Required Minimum Distribution Rules Incorporate SECURE, SECURE 2.0 Act Changes

The IRS has issued final regulations updating required minimum distribution requirements for certain retirement plan participants and IRA owners and beneficiaries, reflecting changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act and SECURE 2.0 Act. The agency concurrently issued proposed rules addressing additional issues under the SECURE 2.0 Act. (TD 10001; Preamble to Prop Reg REG-103529-23; IR 2024-190, 7/18/2024)

Required minimum distribution final rules.

The final rules incorporate statutory changes to Code Sec. 401(a)(9) regarding required minimum distributions (RMDs) from qualified plans. Those rules are also adopted by reference into sections regarding IRAs, 403(b) plans, and eligible deferred compensation plans. The final rules under Code Sec. 401(a)(9) apply for distribution calendar years beginning on or after January 1, 2025.

Among other things, the final rules provide that the required RMD beginning date is April 1 of the calendar year following the later of the calendar year in which the employee reaches the applicable age, and the calendar year in which the employee retires from employment with the plan employer. Applicable ages are set forth based on the employee’s date of birth.

The final rules also incorporate requirements under Code Sec. 401(a)(9)(H) regarding employees who die before their distribution beginning date. For employees with designated beneficiaries, plans may apply the five-year rule for defined benefit plans or 10-year rule for defined contribution plans, provided that the life expectancy rule applies, or allow the employee or beneficiary to elect between the five or 10-year rule or life expectancy rule. The final rules also address the default where no election is made.

In terms of RMDs from defined contribution plans, the final rules add an alternative to the bifurcation rule applicable where an employee with an individual account uses a portion of that account to purchase an annuity contract. The rules provide that a plan may permit an employee to elect to satisfy Section 401(a)(9) for the annuity contract and account balance in the aggregate by adding the fair market value of the contract to the remaining account balance and treating payments under the annuity contract as distributions from the individual account.

The final rules also address required minimum distributions when an employee dies after the required beginning date. In the final rules preamble, the IRS indicates it disagrees with commenters requesting that requirements for continued annual distributions be eliminated under these circumstances. The agency concludes that both Code Sec. 401(a)(9)(B)(i) and Code Sec. 401(a)(9)(B)(ii) apply if an employee dies after the employee’s required beginning date (unless the designated beneficiary is an eligible designated beneficiary taking life expectancy payments under Code Sec. 401(a)(9)(B)(iii)), and that annual distributions generally must continue although full distribution of the employee’s interest in the plan must be made by the 10th anniversary of the employee’s death.

Other final rules provisions.

The final rules also address the rollover of a distribution from a qualified plan to another eligible retirement plan under Code Sec. 402(c). Under these rules, an amount distributed from a qualified plan is generally excluded from income if it is transferred to an eligible retirement plan within 60 days after receipt.

In addition, the final rules provide that Section 403(b) plans, individual retirement accounts, and individual retirement annuities must satisfy minimum distribution rules similar to those under Section 401(a)(9) and incidental death benefit requirements under Section 401(a).

The final rules also address the excise tax imposed on payees under qualified retirement plans or eligible deferred compensation plans where the amount distributed is less than that taxable year’s required minimum distribution under Code Sec. 4974. That excise tax is 25% of the amount by which the required distribution for the tax year exceeds the amount actually distributed in that tax year. The excise tax, however, may be waived where the failure to distribute was due to reasonable error and steps are being taken to remedy the shortfall.

The final rules are effective September 17, 2024. Though the SECURE 2.0 Act was enacted after proposed rules were issued in 2022, the IRS is finalizing some rule changes clearly required under that law.

Proposed rules.

The IRS concurrently issued proposed rules addressing remaining updates to minimum distribution rules, necessary in light of the SECURE 2.0 Act.

The proposed rules specify that the applicable age for employees who are born in 1959 is age 73 for purposes of determining a beginning date. The rules also address how to determine the fair market value of an annuity contract purchased with a portion of the employee’s account.

In addition, the rules provide that certain Roth account distributions are not treated as required minimum distributions and can by rolled over to a Roth IRA if otherwise eligible. They also address treatment of corrective distributions under Code Sec. 4974, spousal elections, and divorce or separation instruments.

Finally, the rules set forth an exception to new minimum distribution requirements for multiple beneficiaries in the case of an outright distribution to a trust beneficiary.

Hearing and comments.

A hearing on the proposed rules is scheduled for September 25, 2024, at 10 am ET. Comments on the proposed rules and requests to speak at the hearing are due September 17, 2024.

For more on the current required minimum distribution rules, see Checkpoint’s Federal Tax Coordinator ¶ H-8275 et seq.