IRS Extends Helpful RMD Rule Transition Relief
The Internal Revenue Service (IRS) issued a proposed rule on February 24, 2022
("Proposed Rule"), that addressed the changes to the
required minimum distribution ("RMD") rules made by the
Setting Every Community Up for Retirement Enhancement Act of 2019
("SECURE Act"). The Proposed Rule affects qualified
401(a) plans, 403(b) plans, and 457(b) plans that are defined
contribution plans, and also IRAs, and applies to RMDs made in
2022, with a good faith interpretation of the SECURE Act applying
to RMDs made in 2021. As outlined in our prior ebulletin, the Proposed
Rule's interpretation of the SECURE Act as it applies to RMDs
made when an employee dies after their required beginning date took
many plan sponsors and beneficiaries by surprise. In
recognition that RMDs may not have been made in 2022 in compliance
with the Proposed Rule, or in 2021 consistent with what the IRS
would consider a good faith interpretation of the SECURE Act, the
IRS issued Notice 2022-53 to provide transition relief for 2021 and
2022. Additionally, Notice 2022-53 states that the final RMD rule
will not apply to RMDs any earlier than 2023.
The SECURE Act changed the way that the RMD rules operate under
defined contribution plans and IRAs for designated beneficiaries
upon the death of the employee, regardless of whether or not RMDs
had already begun during the employee's lifetime. Specifically,
upon an employee's death, their remaining account can no longer
be distributed over the designated beneficiary's life or life
expectancy ("life expectancy rule") unless the
designated beneficiary is an "eligible designated
beneficiary." Instead, if an employee has designated a
beneficiary who is not an eligible designated beneficiary, a full
distribution of the employee's account must be made within 10
years of the employee's death ("ten-year rule"). An
"eligible designated beneficiary" is a surviving spouse,
a child who is not yet 21, a disabled or chronically ill
individual, or an individual who is not more than 10 years younger
than the employee. When a minor child reaches age 21, that child
will no longer be considered an "eligible designated
beneficiary" and the remainder of that child's portion of
the employee's interest in the plan must then be distributed
within 10 years of that date.
The IRS recently issued Notice 2022-33 extending the date by which plans must be amended to reflect the SECURE Act changes to December 31, 2025 (for governmental plans, the deadline is 90 days after the close of the third regular legislative session of the legislative body with authority to amend the plan that begins after December 31, 2023). However, all plans are now required to be administered in accordance with the SECURE Act.
Under the Proposed Rule, if an employee dies before their required beginning date (the later of age 72 or retirement for plans; age 72 for IRAs), then
- an eligible designated beneficiary must receive distributions under either the life expectancy rule or the 10-year rule, and
- a designated beneficiary must receive distributions under the 10-year rule.
- an eligible designated beneficiary must receive benefits at least as rapidly as they were being paid to the employee, and
- a designated beneficiary must receive distributions under the life expectancy rule until the account is fully distributed under the 10-year rule.
This interpretation – applying both the life expectancy rule AND the 10-year rule to designated beneficiaries when the employee dies on or after their required beginning date or when an eligible designated beneficiary receiving lifetime distributions dies – took many plan sponsors and beneficiaries by surprise. This is because it was anticipated that the 10-year rule would apply in the same manner that the 5-year rule has always applied. The 5-year rule does not require annual distributions before full distribution of the account in year five. Accordingly, many plans were not administered in 2021 to provide such annual distributions, nor did all beneficiaries of inherited IRAs take such distributions. Moreover, plan sponsors and beneficiaries were uncertain as to whether an annual distribution would be required for 2022 since the Proposed Rule, although effective January 1, 2022, was not yet issued in final form.
This uncertainty caused concern for both plan sponsors and beneficiaries. For plan sponsors, a failure to make the required annual distributions causes a plan qualification failure. For beneficiaries, a failure to timely take the required annual distribution results in a 50% excise tax.
Notice 2022-53 addresses this uncertainty.
- First, it provides that the final RMD regulations will apply no earlier than 2023.
- Second, it provides that a defined contribution plan will not be treated as having failed to satisfy the RMD rules under Code Section 401(a)(9), as amended by the SECURE Act, merely because it did not make a "specified RMD."
- Third, it provides that if a beneficiary did not take a "specified RMD" the IRS will not assert that the 50% excise tax applies, and will refund any excise tax that has already been paid for a missed RMD in 2021.
- A designated beneficiary of an employee or IRA owner if the employee or IRA owner died in 2020 or 2021 and on or after their required beginning date, and the designated beneficiary is not an eligible designated beneficiary taking distributions under the life expectancy rule, or
- A beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020 or 2021 and they were taking distributions under the life expectancy rule.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.