IRS Issues Proposed Amendments to the Required Minimum Distribution Rules

On February 24, 2022, the Internal Revenue Service (IRS) issued proposed amendments to rules for required minimum distributions from a defined contribution plan after the participant’s death. This article provides details about key provisions of the proposed amendments.

Background

The Setting Every Community Up for Retirement Enhancement (SECURE) Act made significant changes to Internal Revenue Code (IRC) Section 401(a)(9) (which addresses the required minimum distribution (RMD) requirements from qualified retirement plans).

IRC Section 401(a)(9) provides rules for determining the timing and amount of distributions from a qualified plan to the plan participant and/or the participant’s designated beneficiary. In general, the entire interest of a participant in a qualified plan must be distributed, beginning not later than the participant’s “required beginning date,” over the life of the participant or over the joint lives of the participant and a designated beneficiary (or over a period not extending beyond the life expectancy of the participant and a designated beneficiary).

The required beginning date for a participant is generally April 1 of the calendar year following the later of: (i) the calendar year in which the participant attains age 72; and (ii) the calendar year in which the participant retires from employment with the employer maintaining the plan.

Different distribution rules apply once the participant dies – either before or after RMDs have begun – and are now influenced by whether or not the participant has an “eligible designated beneficiary.” An eligible designated beneficiary is an individual who, as of the date of the participant’s death, is designated as the beneficiary of the plan and is:

• The surviving spouse of the participant;
• A minor child of the participant;
• A chronically ill individual; or
• Any other individual who is not more than 10 years younger than the participant.

Distributions After the Participant’s Death

The SECURE Act added IRC Section 401(a)(9)(H) that applies a new limitation on the period over which a participant’s remaining interests in a defined contribution plan may be distributed after the death of that participant. The precise application of the new limitation depends upon whether the participant dies before or after his or her required beginning date.

Death Before Required Beginning Date

If a participant dies before his or he required beginning date (i.e., before RMDs have begun), the participant’s interest must be distributed using one of three methods:

1. If the participant does not have a designated beneficiary, the participant’s entire interest must be distributed by the end of the calendar year that includes the fifth anniversary of the date of the employee’s death (the “5-year rule”);
2. If the participant has a designated beneficiary that is not an eligible designated beneficiary, the participant’s entire interest must be distributed by the end of the calendar year that includes the tenth anniversary of the date of the employee’s death (the “10-year rule”); or
3. If the participant has a designated beneficiary that is an “eligible designated beneficiary,” the participant’s interest may be distributed over the life expectancy of the eligible designated beneficiary.

The preamble to the proposed regulations clarifies that, if the 5-year rule or the 10-year rule applies, distributions from the participant’s retirement plan may be delayed until the end of the fifth or tenth (whichever is applicable) calendar year following the calendar year of the participant’s death.

Death After Required Beginning Date

If a participant dies after his or her required beginning date and has a designated beneficiary that is not an eligible designated beneficiary, then the period over which the participant’s entire interest in the plan must be distributed may not exceed 10 years following the year of the participant’s death. In other words, even though the annual distribution amount from the participant’s plan may be based on the designated beneficiary’s remaining life expectancy (or, if longer, the participant’s remaining life expectancy), Section 401(a)(9)(H) imposes a ten-year limit on the distribution period.

If a participant dies after his or her required beginning date and has a designated beneficiary that is an eligible designated beneficiary, then the participant’s entire interest in the plan must be distributed by the earliest of the following dates:

• The end of the tenth calendar year following the calendar year in which the eligible designated beneficiary dies;
• The end of the tenth calendar year following the calendar year in which the eligible designated beneficiary reaches the age of majority if the eligible designated beneficiary is the minor child of the participant as of the date of the participant’s death; and
• The end of the calendar year in which the remaining life expectancy of the eligible designated beneficiary is one year or less.

Surprise Contained in the Proposed Regulations

The proposed regulations contain a surprise in the case of a participant that dies after his or her required beginning date. According to the preamble to the proposed regulations:

“[I]f an employee died after the required beginning date with a designated beneficiary who is not an eligible designated beneficiary, then the designated beneficiary would continue to have required minimum distributions calculated using the beneficiary’s life expectancy as under the existing regulations for up to nine calendar years after the employee’s death. In the tenth year following the calendar year of the employee’s death, a full distribution of the employee’s remaining interest would be required.”

In other words, if a participant was receiving RMDs before he or she died, the participant’s designated beneficiary must continue receiving annual RMDs after the participant’s death (and, if the designated beneficiary is not an eligible designated beneficiary, a full distribution of the participant’s remaining interest in the plan must be made in the tenth year following the calendar year of the participant’s death).

Many practitioners believed that a designated beneficiary did not have to take RMDs after the participant’s death and, instead, could defer receiving any distributions from the participant’s retirement plan until the tenth year following the calendar year of the participant’s death. As a result, many designated beneficiaries may have failed to take a RMD in 2021.

In a July 15, 2022 letter to the Commissioner of Internal Revenue, the Texas Society of Certified Public Accountants urged “relief from penalties and other inequities that will result from” the requirement in the proposed regulations that a designated beneficiary must take annual RMDs after the participant’s death (if the participant dies after his or her required beginning date). Hopefully the IRS will grant such relief or withdraw the proposed rule.

Effective Date

The proposed regulations are proposed to apply for calendar years beginning on or after January 1, 2022. For the 2021 distribution calendar year, taxpayers must apply the existing regulations while taking into account a reasonable, good faith interpretation of the SECURE Act amendments. Compliance with the proposed regulations will satisfy the “good faith interpretation” requirement.

For more information about this proposed change, contact us. We are here to help.

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