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IRS: 2024 Will Be the Last Transitional Relief Year for Required Minimum Distributions
(Parker Tax Publishing May 2024)
The IRS announced that final regulations regarding required minimum distributions (RMDs) under Code Sec. 401(a)(9) are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025. In addition, the IRS provided transitional relief for 2024 under which (1) a defined contribution plan that failed to make a specified RMD will not be treated as having failed to satisfy Code Sec. 401(a)(9) merely because it did not make that distribution and (2) to the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under Code Sec. 4974. Notice 2024-35.
Background
Code Sec. 401(a)(9) requires a stock bonus, pension, or profit-sharing plan described in Code Sec. 401(a) (or an annuity contract described in Code Sec. 403(a)) to make minimum distributions starting by the required beginning date (as well as minimum distributions to beneficiaries if the employee dies before the required beginning date). Individual retirement accounts and individual retirement annuities (IRAs) described in Code Sec. 408(a) and (b), annuity contracts, custodial accounts, and retirement income accounts described in Code Sec. 403(b) (Code Sec. 403(b) plans), and eligible deferred compensation plans under Code Sec. 457(b) are also subject to the rules of Code Sec. 401(a)(9).
RMD Distribution Period
Under Code Sec. 401(a)(9)(A)(ii), 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 method of distributions being used by the employee under Code Sec. 401(a)(9)(A)(ii) as of the date of the employee's death. Code Sec. 401(a)(9)(B)(ii) and (iii) provides that, if the employee dies before RMDs have begun, the employee's interest must either be: (1) distributed within 5 years after the death of the employee (5-year rule), or (2) distributed (in accordance with regulations) over the life or life expectancy of the designated beneficiary with the distributions beginning no later than one year after the date of the employee's death (subject to an exception in Code Sec. 401(a)(9)(B)(iv) if the designated beneficiary is the employee's surviving spouse).
10-Year Rule Under the SECURE Act
Code Sec. 401(a)(9) was amended by Section 401(a)(1) of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (Pub. L. 116-94), to add Code Sec. 401(a)(9)(H).
Generally, under 401(a)(9)(H)(i), if an employee in a defined contribution plan has a designated beneficiary, the 5-year period under the 5-year rule is lengthened to 10 years (10-year rule) and the 10-year rule applies regardless of whether the employee dies before the required beginning date. In addition, under Code Sec. 401(a)(9)(H)(ii), the Code Sec. 401(a)(9)(B)(iii) exception to the 10-year rule (under which the 10-year rule is treated as satisfied if distributions are paid over the designated beneficiary's lifetime or life expectancy) applies only if the designated beneficiary is an eligible designated beneficiary, as that term is defined in Code Sec. 401(a)(9)(E)(ii).
Code Sec. 401(a)(9)(H)(iii) provides that when an eligible designated beneficiary dies before that individual's portion of the employee's interest in the plan has been entirely distributed, the beneficiary of the eligible designated beneficiary will be subject to a requirement that the remainder of that individual's portion be distributed within 10 years of the eligible designated beneficiary's death. In addition, Code Sec. 401(a)(9)(E)(iii) provides that when an eligible designated beneficiary who is a minor child of the employee reaches the age of majority, 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 be distributed within 10 years of that date.
Section 401(b)(1) of the SECURE Act provides that, generally, the amendments made to Code Sec. 401(a)(9)(H) apply to distributions with respect to employees who die after December 31, 2019. Section 401(b)(4) of the SECURE Act provides that Code Sec. 401(a)(9)(H) does not apply to payments under certain annuity contracts under which payment commenced (or the manner of payments was fixed) before December 20, 2019. Section 401(b)(5) of the SECURE Act provides that if an employee who participated in a plan died before Code Sec. 401(a)(9)(H) became effective with respect to the plan, and the employee's designated beneficiary died after that effective date, then that designated beneficiary is treated as an eligible designated beneficiary and Code Sec. 401(a)(9)(H) applies to any beneficiary of that designated beneficiary.
Proposed Regulations
In February 2022, the IRS published proposed regulations (REG-105954-20) regarding RMDs under Code Sec. 401(a)(9) and related provisions which provided that the regulations, when finalized, would apply beginning with the 2022 calendar year.
Along with other matters, the proposed regulations address issues relating to the 10-year rule in Code Sec. 401(a)(9)(H). Specifically, Prop. Reg. Sec. 1.401(a)(9)-5(d)(1)(i) requires that, in the case of an employee who dies on or after the employee's required beginning date, distributions to the employee's beneficiaries for calendar years after the calendar year of the employee's death must satisfy Code Sec. 401(a)(9)(B)(i). In addition, distributions to the employee's beneficiaries must also satisfy Code Sec. 401(a)(9)(B)(ii) (or if applicable, Code Sec. 401(a)(9)(B)(iii)), taking into account Code Sec. 401(a)(9)(E)(iii), (H)(ii), and (H)(iii).
In order to satisfy Code Sec. 401(a)(9)(B)(i), the beneficiary of an employee who died after the employee's required beginning date must take an annual RMD beginning in the first calendar year after the calendar year of the employee's death. In order to satisfy Code Sec. 401(a)(9)(B)(ii) (applied by substituting "10 years" for "5 years"), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee's death (subject to an exception under Code Sec. 401(a)(9)(B)(iii), if applicable). In order to satisfy both of those requirements, the proposed regulations generally provide that, in the case of an employee who dies after the employee's required beginning date with a designated beneficiary who is not an eligible designated beneficiary (and for whom the Code Sec. 401(a)(9)(B)(iii) alternative to the 10-year rule is not applicable), annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee's death.
In the case of a designated beneficiary who is an eligible designated beneficiary, the proposed regulations include an alternative to the 10-year rule under which annual lifetime or life expectancy payments would be made to the beneficiary beginning in the year following the year of the employee's death, in accordance with Code Sec. 401(a)(9)(B)(iii). Under the proposed regulations, if an eligible designated beneficiary of an employee is using the lifetime or life expectancy payment alternative to the 10-year rule, then the eligible designated beneficiary (and, after the death of the eligible designated beneficiary, the beneficiary of the eligible designated beneficiary) would need to continue to take annual RMDs after the death of the employee (with the employee's entire interest distributed by no later than the 10th year after the year of the eligible designated beneficiary's death). The proposed regulations provide for similar treatment (that is, continued annual RMDs with a requirement that the employee's entire interest be distributed no later than the 10th year after a specified event) in the case of a designated beneficiary who is a minor child of the employee (with the specified event being the child reaching the age of majority).
In comments on the proposed regulations, some individuals who are owners of inherited IRAs or are beneficiaries under defined contribution plans indicated that they thought the new 10-year rule would apply differently than it would under the proposed regulations. Specifically, these commenters expected that, regardless of when an employee died, the 10-year rule would operate like the 5 year rule, such that there would not be any RMD due for a calendar year until the last year of the 5- or 10-year period following the specified event (the death of the employee, the death of the eligible designated beneficiary, or the attainment of the age of majority for the employee's child who is an eligible designated beneficiary). Commenters who are heirs or beneficiaries of individuals who died in 2020 explained that they did not take an RMD in 2021 and were unsure of whether they would be required to take an RMD in 2022. Commenters asserted that, if final regulations adopt the interpretation of the 10-year rule set forth in the proposed regulations, the IRS should provide transition relief for failure to take distributions that are RMDs due in 2021 or 2022 pursuant to Code Sec. 401(a)(9)(H) in the case of the death of an employee (or designated beneficiary) in 2020 or 2021.
In response to these comments, the IRS announced in Notice 2022-53 that the final regulations will apply no earlier than the 2023 distribution calendar year and provided guidance regarding certain amounts that were not paid in 2021 or 2022. Specifically, Notice 2022-53 provided that a defined contribution plan will not fail to be qualified for failing to make a specified RMD in 2021 or 2022 and the taxpayer who did not take a specified RMD will not be subject to the excise tax under Code Sec. 4974 for failing to take the specified RMD. Subsequently, the IRS issued Notice 2023-54, which extended the relief in Notice 2022-53 to specified RMDs for 2023, and announced that the final regulations will apply no earlier than the 2024 distribution calendar year.
Notice 2024-35
In Notice 2024-35, the IRS announced that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.
In addition, the IRS provides guidance in Notice 2024-35 for specified RMDs for 2024. Specifically, the notice provides that a defined contribution plan that failed to make a "specified RMD" will not be treated as having failed to satisfy Code Sec. 401(a)(9) merely because it did not make that distribution. In addition, to the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under Code Sec. 4974.
For purposes of Notice 2024-35, a "specified RMD" is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to Code Sec. 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
(1)a designated beneficiary of an employee under the plan (or IRA owner) if: (i) the employee (or IRA owner) died in 2020, 2021, 2022, or 2023, and on or after the employee's (or IRA owner's) required beginning date, and (ii) the designated beneficiary is not using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii); or
(2)a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to Section 401(b)(5) of the SECURE Act) if: (i) the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and (ii) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii).
For a discussion of RMDs, see Parker Tax ¶131,502.
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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