The IRS has proposed a restatement of most of the regulations under Code § 401(a)(9) that govern required minimum distributions (RMDs) from qualified plans (including 401(k) plans), IRAs, Roth IRAs, 403(b) plans, and eligible deferred compensation plans under Code § 457(d). (Only the last section of the regulations, which provides life expectancy and distribution period tables, has been retained with conforming revisions.) The primary purpose of the restatement is to incorporate SECURE Act changes that increased the age for determining an individual’s required beginning date to age 72 from 70-1/2 (for individuals attaining age 70-1/2 after 2019) and significantly altered the timing requirements for RMDs made under defined contribution plans to designated beneficiaries after a participant’s death (see our Checkpoint article). Under the SECURE Act, the maximum period for distributing a deceased participant’s remaining interest to a designated beneficiary when the participant dies before commencing benefits increased from 5 to 10 years, and the 10-year maximum is also applied to designated beneficiaries when the participant dies after commencing benefits. Distributions over the life of the beneficiary are limited to the new category of “eligible designated beneficiaries”—designated beneficiaries that are spouses, children who have not reached majority, individuals who are disabled or chronically ill, and individuals who are not more than 10 years younger than the participant. These RMD timing requirements are generally effective with respect to employees who die after 2019.
The proposed regulations retain the general structure and much of the content of the current rules to the extent they are unaffected by the SECURE Act changes. The current question-and-answer format, however, is replaced by a more conventional statement of the rules. Here are highlights of the SECURE Act changes for 401(k) plan distributions as detailed in the proposed regulations:
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Effective Date of Age 72 Change. The SECURE Act increased the age used to determine the required beginning date for RMDs from age 70-1/2 to age 72, for employees who attain age 70-1/2 on or after January 1, 2020. The preamble to the proposed regulations acknowledges that this effective date could be interpreted to require the employee to actually survive until age 70-1/2, but “for ease of administration” the proposal applies the change to participants who “would have” attained age 70-1/2 on or after that date, if they had survived. This allows spouses who waited to begin distributions to delay commencing their distributions until the participant would have attained age 72 if the participant’s date of birth was on or after July 1, 1949.
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Effective Date of RMD Timing Changes. Generally, the SECURE Act’s rules regarding post-death distributions apply to participants who die on or after January 1, 2020. (Later effective dates apply to collectively bargained and governmental plans.) If a participant died before the effective date, the rules would not apply to the participant’s designated beneficiary but would apply to the beneficiary of that designated beneficiary if the designated beneficiary died after the effective date. If there are multiple designated beneficiaries, the rule would be applied based on the date of death of the oldest designated beneficiary. And if a spouse were the beneficiary and died before the effective date, the rule would be applied as if the spouse were the participant.
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Eligible Designated Beneficiary. Provisions interpreting the definition of eligible designated beneficiary would treat children as having attained the age of majority on the child’s 21st birthday. A safe harbor would treat beneficiaries as disabled if they are deemed disabled for Social Security purposes. And because the statutory disability criterion that an individual be “unable to engage in substantial gainful activity” is difficult to apply to children, the proposed regulations would apply a modified but comparable standard for beneficiaries under age 18.
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Multiple Beneficiaries. If the participant has more than one designated beneficiary and all are not eligible designated beneficiaries, the participant is treated as not having an eligible designated beneficiary unless one of the designated beneficiaries is a minor child as of the date of death, or there is a “Type II” see-through trust that benefits a disabled or chronically ill beneficiary (in which case the individual is considered an eligible designated beneficiary regardless of the other beneficiaries). The rule for determining life expectancy when there are multiple beneficiaries is also changed: Instead of using the shortest life expectancy, the “applicable denominator”—the factor currently referred to as the “applicable distribution period”—would be based on the life expectancy of the oldest designated beneficiary.
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Documentation of Disability or Chronically Ill Status. The proposed regulations would require documentation of disability or chronic illness to be provided no later than October 31 of the year after the participant’s death. Specific information must be included.
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Application of 10-Year Rule to Post-Commencement Distributions. Unlike the 5-year rule, the SECURE Act makes the 10-year rule applicable without regard to whether distributions have commenced before the participant’s death. To implement this rule, the proposed regulations would require full distribution of the participant’s entire benefit by the earliest of—
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the end of the tenth year following the year of the participant’s death if the designated beneficiary is not an eligible designated beneficiary;
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the end of the tenth year following the year of an eligible designated beneficiary’s death;
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the end of the tenth year following the year a child beneficiary attains majority; or
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the end of the year the applicable denominator would be less than or equal to one if it were based on the life expectancy of the eligible designated beneficiary instead of on the participant’s life expectancy.
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Excise Tax Regulations. The excise tax rules for failure to make RMDs would be conformed to the SECURE Act changes, and two automatic waivers of the tax would be added. The first waiver would apply to certain eligible designated beneficiaries who did not elect to use the life expectancy rule but are subject to the rule because of a plan provision or the regulations’ default rule. The second would apply to beneficiaries who are required to satisfy a participant’s RMD obligation and do so by their income tax filing deadline (including extensions).
In addition to the changes that respond more directly to the SECURE Act, the proposed regulations would provide additional guidance regarding when beneficiaries of a “see-through” trust can be treated as beneficiaries of the participant for purposes of the RMD rules. (Many of the proposed changes relating to trust beneficiaries are rooted in comments and ruling requests received by the IRS.) The proposal provides an exclusive list of circumstances in which a beneficiary may be disregarded and an updated list of the distributions (and deemed distributions) that must be disregarded when determining whether an RMD has been made. The package also proposes amendments to the regulations governing eligible rollover distributions to reflect statutory amendments after 1995, including changes regarding distributions to Roth IRAs, amounts that cannot be rolled over, rules regarding distributions that include basis, exceptions to the 60-day rollover deadline, and determination of the RMD portion of distributions to beneficiaries.
The restated RMD regulations would be effective for RMDs for 2022 and later years, but operating in accordance with them will be considered a reasonable, good faith interpretation of the SECURE Act changes for 2021 RMDs. The amendments to the regulations on eligible rollover distributions would apply to distributions after 2021.
EBIA Comment: Many 401(k) plans are designed to minimize the impact of the required minimum distribution rules on plan administration—e.g., by permitting only lump-sum distributions and requiring that benefits be distributed in full before the participant’s required beginning date. When the rules apply, however, they must be followed: failure to make RMDs not only subjects the participant who should have received the RMD to excise tax penalties, it also puts the plan’s qualification at risk. Consequently, plan sponsors and their advisors will want to study these proposals to determine how they may be affected. Comments regarding the proposed regulations must be received by May 25, 2022. For more information, see EBIA’s 401(k) Plans manual at Sections XII.I (“Required Minimum Distributions”) and XII.C.7 (“When Is Distribution Made Following Death?”).
Contributing Editors: EBIA Staff.