneficiaries off guard. The proposed regulations would require payments under the 10-year rule to begin the year after the participant’s death if the participant died after the RBD. The preamble explains that this is because the “at least as rapidly” rule still applies when participants die after their RBDs; the 10-year rule merely requires paying out any benefit still remaining at the end of the 10th year.

Until IRS published the proposal, several commenters had believed the new 10-year rule would work like the five-year rule, which allows delaying all payments until the end of the fifth year after the participant’s death. Under the proposal, DC plans that hadn’t paid RMDs to beneficiaries of participants who died in 2020 or 2021 after reaching their RBDs would have violated Section 401(a)(9), and the beneficiaries could face a 50% excise tax under IRC Section 4974.

Relief for 2020 and 2021. In response to these concerns, the notice says IRS won’t consider DC plans to have violated Section 401(a)(9) merely because they didn’t make “specified RMDs.” In addition, individuals who didn’t take specified RMDs won’t be subject to the excise tax. (Individuals who already paid an excise tax can file for a refund.) The notice’s definition of a specified RMD is complex, but in simplified terms, it is a payment that should have been made under the new 10-year rule to the beneficiary of a participant who died in 2020 or 2021 after reaching the RBD, if the beneficiary is not taking stretch payments.

Applicability. 

The new 10-year rule is generally effective for distributions to beneficiaries of participants who died after Dec. 31, 2019, though governmental plans and certain collectively bargained plans have a later effective date. The notice’s relief applies only to beneficiaries of participants who died in 2020 or 2021 after the new requirement took effect for the plan. The relief also applies to individuals with inherited IRAs and certain beneficiaries of EDBs who died in 2020 or 2021.

No relief beyond 2021. The notice’s relief applies only for the 2020 and 2021 distribution calendar years. Although the new notice doesn’t address RMDs beyond 2021, presumably IRS expects plans and taxpayers to comply with the proposed regulations’ interpretation of the 10-year rule for 2022 and later years. This could also signal that IRS doesn’t intend to revise its interpretation of the 10-year rule in response to comments received on the proposed regulations.