IRS Addresses Confusion over Changes to RMD Rules; Postpones Certain Deadlines

(Parker Tax Publishing October 2022)

The IRS announced its intention to issue final regulations relating to required minimum distributions (RMDs) under Code Sec. 401(a)(9) that will apply no earlier than the 2023 distribution calendar year. Further, because of confusion surrounding the application of the proposed regulations under Code Sec. 401(a)(9), which were issued as a result of changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), the IRS states that a defined contribution plan that failed to make a specified RMD in 2021 or 2022 (1) will not be treated as having failed to satisfy Code Sec. 401(a)(9) merely because it did not make that distribution, and (2) to the extent a taxpayer did not take a specified RMD (as defined in the guidance), the IRS will not assert that an excise tax is due under Code Sec. 4974. Notice 2022-53.

Background

Code Sec. 401(a)(9) provides rules for required minimum distributions (RMDs) from a qualified plan during the life of the employee in Code Sec. 401(a)(9)(A) and after the death of the employee in Code Sec. 401(a)(9)(B). The rules set forth a required beginning date for distributions and identify the period over which the employee's entire interest must be distributed. Specifically, Code Sec. 401(a)(9)(A)(ii) provides that the entire interest of an employee in a qualified plan must be distributed, beginning not later than the employee's required beginning date, in accordance with regulations, 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).

Under Code Sec. 401(a)(9)(B)(i), 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. Code Sec. 401(a)(9)(B)(ii) and (iii) provides that, if the employee dies before required minimum distributions have begun, the employee's interest must either be: (1) distributed within five years after the death of the employee (i.e., the five-year rule), or (2) distributed (in accordance with regulations) 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 (subject to an exception if the designated beneficiary is the employee's surviving spouse).

The rules of Code Sec. 401(a)(9) are incorporated into the rules relating to individual retirement accounts and individual retirement annuities (collectively, IRAs), Roth IRAs, annuity contracts, custodial accounts, Code Sec. 403(b) retirement income accounts, and Code Sec. 457(d) for eligible deferred compensation plans.

If the amount distributed during the tax year of a payee under a qualified retirement plan or any eligible deferred compensation plan is less than that tax year's minimum required distribution, then an excise tax under Code Sec. 4974 is imposed on the payee equal to 50 percent of the amount by which the minimum required distribution for the tax year exceeds the amount actually distributed in that tax year.

Changes Made by the SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was signed into law on December 20, 2019, enacted new Code Sec. 401(a)(9)(H). Generally, pursuant to Code Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan has a designated beneficiary, the five-year period under the five-year rule is lengthened to 10 years (10-year rule) and the new 10-year rule applies regardless of whether the employee dies before the required beginning date. In addition, pursuant to Code Sec. 401(a)(9)(H)(ii), the exception to the 10-year rule under which the 10-year 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, as that term is defined in the newly enacted Code Sec. 401(a)(9)(E)(ii).

When an eligible designated beneficiary dies before that individual's portion of the employee's interest in the plan has been distributed, Code Sec. 401(a)(9)(H)(iii) provides that 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. Additionally, Code Sec. 401(a)(9)(E)(iii) provides that 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.

Generally, the amendments made to Code Sec. 401(a)(9)(H) apply to distributions with respect to employees who die after December 31, 2019. Later effective dates apply for certain collectively bargained plans and governmental plans. The SECURE Act provides that Code Sec. 401(a)(9)(H) does not apply to payments under certain annuity contracts under which payment began (or the manner of payments was fixed) before December 20, 2019.

Under the SECURE Act, if an employee who participated in a plan died before Code Sec. 401(a)(9)(H) became effective with respect to the plan, and the employee's designated beneficiary died after that effective date, then that designated beneficiary is treated as an eligible designated beneficiary and Code Sec. 401(a)(9)(H) applies to any beneficiary of that designated beneficiary.

Proposed Regulations

In February, the IRS issued proposed regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions. Those regulations provided that, when finalized, they would apply beginning with the 2022 distribution calendar year. The proposed regulations addressed issues relating to the new 10-year rule in Code Sec. 401(a)(9)(H). Prop. Reg. Sec. 1.401(a)(9)-5(d)(1)(i) requires that, in the case of an employee who dies on or after the employee's required beginning date, distributions to the employee's beneficiaries for calendar years after the calendar year of the employee's death must satisfy Code Sec. 401(a)(9)(B)(i). In addition, distributions to the employee's beneficiaries must also satisfy Code Sec. 401(a)(9)(B)(ii) (or if applicable, Code Sec. 401(a)(9)(B)(iii), taking into account Code Secs. 401(a)(9)(E)(iii), (H)(ii), and (H)(iii)).

In order to satisfy Code Sec. 401(a)(9)(B)(i), the beneficiary of an employee who died after the employee's required beginning date must take an annual required minimum distribution beginning in the first calendar year after the calendar year of the employee's death. In order to satisfy Code Sec. 401(a)(9)(B)(ii), the remaining account balance must be distributed by the 10th calendar year after the calendar year of the employee's death (subject to an exception under Code Sec. 401(a)(9)(B)(iii), if applicable). In order to satisfy both of those requirements, the proposed regulations generally provide that, in the case of an employee who dies after the employee's required beginning date with a designated beneficiary who is not an eligible designated beneficiary (and for whom the Code Sec. 401(a)(9)(B)(iii) alternative to the 10-year rule is not applicable), annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee's death.

In the case of a designated beneficiary who is an eligible designated beneficiary, the proposed regulations include an alternative to the 10-year rule under which annual lifetime or life expectancy payments are made to the beneficiary beginning in the year following the year of the employee's death. Under the proposed regulations, if an eligible designated beneficiary of an employee is using the lifetime or life expectancy payment alternative to the 10-year rule, then the eligible designated beneficiary (and, after the death of the eligible designated beneficiary, the beneficiary of the eligible designated beneficiary) must continue to take annual distributions after the death of the employee (with a full distribution made no later than the 10th year after the year of the eligible designated beneficiary's death). The proposed regulations provide for similar treatment (that is, continued annual RMDs with a requirement to take a full distribution no later than the 10th year after a specified event) in the case of a designated beneficiary who is a minor child of the employee (with the specified event being the child's reaching the age of majority).

Notice 2022-53

In response to the proposed regulations, some individuals who are owners of inherited IRAs or are beneficiaries under qualified defined contribution plans or Section 403(b) plans submitted comments indicating that they thought the new 10-year rule would apply differently than what was proposed in the proposed regulations. Specifically, commenters believed that, regardless of when an employee died, the 10-year rule would operate like the 5-year rule, under which there would not be any RMD due for a calendar year until the last year of the 5- or 10-year period following the specified event (the death of the employee, the death of the eligible designated beneficiary, or the attainment of the age of majority for the employee's child who is an eligible designated beneficiary). Commenters in those situations who are heirs or beneficiaries of individuals who died in 2020 explained that they did not take an RMD in 2021 and were unsure of whether they would be required to take an RMD in 2022. They asserted that, if final regulations adopt the interpretation of the 10-year rule set forth in the proposed regulations, the IRS should provide transition relief for failure to take distributions that are RMDs due in 2021 or 2022 pursuant to Code Sec. 401(a)(9)(H) in the case of the death of an employee (or designated beneficiary) in 2020 or 2021.

In response, the IRS stated that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions will apply no earlier than the 2023 distribution calendar year. Further, the IRS stated that (1) a defined contribution plan that failed to make a specified RMD will not be treated as having failed to satisfy Code Sec. 401(a)(9) merely because it did not make that distribution, and (2) to the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under Code Sec. 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.

For purposes of Notice 2022-53, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to Code Sec. 401(a)(9) in 2021 or 2022 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 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:

(1) a designated beneficiary of an employee under the plan (or IRA owner) if: (1) 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 (2) the designated beneficiary is not taking lifetime or life expectancy payments pursuant to Code Sec. 401(a)(9)(B)(iii); or

(2) a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to the SECURE Act) if: (1) the eligible designated beneficiary died in 2020 or 2021, and (2) that eligible designated beneficiary was taking lifetime or life expectancy payments pursuant to Code Sec. 401(a)(9)(B)(iii).

For a discussion of RMDs, see Parker Tax ¶131,502.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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