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IRS Issues Final and Proposed Regs on Required Minimum Distributions
(Parker Tax Publishing July 2024)
The IRS issued final regulations relating to required minimum distributions (RMD) from qualified plans; Code Sec. 403(b) annuity contracts, custodial accounts, and retirement income accounts; individual retirement accounts and annuities; and certain eligible deferred compensation plans; the IRS also issued proposed regulations that address various RMD provisions that were reserved in the final regulations. The regulations, which address changes made by the SECURE Act and the SECURE 2.0 Act, are generally effective for calendar years beginning on or after January 1, 2025. T.D. 10001; REG-103529-23.
Background
Code Sec. 401(a)(9) provides rules for distributions from a qualified plan during the life of the employee in Code Sec. 401(a)(9)(A) and after the death of the employee in Code Sec. 401(a)(9)(B). The rules set forth a required beginning date for distributions and identify
the period over which the employee's entire interest must be distributed. Code Sec. 401(a)(9) was amended by Sections 114 and 401 of the SECURE Act (Pub. L. 116-94) enacted in 2019 and by various sections of the SECURE 2.0 Act of 2022 (Pub. L. 117-328) enacted in 2022.
Required Minimum Distributions
Code Sec. 401(a)(9) provides rules for (1) distributions from a qualified plan during the life of the employee in Code Sec. 401(a)(9)(A) and (2) after the death of the employee in Code Sec. 401(a)(9)(B). The rules set forth a required beginning date for distributions and identify the period over which the employee's entire interest must be distributed.
Specifically, Code Sec. 401(a)(9)(A)(ii) provides that the entire interest of an employee in a qualified plan must be distributed, beginning not later than the employee's required beginning date, in accordance with regulations, over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary). Code Sec. 401(a)(9)(B)(i) provides that, if the employee dies after distributions have begun, the employee's remaining interest must be distributed at least as rapidly as under the distribution method used by the employee as of the date of the employee's death (referred to in this preamble as the "at least as rapidly" rule).
Code Sec. 401(a)(9)(B)(ii) and (iii) provides that, if the employee dies before required minimum distributions have begun, the employee's interest must either be: (1) distributed within 5 years after the death of the employee; or (2) distributed (in accordance with regulations) over the life or life expectancy of the designated beneficiary with the distributions generally beginning not later than 1 year after the date of the employee's death.
However, under Code Sec. 401(a)(9)(B)(iv) (as amended by Section 327 of the SECURE 2.0 Act), a surviving spouse may elect to: (1) be treated as if the surviving spouse were the employee for purposes of Code Sec. 401(a)(9)(B)(iii)(II); (2) wait until the date the employee would have attained the applicable age (as defined in Code Sec. 401(a)(9)(C)(v)) to begin taking required minimum distributions; and (3) have the beneficiaries of the surviving spouse be treated as beneficiaries of the employee if the surviving spouse dies before distributions to the spouse begin.
Code Sec. 401(a)(9)(C)(i) (as amended by Section 114 of the SECURE Act and further amended by Section 107 of the SECURE 2.0 Act) defines the required beginning date for an employee (other than a 5-percent owner or IRA owner) as April 1 of the calendar year following the later of the calendar year in which the employee attains the "applicable age" or the calendar year in which the employee retires. Code Sec. 401(a)(9)(C)(v)(I) provides that in the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. Code Sec. 401(a)(9)(C)(v)(II) provides that in the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75. For a 5-percent 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.
Code Sec. 401(a)(9)(D) provides that (except in the case of a life annuity) the life expectancy of an employee and the employee's spouse (used to measure the period over which payments must be made) may be redetermined, but not more frequently than annually. Code Sec. 401(a)(9)(E)(i) defines the term designated beneficiary as any individual designated as a beneficiary by the employee. Code Sec. 401(a)(9)(E)(ii) (which was added to the Code as part of Section 401 of the SECURE Act) defines the term eligible designated beneficiary, with respect to any employee, as any designated beneficiary who, as of the date of the employee's death, is: (1) the surviving spouse of the employee; (2) a child of the employee who has not reached the age of majority (within the meaning of Code Sec. 401(a)(9)(F)); (3) disabled (within the meaning of Code Sec. 72(m)(7)); (4) a chronically ill individual (within the meaning of Code Sec. 7702B(c)(2), subject to certain exceptions); or (5) an individual not described elsewhere in Code Sec. 401(a)(9)(E)(ii) who is not more than 10 years younger than the employee.
Code Sec. 401(a)(9)(E)(iii) provides that, subject to the rule in Code Sec. 401(a)(9)(F), the treatment of an employee's child as an eligible designated beneficiary ends when the child attains the age of majority and that any remaining interest must be distributed within 10 years of that date. Code Sec. 401(a)(9)(F) provides that, under regulations, any amount paid to a child is treated as if it had been paid to the surviving spouse if it will become payable to the surviving spouse upon that child reaching the age of majority (or other designated event permitted under regulations).
Code Sec. 401(a)(9)(H) (which was added to the Code as part of Section 401 of the SECURE Act) provides special rules that generally apply to the distribution of an employee's remaining interest in a defined contribution plan after the death of that employee. Specifically, Code Sec. 401(a)(9)(H)(i) provides that, except in the case of a beneficiary who is not a designated beneficiary, Code Sec. 401(a)(9)(B)(ii): (1) is applied by substituting 10 years for 5 years; and (2) applies whether or not distributions of the employee's interest have begun in accordance with Code Sec. 401(a)(9)(A). Code Sec. 401(a)(9)(H)(ii) provides that Code Sec. 401(a)(9)(B)(iii) (permitting payments over the life or life expectancy of the designated beneficiary as an alternative to the 10-year rule) applies only in the case of an eligible designated beneficiary. Code Sec. 401(a)(9)(H)(iii) provides that if an eligible designated beneficiary dies before that individual's portion of the employee's interest in the plan has been entirely distributed, then Code Sec. 401(a)(9)(H)(ii) does not apply to the beneficiary of the eligible designated beneficiary, and the remainder of that portion must be distributed within 10 years after the death of the eligible designated beneficiary.
SECURE 2.0 Act Provisions
As noted above, prior to amendment by Section 107 of the SECURE 2.0 Act, Code Sec. 401(a)(9)(C) defined the required beginning date by reference to the calendar year in which the employee attains age 72. Section 107 of the SECURE 2.0 Act changes the age by reference to which the required beginning date is determined from 72 to either 73 or 75 (depending on an employee's date of birth). Section 107(e) of the SECURE 2.0 Act provides that the amendments made by Section 107 of the SECURE 2.0 Act apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after that date.
Section 202 of the SECURE 2.0 Act instructs the Secretary of the Treasury (or that person's delegate) to make certain amendments to Reg. Sec. 1.401(a)(9)-6. Those amendments are: (1) to eliminate the requirement that premiums for an individual's qualifying longevity annuity contracts (QLACs) be limited to 25-percent of an individual's account balance; (2) to increase the dollar limitation on premiums for an individual's QLACs from $125,000 to $200,000 (adjusted for inflation); (3) to provide that, in the case of a QLAC purchased with joint and survivor annuity benefits for an individual and the individual's spouse, a divorce occurring after the original purchase and before the date that the annuity payments commence under the contract will not affect the permissibility of the joint and survivor benefits if certain conditions related to an associated qualified domestic relations order (or, if applicable, a divorce or separation agreement) are met; and (4) to provide that a QLAC may include a provision under which an employee may rescind the purchase of the contract within a period not exceeding 90 days from the date of purchase.
Section 204 of the SECURE 2.0 Act instructs the Secretary of the Treasury (or that person's delegate) to amend the Code Sec. 401(a)(9) regulations to provide that if an employee's benefit is in the form of an individual account under a defined contribution plan, then the plan may allow the employee to elect to have the amount required to be distributed for a calendar year from that account to be calculated as the excess of the total required amount for that year over the annuity amount for that year. For this purpose, Section 204(b)(1) of the SECURE 2.0 Act defines the total required amount with respect to a calendar year as the amount that would be required to be distributed under Reg. Sec. 1.401(a)(9)-5 by including in the balance of that account the value of all annuity contracts that were purchased with a portion of that account. Section 204(b)(2) of the SECURE 2.0 Act defines the annuity amount with respect to a calendar year as the total amount distributed in that year from all annuity contracts purchased with a portion of the employee's account under the plan.
Section 325 of the SECURE 2.0 Act amended Code Sec. 402A (relating to designated Roth accounts) to add a new paragraph (d)(5) providing that the rules requiring minimum distributions to be paid during the employee's lifetime do not apply to a designated Roth account. Section 325(b)(1) of the SECURE 2.0 Act provides that this amendment applies to tax years beginning after December 31, 2023. However, Section 325(b)(2) of the SECURE 2.0 Act provides that the amendment does not apply to a required minimum distribution for a year beginning before January 1, 2024, that is permitted to be paid by April 1, 2024.
2022 Proposed Regulations
In February 2022, the IRS issued proposed regulations in REG-105954-20. The SECURE 2.0 Act, which affected many of the provisions included in the proposed regulations, was enacted after the close of the comment period for the proposed regulations.
T.D. 10001
On July 18, the IRS issued final regulations in T.D. 10001 that adopt the 2022 proposed regulations with certain changes in response to practitioners' comments as well as the enactment of the SECURE 2.0 Act. According to the IRS, some of the rules in the final regulations that reflect provisions of the SECURE 2.0 Act are a clear application of statutory language for which it is unnecessary to solicit comments; other rules in the final regulations are the logical outgrowth of rules in the proposed regulations that take into account both the comments received on those proposed rules and the subsequent enactment of the SECURE 2.0 Act. Other provisions of the SECURE 2.0 Act relating to Code Sec. 401(a)(9) are provided in the proposed regulations issued in REG-103529-23 (see below).
The IRS noted that a number of practitioners requested the applicability date of the final regulations to be delayed from the proposed applicability date of distribution calendar years beginning on or after January 1, 2022, in order to provide adequate time for plan administrators and IRA providers to familiarize themselves with the new rules and to update administrative systems to implement necessary changes. In response to these comments, the final regulations under Code Sec. 401(a)(9) apply for distribution calendar years beginning on or after January 1, 2025. For earlier distribution calendar years, taxpayers must apply the regulations relating to required minimum distributions issued in 2002 and 2004, but taking into account a reasonable, good faith interpretation of the amendments made by Sections 114 and 401 of the SECURE Act. For the 2023 and 2024 distribution calendar years, taxpayers must also take into account a reasonable, good faith interpretation of the amendments made by Sections 107, 201, 202, 204, and 337 of the SECURE 2.0 Act.
REG-103529-23
In REG-10352-23, the IRS issued proposed regulations setting forth proposed rules relating to required minimum distributions. The proposed regulations reflect changes made by Sections 107, 202, 204, 302, 325, and 327 of the SECURE 2.0 Act that are not reflected in the final regulations issued in T.D. 10001. The proposed regulations are proposed to apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2025, and for distributions on or after January 1, 2025.
For a discussion of required distributions from qualified plans, see Parker Tax ¶131,505.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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