What the Proposed RMD Regulations May Mean for Your Qualified Plan
By Lisa Haberman, MBA, MAM, ChFC, CLU
It has been 20 years since the IRS last made regulatory changes for required minimum distributions (RMDs). The global pandemic forced regulators to work overtime to address the public’s immediate financial needs while at the same time to complete the long overdue overhaul of RMD regulatory guidance. Today, we have proposed RMD regulations. But we also have many new questions that affect the plan administration of RMDs.
Foundation of RMD Administration for Qualified Plans (2002)
In April 2002, the Department of Treasury issued final RMD regulations for qualified retirement plans (QRPs), individual retirement arrangements (IRAs), 457(b) government plans, and 403(b) plans. This guidance provided the foundation for plan administration of RMDs for the past two decades by defining distribution options before and after a participant’s death, determining beneficiary payout rules, and establishing required beginning dates.
Legislation affecting RMD Administration (2008 – 2020)
Since the release of the final RMD regulations, Congress has twice passed legislation designed to help qualified plan participants navigate severe economic downturns. In 2008, the Worker, Retiree, and Employer Recovery Act (WERA) was passed in response to the Great Recession. And in 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act promoted financial recovery as a result of the global pandemic. Both pieces of legislation provided for a waiver of the RMD requirement in tax years 2008 and 2020, respectively.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2020 was also passed in response to the economic challenges imposed by the global pandemic. The SECURE Act directly affected two key plan administration concerns: RMDs and beneficiary payout options. First, the SECURE Act delayed the starting age for RMDs from 70½ to 72. This legislation also increased the beneficiary payout rule from five to 10 years (for most beneficiaries) but eliminated the option for many beneficiaries to take lifetime distributions.
New Proposed RMD Regulations (2022)
Although most of the SECURE Act provisions became effective on January 1, 2020, the proposed RMD regulations—released on February 23, 2022—are expected to be effective on January 1, 2022. For 2021, the preamble to the proposed regulations states that taxpayers must apply the existing regulations and exercise a “reasonable, good faith interpretation” of the increased RMD age and 10-year rule created by the SECURE Act. Plan administrators may satisfy this requirement by following the guidance as outlined in the proposed RMD regulations.
What are the Current Distribution Rules?
Now, plan administrators need to be aware of two different sets of distribution rules because of the changes created by the SECURE Act. The first set of distribution rules applies to participants who died before 2020, and the second set applies to participants who die on or after January 1, 2020.
10-Year Rule
The SECURE Act implemented a substantial change with the 10-year rule, which requires most beneficiaries to distribute all inherited assets by the end of the tenth year following the participant’s death. The 10-year rule is a key component of the second set of distribution rules, which now limits the availability of the “stretch” distribution only to individuals who qualify as an eligible designated beneficiary.
An “eligibility designated beneficiary” is a beneficiary who falls into one of five categories:
Account owner’s spouse
Individual who is not more than 10 years younger than the account owner
Disabled or chronically ill individual
Account owner’s minor child
Designated beneficiary of account owner who died before January 1, 2020
So if a participant dies on or after January 1, 2020, and the beneficiary does not meet the requirements of an eligible designated beneficiary, the inherited assets must be distributed within 10 years following the year of death. In this scenario, the beneficiary would no longer be able to take annual distributions of the inherited assets based on the beneficiary’s life expectancy.
“At Least as Rapidly” Rule
In addition, the proposed RMD regulations state that beneficiaries who are subject to the 10-year rule must deplete the inherited account even faster if participants die on or after their required beginning date (RBD). This rule—which requires beneficiaries to take RMDs “at least as rapidly” as the account owner—means that beneficiaries who are subject to the 10-year rule must also take annual distributions based on their single life expectancy.
Note: The “at least as rapidly” rule does not apply when a participant dies before the RBD.
The 10-year rule and the “at least as rapidly” rule are key components of the proposed RMD regulations, but there are many more nuances that plan sponsors and administrators should become familiar with. For a more in-depth review of the provisions of the proposed regulations, please review our Washington Pulse article here.
A public hearing was scheduled for June 15, 2022, to address any comments the IRS has received. After the hearing, it may take several months (or more) for the IRS to release final regulations. Meanwhile, for the 2021 distribution year, the existing regulations apply. Taxpayers must use a “reasonable, good faith interpretation” of the SECURE Act provisions related to the increased RMD age and to the distribution rules for beneficiaries. And the IRS has stated that “compliance with these proposed regulations will satisfy that requirement.” Depending on when the IRS releases the final regulations, they may extend the good faith requirement to cover 2022, as well. But as we stated at the outset, the content and timing of the proposed regulations has created new questions. As the IRS provides answers, Ascensus will analyze them and provide them in The Link.
