In response to confusion over the “10-year rule” that was added to the Required Minimum Distribution (RMD) rules by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), the Internal Revenue Service (IRS ) of the United States has provided relief to beneficiaries of defined contribution plans and beneficiaries of Individual Retirement Accounts. In Notice 2022-53, the IRS provides two forms of relief: (1) the proposed RMD rule, including application of the 10-year rule, if finalized, will not apply not before 2023, and (2) failure to distribute “Specified RMD” payments in 2021 and 2022 will not be treated as a plan qualification failure or trigger the 50% excise tax for specified RMDs .
Rules before the SECURE law
Before the SECURE law, if a participant in a defined contribution plan died before their age 70½ required start date, a plan could provide that the participant’s designated beneficiary (1) could receive annual distributions over the beneficiary’s life expectancy, beginning in the year following the participant’s death, or (2) could receive the full benefits in one lump sum within five years of the member’s death (the five-year rule). Under the five-year rule, the beneficiary was not required to receive payments during the first four years after death as long as full payment of the benefit was made before the end of the fifth year.
If a member of the defined contribution plan dies after From their required start date of age 70½, distributions to the designated beneficiary were to continue “at least as quickly” as before the participant’s death (At least as quickly method). However, defined contribution plans might require distributions to occur faster than IRS rules require.
Changes made by the SECURE law
The SECURE Act added the 10-year rule to the RMD rules, requiring payment of the full benefits of the defined contribution scheme before the end of the 10th calendar year following the year of death, unless the beneficiary is an “eligible designated beneficiary” (i.e., a surviving spouse, a child of the employee before the age of majority, a disabled person, a person suffering from a chronic illness or any person who is at most 10 years younger than the participant).
The 10-year rule applies to a child who reaches the age of majority, as well as to the beneficiary of an eligible designated beneficiary who dies before receiving a distribution of all benefits from the plan. It also applies to a designated beneficiary, whether he or she dies before or after the participant’s required start date (which was extended from age 70.5 to age 72 by the SECURE Act).
On February 24, 2022, the IRS released proposed RMD regulations, which were originally scheduled to take effect from 2022. The proposed regulations explicitly state that designated beneficiaries of participants who die after the required start date must continue to receive distributions from the defined contribution plan. under the method At least as quickly and additionally must receive a full distribution of benefits under the 10-year rule. This made clear that named beneficiaries of participants who died after the required start date could not stop receiving distributions and wait until the end of the 10th year to enjoy the full benefits (this is how the five-year rule applied to beneficiaries of participants who died before their required start date).
Comments and confusion about the proposed IRS regulations
Comments to the IRS regarding the proposed regulations expressed some confusion about the application of the 10-year rule to named beneficiaries of participants who died after the required start date and named beneficiaries of eligible named beneficiaries. Expecting the 10-year rule to be applied in the same way as the five-year rule, some commentators who were beneficiaries of participants who died in 2020 (after the participants’ required start date) said they don’t had not taken an RMD 2021 and do not know if they are required to take an RMD 2022.
In response, the IRS issued a transitional waiver providing that (1) the proposed RMD regulations, if finalized, will not apply until 2023, and (2) failure to distribute specified RMDs in 2021 and 2022 will not constitute a failure to qualify the plan or cause the 50% excise tax to apply with respect to the specified RMD.
A specified RMD is a payment from a defined contribution plan that would be required under proposed IRS regulations for
- a designated beneficiary of a Participant if (1) the Participant died in 2020 or 2021, (2) the Participant died on or after the Participant’s Required Start Date, and (3) the designated Beneficiary is not take lifetime or life expectancy payments (for example, a conditional annuitant of a joint and survivor annuity); Where
- a beneficiary of an eligible designated beneficiary if (1) the eligible designated beneficiary died in 2020 or 2021, and (2) that eligible designated beneficiary was receiving lifetime or life expectancy payments.
This relief provides welcome flexibility to plan sponsors and their administrators for 2021 and 2022. Plan administrators should discuss this relief with archivists and third-party administrators to confirm whether their plans should take advantage of this relief or if they have been administered in accordance with the proposed settlement.
In addition, plan administrators should consider whether changes to plan summary descriptions or other member communications are desirable. Plan administrators should also discuss with archivists and plan administrators whether any changes are needed to the administration for 2023 to reflect the 10-year rule.
If you have any questions about this IRS relief or the application of post-SECURE Act RMD rules to your plans, please contact one of the authors or your usual Morgan Lewis benefits contact.