IRS Issues Update on 10-Year RMD Rule

The IRS has issued Notice 2022-53, providing guidance on final regulations related to required minimum distributions under section 401(a)(9) of the Internal Revenue Code that will apply no earlier than the 2023 distribution calendar year. The notice also provides guidance related to certain provisions of section 401(a)(9) that apply for 2021 and 2022.

The guidance for certain RMDs for 2021 and 2022 state that a DC plan that failed to make a specified RMD will not be treated as having failed to satisfy Internal Revenue Code section 401(a)(9) because it did not make that distribution. Additionally, for taxpayers who did not take a specified RMD, the IRS will not assert an excise tax under IRC section 4974. “If a taxpayer has already paid an excise tax for a missed RMD in 2021 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax,” the notice states.

According to the IRS, the notice addresses “specified RMDs,” defined as any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to section 401(a)(9) in 2021 or 2022 under a defined contribution plan or IRA that is subject to the rules of 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

• a designated beneficiary of an employee under the plan (or IRA owner) if the employee (or IRA owner) died in 2020 or 2021 and on or after the employee’s (or IRA owner’s) required beginning date, and the designated beneficiary is not taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii); or
• a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to section 401(b)(5) of the SECURE Act) if the eligible designated beneficiary died in 2020 or 2021, and that eligible designated beneficiary was taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii) of the code.

The notices states that the final regulations regarding RMDs under section 401(a)(9) of the code and related provisions will apply no earlier than the 2023 distribution calendar year.

Background

Section 401(a)(9) provides rules for RMDs from a qualified plan during the life and after the death of the employee, the notice states. The rules provide a required beginning date for distributions and identify the period over which the employee’s entire interest must be distributed.

Under the old rules, the entire interest of an employee in a qualified plan must be distributed, beginning no later than the employee’s required beginning date, over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).

If the employee dies after distributions have begun, the employee’s remaining interest must be distributed at least as rapidly as under the distribution method used by the employee as of the date of the employee’s death, the notice states. If the employee dies before RMDs have begun, the employee’s interest must either be distributed within five years after the death of the employee (five-year rule) or distributed over the life or life expectancy of the designated beneficiary with the distributions beginning no later than one year after the date of the employee’s death—with certain exceptions.

This code has been amended by the SECURE Act, extending the five-year time period to 10 years, which applies regardless of whether the employee dies before the required beginning date, the notice states. Additionally, the exception to the 10-year rule, under which the rule is treated as satisfied if distributions are paid over the designated beneficiary’s lifetime or life expectancy, applies only if the designated beneficiary is an eligible designated beneficiary.

The new rules also state that when an eligible designated beneficiary dies before that individual’s portion of the employee’s interest in the plan has been distributed, the beneficiary of the eligible designated beneficiary will be subject to a requirement that the remainder of that individual’s portion be distributed within 10 years of the eligible designated beneficiary’s death.

When a minor child reaches the age of majority, that child will no longer be considered an eligible designated beneficiary and the remainder of that child’s portion of the employee’s interest in the plan must be distributed within 10 years of that date, the notice states.

These amendments to the code apply to distributions of employees who die after December 31, 2019, though later effective dates apply for certain collectively bargained plans and governmental plans, the release states. The rules do not apply to payments associated with certain annuity contracts under which payments began before December 20, 2019.

If an employee who participated in a plan died before IRC section 401(a)(9)(H) became effective, and the employee’s designated beneficiary died after that effective date, then that designated beneficiary is treated as an eligible designated beneficiary and the new rule applies to any beneficiary of that designated beneficiary.

If the amount distributed during the taxable year of a payee under any qualified retirement plan or any eligible DC plan is less than that taxable year’s minimum required distribution, then an excise tax is imposed on the payee equal to 50% of the amount by which the minimum required distribution for the taxable year exceeds the amount actually distributed in that taxable year.