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Yielding to Taxpayer Frustration, IRS Provides That Certain Controversial Changes in Its Proposed Required Minimum Distribution Regulations Will Not Apply Before 2023

EBIA  

EBIA  

IRS Notice 2022-53 (Oct. 7, 2022)

Available at https://www.irs.gov/pub/irs-drop/n-22-53.pdf

The IRS has issued limited relief relating to required minimum distributions (RMDs) from qualified plans (including 401(k) plans), IRAs, Roth IRAs, 403(b) plans, and 457(d) eligible deferred compensation plans. As background, the SECURE Act increased the age for determining an individual’s required beginning date to age 72 (from 70-1/2) and significantly altered the timing requirements for RMDs made to designated beneficiaries after a participant’s death, generally effective with respect to employees who die after 2019 (see our Checkpoint article). In February, the IRS proposed revisions to the Code § 401(a)(9) regulations to incorporate the SECURE Act changes, including provisions relating to the period during which a deceased employee’s entire interest must be distributed (see our Checkpoint article). The regulations as proposed would be effective for RMDs for 2022 and later years. This notice announces that the RMD regulations, once finalized, will apply no earlier than the 2023 distribution calendar year, and provides transitional relief relating to portions of the proposed regulations addressing certain post-death RMDs.

The notice addresses the proposed requirement that, if the participant died on or after the participant’s required beginning date, certain beneficiaries would have to take annual RMDs beginning in the first calendar year after the year of the participant’s death. (The precise rules, including the time by which the participant’s full account must be distributed, vary depending on the type of beneficiary; additional rules apply to distributions after a beneficiary’s death.) As described in the notice, comments the IRS received on the proposed regulations indicated that affected beneficiaries had expected that there would not be any RMD due until the last year of the applicable period, as was the case with similar post-death distributions under pre-SECURE Act rules. Accordingly, some beneficiaries of individuals who died in 2020 failed to take RMDs in 2021, and were unsure of whether RMDs would have to be taken in 2022.

In response to these comments, the notice provides relief for “specified” RMDs. Broadly speaking, a specified RMD is one that, under the interpretation in the proposed regulations, would be required to be made in 2021 or 2022 to (1) a designated beneficiary if the participant died in 2020 or 2021 on or after the participant’s required beginning date and the beneficiary is not taking lifetime or life expectancy payments; or (2) a beneficiary of an eligible designated beneficiary who died in 2020 or 2021 and was taking lifetime or life expectancy payments. A plan will not be treated as having failed to satisfy the RMD rules merely for having failed to make a specified RMD. Similarly, a taxpayer will not be subject to an excise tax for having failed to take a specified RMD. Any taxpayers that already paid excise taxes for a missed RMD in 2021 that is a specified RMD can request a refund.

EBIA Comment: The good news is that the IRS has provided transition relief that taxpayers wanted. The bad news is that the IRS did not change its interpretation of how the rules work. This may indicate that the annual distribution requirement will remain in its current form once the regulations are finalized. Fortunately, plans are under no obligation to allow beneficiaries to receive RMDs over the maximum permissible time periods. For administrative simplicity, many 401(k) plans provide that death benefits must be paid within a much shorter time, such as by the end of the calendar year following the year of the participant’s death. In any event, affected beneficiaries who failed to take specified RMDs, and plans that failed to make them, will welcome this relief. 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.

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