IRS and Treasury Release Proposed Regulations for Required Minimum Distribution Rules
The IRS and Treasury recently released proposed regulations REG-105954-20 that would amend rules for required minimum distributions (RMDs) from qualified retirement plans and annuity contracts and related matters to conform with statutory changes. The majority of the statutory changes were made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Division O of the Further Consolidated Appropriations Act of 2019, P.L. 116-94.
Among other changes, the SECURE Act revised the starting date for RMDs from a qualified plan generally to April 1 of the calendar year following the later of the calendar year in which the employee turns 72 or retires. Previously, that age was 70½. The higher age was effective for distributions required to be made after Dec. 31, 2019, with respect to individuals who turned 70½ after that date.
The SECURE Act also removed "stretch" individual retirement accounts (IRAs) or plan distributions by requiring distributions to nonspouse beneficiaries, other than eligible designated beneficiaries, to be finished within 10 years of a plan participant or IRA owner's death instead of over the beneficiary's life or life expectancy. The Act defined eligible designated beneficiaries for purposes of the exception to the 10-year rule as the employee's surviving spouse, the employee's child under the age of majority, a disabled designated beneficiary, a chronically ill individual or other individual no more than 10 years younger than the employee.
General RMD Rules
Prop. Regs. Sec. 1.401(a)(9)-1 specifies general rules for RMDs, including use of the 10-year rule when an employee dies, and the designated beneficiary also dies. If the employee died before Sec. 401(a)(9)(H)'s effective date for the plan and the employee had only one designated beneficiary who also died before that date, the beneficiary of the designated beneficiary is subject to the 10-year rule. If the employee's designated beneficiary died on or after the effective date, the 10-year rule does not apply to the beneficiary of the designated beneficiary. If the employee dying before the Sec. 401(a)(9)(H) effective date had more than one designated beneficiary, whether the SECURE Act amendments apply depends on when the oldest beneficiary dies.
The proposed regulations also discuss the SECURE Act RMD starting age of beneficiaries of an employee who died before turning 70½ but would have reached that age on or after Jan. 1, 2020. The beneficiary may wait until the calendar year in which the employee would have turned 72 to begin RMDs.
Eligible Designated Beneficiaries
The proposed regulations address the SECURE Act's definition of eligible designated beneficiaries. Previously, the "age of majority" for the child of an employee had been left for each plan to determine. The proposed regulations would establish that age as the child's 21st birthday, although they would still permit defined benefit plans to maintain their prior definition.
Likewise, "disability" would depend on the age of the beneficiary. If under 18 at the time of the employee's death, the individual must have a "medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or be of long-continued and indefinite duration" (Explanation of Provisions, page 25). Older disabled beneficiaries are defined by reference to Sec. 72(m)(7) based on an inability to engage in substantial gainful activity. A safe harbor for determining disability is available based on a determination for Social Security benefits purposes. The proposed regulations specify rules for documenting disabled or chronically ill status.
The proposed regulations preserve existing "see-through" rules for trusts as beneficiaries but also provide further extensive guidance regarding which of a see-through trusts' beneficiaries can be treated as beneficiaries of the employee.
Defined Benefit Plans
Additionally, the proposed regulations discuss an actuarial increase defined benefit plans need to take into account for the period after age 70½ when the employee was not receiving benefits. The increase applies to an employee (other than a 5 percent owner) who retires in a calendar year after the calendar year in which the employee turns 70½.
Special Rules
Prop. Regs. Sec. 1.401(a)(9)-8 describes rules concerning separate account treatment for beneficiaries and updates the definition of "spouse" to reflect gender changes to Regs. Sec. 301.7701-18; eligible rollover distributions; and more.
Applicability Dates
The proposed regulations would generally apply for calendar years beginning on or after Jan. 1, 2022, or to distributions on or after that date. For the 2021 distribution calendar year, taxpayers must apply the existing regulations but make a good-faith interpretation of the SECURE Act amendments.