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IRS Provides 2023 Transition Relief for Required Minimum Distributions
(Parker Tax Publishing July 2023)
The IRS provided transition relief for plan administrators, payors, plan participants, IRA owners, and beneficiaries in connection with the change in the required beginning date for required minimum distributions (RMDs) under Code Sec. 401(a)(9) pursuant to Section 107 of the SECURE 2.0 Act of 2022 (Pub. L. 117-328). The IRS also provided guidance related to certain specified RMDs for 2023 and announced that the final regulations that the IRS intends to issue related to RMDs will apply for purposes of determining RMDs for calendar years beginning no earlier than 2024. Notice 2023-54.
Background
Code Sec. 401(a)(9) provides rules for 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). The rules in Code Sec. 401(a)(9) apply to 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); and eligible deferred compensation plans under Code Sec. 457(b).
Required Beginning Date
Section 107 of the SECURE 2.0 Act of 2022 (Pub. L. 117-328) amended Code Sec. 401(a)(9) to change the required beginning date applicable to Code Sec. 401(a) plans and other eligible retirement plans, including IRAs. Rather than defining the required beginning date by reference to April 1 of the year following the year in which an individual attains age 72, the new required beginning date for an employee or IRA owner is defined by reference to April 1 of the year after the year in which the individual attains the "applicable age" (which is either age 73 or age 75, depending on the individual's date of birth). Thus, for example, an IRA owner who was born in 1951 will have a required beginning date of April 1, 2025, rather than April 1, 2024, (and the first distribution made to that IRA owner that will be treated as an RMD will be a distribution made for 2024, rather than 2023).
Following enactment of the SECURE 2.0 Act, plan administrators and other payors indicated that automated payment systems would need to be updated to reflect the change in the required beginning date. They expressed concern that plan participants and IRA owners who would have been required to begin receiving RMDs for calendar year 2023 but for Section 107 of the SECURE 2.0 Act (i.e., those who will attain age 72 in 2023) and who receive distributions in 2023 could have had those distributions mischaracterized as RMDs (and therefore ineligible for rollover).
RMD Distribution Period
Code Sec. 401(a)(9) provides rules for RMDs 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). In addition to setting forth a required beginning date for distributions, these rules 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 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. Under Code Sec. 401(a)(9)(B)(ii) and (iii), if an 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) over the life or life expectancy of the designated beneficiary with the distributions generally beginning no later than 1 year after the date of the employee's death.
10-Year Rule, 2022 Proposed Regulations, and Notice 2022-53
The SECURE Act of 2019 (Pub. L. 116-94) amended Code Sec. 401(a)(9) to add Code Sec. 401(a)(9)(H). Generally, under Code Sec. 401(a)(9)(H)(i), if an employee 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.
In February 2022, the IRS issued proposed regulations in REG-105954-20 that 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 years after the 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 year after the 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 year after the 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 year following the 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 are made to the beneficiary beginning in the year following the year of the employee's death. 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) must continue to take annual distributions after the death of the employee (with a full distribution made 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 to take a full distribution 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's reaching the age of majority).
Owners of inherited IRAs and beneficiaries under defined contribution plans responded to the 2022 proposed regulations by stating that they thought the new 10-year rule would apply differently than it would under the proposed regulations. Specifically, 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 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, the IRS announced in Notice 2022-53 that the final regulations would apply no earlier than the 2023 distribution calendar year. Notice 2022-53 also provided that a defined contribution plan will not fail to be qualified for failing to make a specified RMD (as defined in that notice) 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 a specified RMD.
Eligible Rollovers
Code Sec. 402(c) generally provides that the payment of any portion of an employee's interest in a qualified trust to the employee or the employee's surviving spouse in an eligible rollover distribution is not includible in gross income if the distribution is rolled over to an eligible retirement plan described in Code Sec. 402(c)(8) no later than the 60th day following the day of receipt. Under Code Sec. 402(c)(4), an eligible rollover distribution means a distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust other than a distribution that is: (1) one of a series of substantially equal periodic payments made over a specified period; (2) a distribution required under Code Sec. 401(a)(9); or (3) a distribution made on account of the employee's hardship. Code Sec. 402(c)(3)(B) allows the IRS to waive the 60-day rollover deadline under certain circumstances.
Code Sec. 408(d)(3) generally provides that an amount distributed from an IRA to the IRA owner, or to the surviving spouse of the IRA owner, is not included in gross income if the distribution is rolled over to an eligible retirement plan no later than the 60th day following the day of receipt. A distribution of an after-tax amount may only be rolled over to another IRA. Code Sec. 408(d)(3)(B) provides that an IRA owner may roll over only one IRA distribution in a 12-month period, and Code Sec. 408(d)(3)(E) provides that an RMD may not be rolled over. Code Sec. 408(d)(3)(I) allows the IRS to waive the 60-day rollover deadline under certain circumstances.
Notice 2023-54
In Notice 2023-54, the IRS announced that the final regulations related to RMDs will apply no earlier than the 2024 distribution calendar year. In addition, the notice provides transition relief in connection with the change in the required beginning date for RMDs pursuant to Section 107 of the SECURE 2.0 Act. The notice also provides guidance related to certain specified RMDs for 2023.
Relief Relating to Change in Required Beginning Date Under SECURE 2.0 Act
Under Notice 2023-54, a payor or plan administrator will not be considered to have failed to satisfy the requirements of Code Secs. 401(a)(31), 402(f), and Code Sec. 3405(c) merely because of a failure to treat certain distributions as eligible rollover distributions. This relief applies with respect to any distribution made from a plan between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant's surviving spouse) that would have been an RMD but for the change in the required beginning date under Section 107 of the SECURE 2.0 Act.
Further, pursuant to Code Sec. 402(c)(3)(B), the IRS is extending the 60-day rollover period for any distribution made from a plan between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant's surviving spouse) that would have been an RMD but for the change in the required beginning date under Section 107 of the SECURE 2.0 Act, so that the deadline for rolling over such a distribution will be September 30, 2023. For example, if a participant who was born in 1951 received a single-sum distribution in January 2023, part of which was treated as ineligible for rollover because it was mischaracterized as an RMD, that participant will have until September 30, 2023, to roll over that mischaracterized part of the distribution.
Pursuant to Code Sec. 408(d)(3)(I), the IRS is also extending the 60-day rollover period for certain IRA distributions made to an IRA owner (or the IRA owner's surviving spouse), so that the deadline for rolling over that portion of the distribution will be September 30, 2023. The distributions that are subject to this extension are distributions made from an IRA between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or that individual's surviving spouse) that would have been RMDs but for the change in the required beginning date under Section 107 of the SECURE 2.0 Act. This rollover is permitted even if the IRA owner or surviving spouse has rolled over a distribution within the last twelve months. However, making such a rollover of the portion of an IRA distribution mischaracterized as an RMD will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. In that case, that individual could still make a direct trustee-to-trustee transfer as described in Rev. Rul. 78-406.
Guidance for Specified RMDs for 2023
Under Notice 2023-54, a defined contribution plan that failed to make a specified RMD (as defined below) 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 2023-54, 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 2023 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: (1) the employee (or IRA owner) died in 2020, 2021, or 2022, and on or after the employee's (or IRA owner's) required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception 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: (1) the eligible designated beneficiary died in 2020, 2021, or 2022, and (2) 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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