Proposed Required Minimum Distributions (RMD) Regulations Reflect SECURE Act Changes

Practical Law Legal Update w-034-5860 (Approx. 7 pages)

Proposed Required Minimum Distributions (RMD) Regulations Reflect SECURE Act Changes

by Practical Law Employee Benefits & Executive Compensation

SECURE Act's Changes to the RMD Rules

The SECURE Act increased the age for when RMDs from a retirement plan or IRA must start (referred to as the required beginning date (RBD)) from 70½ to 72, effective for distributions required after December 31, 2019 for individuals attaining age 70½ after December 31, 2019 (26 U.S.C. § 401(a)(9)(C)(i)(I)). The change applies to distributions from employee benefit plans and IRAs.

In addition, the SECURE Act requires defined contribution plan and IRA designated beneficiaries to take their inherited assets faster following the death of the participant, regardless of whether the participant started taking RMDs before death. These changes do not apply to defined benefit plans.

Before the SECURE Act, designated beneficiaries generally could "stretch" their inherited interest by taking it over their life expectancy. Now, if a participant in a defined contribution plan or IRA dies before their entire interest is distributed, the designated beneficiary generally must take the inherited interest within 10 years of the participant's death (10-year rule) (26 U.S.C. § 401(a)(9)(H)(i)). However, the 10-year rule does not apply if the distribution is made to an eligible designated beneficiary and certain conditions are met.

For more information on the SECURE Act, see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements.

Effective Date of Limitation on Beneficiary Life Expectancy Distributions

The SECURE Act added Section 401(a)(9)(H), which limits the ability of beneficiaries to take distributions over a period not extending beyond the beneficiary's life expectancy. Under the proposed regulations, application of Section 401(a)(9)(H) depends on when the employee and designated beneficiary die, as follows:

If an employee and the sole designated beneficiary both died before the effective date of Section 401(a)(9)(H), the SECURE Act amendments would not apply.
If the designated beneficiary died after the effective date, the amendments would apply to the designated beneficiary's beneficiary.
If the employee has more than one designated beneficiary, the application of the amendments depends on when the oldest beneficiary dies.

If the employee's surviving spouse waits to begin distributions under the year in which the employee would have been required to take distributions, the spouse is treated as the employee for purposes of determining whether Section 401(a)(9)(H) applies.

Participants in Multiple Plans

The proposed regulations retain the rule that, if individuals and employees participate in more than one plan requiring RMDs, the plans in which they participate may not be aggregated for purposes of testing whether the RMD requirements are met.

Distributions Beginning During Employee's Lifetime

The proposed regulations retain the rules for determining the RBD for an employee's distributions and whether the distributions are treated as beginning during the employee's lifetime but update them to reflect the change in the RBD age from 70½ to 72.

The amended RBD is effective for employees who turn age 70½ on or after January 1, 2020. The IRS interprets this effective date provision to mean that the amendments apply to an employee who died before reaching age 70½ if the employee would have reached age 70½ on or after January 1, 2020 (i.e., the employee's date of birth is on or after July 1, 1949).

Employee Dies Before RBD

The proposed regulations retain the rules addressing when an employee dies before their RBD but update them to reflect the new special rules for defined contribution plans (26 U.S.C. § 401(a)(9)(H)). Under these rules, if an employee dies before their RBD and has a designated beneficiary, the ten-year rule would apply. The proposed regulations retain the five-year rule for defined benefit plans and defined contribution plans if Section 401(a)(9)(H) does not apply.

The proposed regulations also retain the rule that allows an employee's interest to be distributed over the designated beneficiary's life or life expectancy. However, for defined contribution plans, the life expectancy payment rule is only available if the designated beneficiary is an eligible designated beneficiary. If the employee has a designated beneficiary who is an eligible designated beneficiary, a defined contribution plan may provide:

That either the 10-year rule or the life expectancy payment rule applies.
The employee or eligible designated beneficiary an election between the 10-year rule or the life expectancy payment rule.

A plan that does not provide either of these options must provide the life expectancy payments rule if an employee has an eligible designated beneficiary.

Determining the Designated Beneficiary

The proposed regulations incorporate the SECURE Act's definition of "eligible designated beneficiary." An eligible designated beneficiary is defined as a designated beneficiary who is, as of the date of the employee's death, one of the following:

Surviving spouse.
Child under the age of majority.
Disabled or chronically ill individual.
Other individual who is not more than 10 years younger than the employee.

Under the proposed regulations, if an employee has more than one designated beneficiary and one of them is not an eligible designated beneficiary, the employee is treated as not having an eligible designated beneficiary.

The proposed regulations retain the rules on determining who the beneficiary is for purposes of calculating the RMD. In response to comments and private letter ruling requests, the proposed regulations include an exclusive list of events that can cause a beneficiary to be disregarded.

Age of Majority

Neither the existing regulations nor the SECURE Act define the age of majority. The existing regulations provide that a child may be treated as under the age of majority if the child:

Has not completed a specified course of education.
Is under age 26.

To minimize the difficulty of assessing whether an employee's child has reached the age of majority, the proposed regulations provide that an employee's child reaches the age of majority on their 21st birthday. The proposed regulations permit defined benefit plans that use the existing definition of age of majority to continue doing so.

Disabled or Chronically Ill Beneficiaries

For purposes of determining whether a beneficiary is disabled, the proposed regulations apply the definition used in Code Section 72(m)(7) (26 U.S.C. § 72(m)(7)). The proposed regulations also include a safe harbor under which an individual will be considered disabled for purposes of the RMD rules if the Commissioner of Social Security has determined that individual is disabled within the meaning of the Social Security Act.

The proposed regulations also include documentation requirements for beneficiaries who are disabled or chronically ill.

Trust as Beneficiary

The proposed regulations retain the rules concerning when beneficiaries of a see-through trust will be treated as designated beneficiaries for purposes of the RMD rules (see Practice Note, Required Minimum Distributions from Retirement Plans: Trust as Designated Beneficiary). In response to public comments and private letter ruling requests, the proposed regulations include additional guidance and examples concerning which trust beneficiaries are treated as the employee's beneficiaries.

For purposes of determining which see-through trust beneficiaries are treated as the employee's beneficiaries, the proposed regulations provide that:

Beneficiaries of a see-through trust are taken into account if they could receive amounts in the trust representing the employee's interest in the plan that are not contingent on or delayed until the death of another trust beneficiary who does predecease the employee.
See-through trust beneficiaries with minimal or remote interests are disregarded.
Whether the trust is a conduit trust or accumulation trust will affect the outcome.

Although the proposed regulations retain the requirement that trust beneficiaries be identifiable, they modify the definition of identifiability. Under the proposed amended definition, the following scenarios will not cause a trust to fail to satisfy the identifiability requirement:

The employee names a class of individuals as the beneficiary (for example, grandchildren) and another individual is added to the class.
An individual has the power of appointment with respect to the employee's interest in the plan, and the individual exercises that power by a certain date.
The trust is subject to state law that permits the trust terms to be modified after the employee's death to allow a change in beneficiaries.

The proposed regulations also provide guidance regarding multi-beneficiary trusts and multiple designated beneficiaries.

RMDs from Defined Contribution Plans

The proposed regulations generally retain the method for calculating RMDs from defined contribution plans (see Practice Note, Required Minimum Distributions from Retirement Plans: Defined Contribution Plans and IRAs). The proposed regulations also update the list of distribution amounts and deemed distributions that are disregarded when determining whether the RMD has been made by including a cross-reference to the provision listing the amounts that are not treated as eligible rollover distributions (26 C.F.R. §1.402(c)-2(c)(3)).

The proposed regulations provide that:

Distributions made while the employee is alive are calculated by dividing the previous December 31 balance of the participant's plan account by the applicable denominator (generally, the Uniform Lifetime Table).
Distributions made after the employee's death are calculated according to the existing regulations, with the added requirement that a full distribution of the employee's interest be made if certain designated events occur.

In certain instances, a full distribution of the employee's interest is required. The proposed regulations address the deadlines for such a distribution.

The proposed regulations also modify the existing rules regarding multiple designated beneficiaries. Under the existing regulations, the beneficiary with the shortest life expectancy is used when determining the applicable denominator. Under the proposed regulations, the life expectancy of the oldest designated beneficiary would be used instead.

RMDs from Defined Benefit Plans

For RMDs from defined benefit plans, the proposed regulations update the existing regulations to reflect the change in RBD age from 70½ to 72.

The proposed regulations also address the potential conflict between the five-year rule and the benefit restriction rules under Code Section 436 (26 U.S.C. § 436) (see Practice Note, Benefit Restrictions Under Code Section 436). To address this issue, the proposed regulations include an exception to the five-year rule. Benefits that must be paid under the five-year rule may extend beyond the full payment deadline provided payments:

Start by the fifth year after the employee's death.
Are as accelerated as permitted under Section 436(d).

The proposed regulations retain the requirement that payments under a defined benefit plan or annuity contract generally may not be increased, but expand the exceptions to this rule.

Regarding annuity contracts, the proposed regulations add a requirement that annuity providers be licensed.

Section 402(c) Regulations

The proposed regulations amend the rollover regulations under Section 402(c) to reflect statutory changes. These amendments:

Update the definition of "eligible rollover distribution" to exclude hardship distributions.
Update the list of amounts of distributions and deemed distributions that are not eligible rollover distributions.
Provide special rules for eligible rollover distributions that include an amount that is allocable to the employee's basis.
Include rules on eligible rollover distributions made in the form of property.
Provide certain extensions and exceptions to the 60-day rollover period.
Address whether a distribution to a beneficiary is an eligible rollover distribution.
Address how to determine the amount of the distribution that constitutes the RMD.
Provide a special rule for distributions to surviving spouses.

Distributions from 403(b) Plans

The proposed regulations amend the regulations governing 403(b) plans to reflect the change in RBD age from 70½ to 72 (see Practice Note, Code Section 403(b) Plans: Overview). The IRS indicated that it is considering additional changes to the RMD rules for 403(b) plans to align them more closely with qualified plans. Public comments are invited on this topic.

Other Changes

The proposed regulations also include changes to the RMD requirements for IRAs and Section 457 plans, and the excise tax on accumulations in qualified plans.

Practical Implications

The proposed regulations would apply to determine RMDs for calendar years beginning on or after January 1, 2022. The proposed regulations on Section 1.402(c)-2 would apply for distributions on or after January 1, 2022. Additionally, the proposal related to excise taxes would apply for taxable years beginning on or after January 1, 2022.

For the 2021 distribution calendar year, taxpayers must apply the existing regulations, but take into account a reasonable, good faith interpretation of the amendments made by sections 114 and 401 of the SECURE Act (compliance with the proposed regulations will satisfy this requirement).

Comments on the proposed regulations are due May 25, 2022.

Proposed Required Minimum Distributions (RMD) Regulations Reflect SECURE Act Changes | Practical Law