Final Regulations, Required Minimum Distributions, 29 CFR Parts 1, 31, and 54, 89 Fed. Reg. 58886 (July 19, 2024); Notice of Proposed Rulemaking and Notice of Public Hearing, Required Minimum Distributions, 26 CFR Part 1, 89 Fed. Reg. 58644 (July 19, 2024)
Final Regulations https://www.govinfo.gov/content/pkg/FR-2024-07-19/pdf/2024-14542.pdf
Proposed Regulations https://www.govinfo.gov/content/pkg/FR-2024-07-19/pdf/2024-14543.pdf
The IRS has issued final regulations updating the required minimum distribution (RMD) rules applicable to qualified plans, including 401(k) plans, to reflect changes made by the SECURE (see our article) and SECURE 2.0 Acts (see our article). These regulations generally follow proposed regulations released in 2022 (see our article), with some changes and clarifications. The IRS has also released proposed regulations addressing additional RMD issues under the SECURE 2.0 Act that are specifically reserved in the final regulations. Here are highlights applicable to 401(k) plans:
- Effective Date. The final rules generally apply when determining RMDs for calendar years beginning on or after January 1, 2025, using a reasonable, good faith interpretation of SECURE Act amendments and, for 2023 and 2024 distribution calendar years, SECURE 2.0 Act amendments.
- Distributions Commencing During Employee’s Lifetime. Generally, the required beginning date (RBD) is April 1 of the year after the later of the year the employee reaches the applicable age or retires. The applicable age varies: 70-1/2 for those born before July 1, 1949; 72 for those born on or after July 1, 1949, and before January 1, 1951; 73 for those born on or after January 1, 1951, and before January 1, 1959; and 75 for those born on or after January 1, 1960. According to the preamble, plans can provide for a uniform RBD of the calendar year following the year an employee attains age 70-1/2 for administrative ease. The proposed regulations would resolve a conflict in the SECURE 2.0 Act regarding applicable ages for employees born in 1959 by providing an applicable age of 73.
- Death Before RBD. The final regulations reflect the Code’s changes regarding RMDs for designated beneficiaries of employees who die before their RBD, including that only “eligible” designated beneficiaries may receive distributions over their life expectancy. If an employee’s entire interest is in a designated Roth account, no lifetime distributions are required. Thus, upon the employee’s death, that employee is treated as having died before their RBD. Annual distributions must continue in accordance with the final regulations until the account is fully distributed. Plans may specify distribution methods or limit distribution method elections for certain categories of eligible designated beneficiaries, such as allowing only an employee’s surviving spouse to choose between the ten-year rule and life expectancy payments.
- Eligible Designated Beneficiaries. An eligible designated beneficiary is a designated beneficiary who is (1) a surviving spouse, (2) a minor child, (3) disabled, (4) chronically ill, or (5) ten or fewer years younger than the employee. Generally, disability is based on inability to engage in substantial gainful activity. Beneficiaries under age 18 must have a medically determinable physical or mental impairment resulting in marked and severe functional limitations and expected to result in death or to be of a long and indefinite duration. A safe harbor allows beneficiaries to be deemed disabled for RMD purposes if they are determined to be disabled by the Social Security Commissioner. Documentation of a disability or chronic illness must be provided to the plan administrator no later than October 31 of the calendar year following the calendar year of the employee’s death. In certain cases, certifications from licensed health care practitioners are required. Plan administrators may not rely on a beneficiary’s self-certification of disability or chronic illness.
- Partial Account Purchase of Annuity Contracts. A plan may allow employees to elect to have an RMD distributed for a calendar year in an amount equal to the excess of the total of the required amount for that year over the annuity amount. As an alternative to the general bifurcation rule, a plan may allow an employee to satisfy the RMD requirement applicable to the annuity contract and the remaining account balance by adding the fair market value of the annuity contract to the remaining account balance and treating the payments under the annuity contract as distributions from the individual account. Under the proposed regulations, the fair market value of the annuity would be determined as of December 31 of the calendar year preceding the distribution calendar year.
- Distributions After Employee’s Death. The final regulations maintain the requirement in the 2022 proposal for continued annual distributions when employees die on or after their RBD. Thus, annual distributions generally must continue when an individual has started RMDs, even though the Code provides that full distribution must be made by the tenth anniversary of the employee’s death. Also maintained is the obligation for ongoing annual distributions for a period of up to ten years following: (1) the death of an eligible designated beneficiary who was taking life expectancy payments or (2) attainment of the age of majority by an eligible designated beneficiary who was a minor child of the employee receiving life expectancy payments.
- Surviving Spouses. Consistent with the SECURE 2.0 Act, a surviving spouse who is the employee’s sole beneficiary may elect to be treated as the employee for certain purposes. The proposed regulations address this election, and would provide that, if the employee dies before the RBD and the sole beneficiary is the surviving spouse who is subject to the life expectancy rule, then the spouse would automatically be treated as making the election. If the employee dies on or after the RBD, then the corresponding election would not apply automatically, unless the plan’s written terms made the election automatic.
- Multiple Designated Minor Beneficiaries. If an employee has more than one child as eligible designated beneficiaries, a full distribution is not required until ten years after the youngest of the employee’s children who are designated beneficiaries attains the age of majority (or, if earlier, ten years after the last of those minor children dies).
- Designated Roth Accounts. When determining the account balance subject to the RMD rules, amounts held in a designated Roth account are disregarded. Under the proposed regulations, distributions from designated Roth accounts would not count toward satisfying any RMD but could be rolled over to a Roth IRA if they otherwise qualified as eligible rollover distributions.
- Corrective Distributions. The final regulations provide an automatic waiver of the Code § 4974 excise tax associated with a beneficiary’s failure to take a RMD in the calendar year in which an individual died if that individual had not already satisfied the RMD for that year, provided that the failure is corrected by the end of the following calendar year. This corrective distribution is not eligible for rollover. Under the proposed regulations, if a missed RMD is corrected by a distribution in a subsequent calendar year, the RMD for that subsequent year would have to be made in addition to the corrective distribution.
- Certain beneficiaries of a see-through trust are regarded as beneficiaries of an employee if specific conditions are met. The trust must (1) be valid under state law or would be if it had corpus; (2) be irrevocable or become irrevocable upon the employee’s death; (3) have identifiable beneficiaries; and (4) meet documentation requirements. When determining whether requirement (3) is met, beneficiaries are treated as if they could receive amounts in the trust representing the employee’s interest in the plan, regardless of whether those amounts are disbursed directly to the beneficiaries or indirectly for their benefit (e.g., in the case of payments to a custodial account for the benefit of a minor child). With respect to requirement (4), the plan administrator may require a trustee to provide a list of trust beneficiaries with a description of the conditions on their entitlement, instead of a trust document.
EBIA Comment: The final regulations generally mirror the 2022 proposal and include few surprises for 401(k) plans. But the requirement that annual payments be continued for the entire ten-year period when RMDs have started is a major disappointment for those who sought to reduce administrative burdens and complexity by temporarily ceasing annual distributions so long as full distribution was made within the ten-year anniversary period. Perhaps the Supreme Court’s recent decision overturning Chevron deference (see our article) will open the door for . For more information, see EBIA’s 401(k) Plans manual at Sections XII.C.7 (“When Is Distribution Made Following Death?”) and XII.I (“Required Minimum Distributions”).
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