September 4, 2024 IRS issues final required minimum distribution regulations In final regulations published July 19, 2024, the IRS and the U.S. Department of the Treasury (Treasury) updated the required minimum distribution (RMD) rules to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the SECURE 2.0 Act. The regulations affect retirement plan participants, IRA owners and their beneficiaries, as well as administrators and custodians of retirement plans and IRAs. The final regulations generally adopt the proposed regulations from February 2022. The regulations are effective September 17, 2024, and apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025. Requiring non-eligible designated beneficiaries subject to the 10-year rule to take annual RMDs The SECURE Act, enacted December 20, 2019, changed the rules for RMDs to beneficiaries of inherited retirement plans and IRAs. Under prior law, beneficiaries of an inherited retirement plan or IRA could take distributions over their life expectancy. Under the SECURE Act, effective for distributions to employees or IRA owners who die after December 31, 2019, beneficiaries of inherited retirement plans or IRAs generally must withdraw the entire balance within 10 years of the employee's or IRA owner's death (the 10-year rule). This rule is subject to certain exceptions for "eligible designated beneficiaries." An eligible designated beneficiary is a beneficiary who is (1) the surviving spouse of the employee or IRA owner, (2) a child of the employee or IRA owner who has not reached the age of majority, (3) disabled, (4) a chronically ill individual or (5) an individual who is not described elsewhere in IRC Section 401(a)(9)(E)(ii) and is not more than 10 years younger than the employee or IRA owner. For a defined contribution plan,1 the designated beneficiary must follow the 10-year rule if the employee or owner died on or after the "required beginning date" (this is the date the employee generally must begin taking RMDs). Some taxpayers and practitioners expected this to mean that beneficiaries did not have to make annual withdrawals as long as they withdrew the entire plan balance by the end of the 10th year. However, the 2022 proposed regulations would require the beneficiary take annual withdrawals. Unfortunately, by the time the proposed regulations were released, many beneficiaries of inherited plans and IRAs had failed to take the required annual distributions. In Notices 2022-53, 2023-54 and 2024-35 (Notices), the IRS responded to comments requesting transition relief for the 10-year rule. Under those notices, the plan or IRA would not be disqualified if the beneficiary failed to take a specified RMD in 2021, 2022, 2023 or 2024, and the beneficiary would not be liable for the excise tax for failure to satisfy the RMD rules. The final regulations retain the requirement for beneficiaries subject to the 10-year rule to take annual distributions each year. The IRS believes this is the correct interpretation based upon the language of the statute. In a footnote in the Preamble to the final regulations, the IRS and Treasury explain how the rules apply going forward for a beneficiary who did not take a specified RMD in 2021, 2022, 2023 or 2024 and is eligible for relief under the notices. The relief in the notices does not require taxpayers to make up missed RMDs, nor does it permit taxpayers to extend the 10-year deadline by which a full distribution must be made. For example, if an employee died in 2020, then in 2025 there are six years remaining in the 10-year period without regard to whether the designated beneficiary took distributions in 2021, 2022, 2023 or 2024. In 2030, the designated beneficiary must take a distribution of the remaining account balance.2 EY observations The footnote doesn't provide details on how to calculate the RMDs in this scenario. Under the final regulations, when an employee in a defined contribution plan dies on or after the required beginning date, the RMD is determined by dividing the employee's account balance as of the end of the prior calendar year by the applicable denominator.3 If the employee has a designated beneficiary, the applicable denominator for distribution calendar years beginning after the employee's death is the greater of (1) the designated beneficiary's remaining life expectancy or (2) the deceased owner's remaining life expectancy.4 All life expectancies are determined using the Single Life Table in the regulations.5 The employee's life expectancy is determined initially using the employee's age as of the employee's birthday in the calendar year of the employee's death, and is reduced by one each year thereafter.6 Similarly, if the designated beneficiary is not the employee's surviving spouse, then the designated beneficiary's remaining life expectancy is determined initially using the beneficiary's age as of the beneficiary's birthday in the calendar year following the calendar year of the employee's death, and is reduced by one for each calendar year thereafter.7 Applying these principles to the example in the footnote, and assuming the beneficiary is younger than the employee, it would seem that beneficiaries should determine their life expectancy as of their birthday in 2021, the year following the employee's death.8 Then beneficiaries should subtract four to figure their remaining life expectancy for the 2025 calendar year. Beneficiaries should divide the account balance as of the end of 2024 by that life expectancy to determine their RMD for 2025. For subsequent years through 2029, beneficiaries should continue in a similar fashion by subtracting one from their life expectancy to determine the applicable denominator, then dividing the account balance at the end of the preceding year by that denominator to determine their RMD. In 2030, beneficiaries would be required to withdraw the remaining account balance by the end of the year. As of September 4, 2024, the IRS had not yet published any further guidance on how to calculate the tax year 2025 and following year RMDs for a beneficiary who did not take a specified RMD in 2021, 2022, 2023 or 2024 and is eligible for relief under the notices. Rules for determining the required beginning date The final regulations update these rules to reflect the amendments to the required beginning date made by Section 114 of the SECURE Act and Section 107 of the SECURE 2.0 Act. The required beginning date is the date the employee or IRA owner generally must begin taking RMDs. Before the SECURE Act, the required beginning date was generally April 1 following the year in which the employee or IRA owner attained age 70½. The SECURE Act, enacted December 20, 2019, generally changed the required beginning date to April 1 following the year the employee or IRA owner attained age 72, effective for distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date. The SECURE 2.0 Act, enacted December 29, 2022, further modified the required beginning date. As a result of the changes by the SECURE Act and the SECURE 2.0 Act, current law defines the required beginning date for an employee (other than a 5% owner or IRA owner) as April 1 of the calendar year following the later of (1) the calendar year in which the employee attains the applicable age or (2) the calendar year in which the employee retires. Accordingly, the applicable age is:
For a 5% owner or an IRA owner, the required beginning date is April 1 of the calendar year following the calendar year in which the individual attains the applicable age, even if the individual has not retired. The final regulations determine the applicable age based on an employee's or IRA owner's date of birth. Accordingly, the applicable age is:
The SECURE 2.0 Act contained an ambiguity around the definition of applicable age for employees or IRA owners born in 1959. On the same date the IRS and Treasury issued the final regulations, the IRS and Treasury also released proposed regulations addressing various RMD issues. Under the proposed regulations, the applicable age for an employee or IRA owner who was born in 1959 would be age 73.10 EY observations The regulations make things simpler by referencing the employee's or IRA owner's date of birth instead of the date the employee or IRA owner attains a specific age (which itself varies depending on what year it is when the employee or IRA owner attains that age). Rules for distributions if a retirement plan or IRA owner dies before his or her required beginning date The final regulations reflect new IRC Section 401(a)(9)(H). If an employee or IRA owner who participates in a defined contribution plan dies before the required beginning date, only an eligible designated beneficiary of the employee or IRA owner can elect to receive distributions over the beneficiary's life expectancy. The regulations also reflect the amendment to IRC Section 402A(d) by the SECURE 2.0 Act. If an employee's entire interest under a defined contribution plan is in a designated Roth account, then no distributions must be made during the employee's lifetime. Thus, upon their death, those employees are treated as having died before the required beginning date. Rules for trusts named as beneficiaries The final regulations retain the see-through trust concept under which certain beneficiaries of a trust are treated as beneficiaries of the employee or IRA owner if the trust meets specified requirements. Extended deadline for certain beneficiaries to take the missed RMD of a deceased individual For an individual who had an RMD requirement in a calendar year and died in that calendar year before satisfying the RMD requirement, the final regulations extend the deadline for the beneficiary to take the missed RMD and be eligible for the automatic excise tax waiver. The new deadline is the tax filing deadline (including extensions thereof) for the beneficiary's tax year that begins with or within the calendar year in which the individual died or, if later, the last day of the following calendar year.11 Implications Overall, the final regulations provide helpful guidance. The IRS and Treasury may provide more explicit guidance on how non-eligible designated beneficiaries who missed specified RMDs in 2021, 2022, 2023 or 2024 and are covered by Notices 2022-53, 2023-54 or 2024-35 should calculate their RMDs beginning in 2025.
Endnotes 1 A defined contribution plan is a retirement plan in which the employee or the employer contribute to the employee's individual account under the plan. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Defined contribution plans include IRAs and 401(k) plans. By contrast, a defined benefit plan promises the participant a specified monthly benefit at retirement. A pension plan is a defined benefit plan. See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-definitions. 2 TD 10001, 89 Fed. Reg. 58897, footnote 11. 3 Treas. Reg. Section 1.401(a)(9)-5(a)(1). 4 Treas. Reg. Section 1.401(a)(9)-5(d)(1)(ii). 5 Treas. Reg. Section 1.401(a)(9)-5(d)(3)(i). 6 Treas. Reg. Section 1.401(a)(9)-5(d)(3)(ii). 7 Treas. Reg. Section 1.401(a)(9)-5(d)(3)(iii). 8 Treas. Reg. Section 1.401(a)(9)-5(d)(3)(iii). The notices excuse beneficiaries from RMDs for 2021-24 but don't require or permit them to recalculate their initial life expectancy in 2025 (i.e., as though the employee died in 2024 instead of 2020). 9 Treas. Reg. Section 1.401(a)(9)-2(b)(2). 10 Prop. Reg. Section 1.401(a)(9)-2(b)(2)(v), 89 Fed. Reg. 58650, July 19, 2024. 11 Treas. Reg. Section 54.4974-1(g)(3).
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