IRS again delays final RMD rule, gives new relief for SECURE acts
Final regulations delayed again
IRS proposed updates to Section 401(a)(9) regulations in February 2022 to reflect changes to the RMD rules made by SECURE 1.0, including an increase in the RMD beginning age from 70-1/2 to 72 and the new 10-year rule. The preamble to the proposal said the final regulations would apply to 2022 and later distribution calendar years. However, IRS announced a delay last October in Notice 2022-53, stating the regulations wouldn’t apply before 2023.
Notice 2023-54 delays the applicability date of the final rules by another year. The additional delay is likely due to IRS’s plans — as noted in the Treasury Department’s spring 2023 regulatory agenda — to include some of SECURE 2.0’s changes to the RMD rules in the final version of the 2022 proposal. The regulatory agenda also says that IRS will contemporaneously propose new regulations for other SECURE 2.0 changes when issuing the final rules.
The preamble to the proposed regulations said that until IRS issues final rules, plans and taxpayers should continue to rely on existing 401(a)(9) regulations, taking into account a good-faith interpretation of SECURE 1.0. This reliance presumably now extends to good-faith interpretations of both SECURE 1.0 and 2.0.
SECURE 2.0 relief requires action this year
SECURE 2.0 raised the age that triggers RMDs from 72 to 73 for participants who turn 72 after 2022 (and to 75 for people who turn 74 after 2032). Plan administrators and other providers have told IRS that updating automated payment systems to reflect this change will take some time, so payments made this year to participants turning 72 in 2023 might be mischaracterized as RMDs. RMDs are not eligible for rollover treatment, so affected participants couldn’t roll over amounts that should be rollover-eligible.
The new notice provides relief to plans that make mischaracterized distributions and the participants receiving such distributions, but only for those made between Jan. 1 and July 31, 2023, to participants born in 1951 (or to such a participant’s surviving spouse). IRS will not consider plans that make mischaracterized distributions during this time period as failing to the treat the amounts as eligible rollover distributions. In addition, affected participants have until Sept. 30, 2023, to roll over distributions mischaracterized as RMDs, even if the usual 60-day rollover deadline has passed. (The extended deadline also applies to mischaracterized distributions from IRAs).
Do employers need to act? The notice is silent on whether plans need to inform affected participants about the extended rollover deadline for mischaracterized distributions. However, affected participants might not have any other way to find out about this opportunity. Employers with plans that made any mischaracterized distributions may want to consult with legal counsel.
Relief for SECURE 1.0’s ‘10-year rule’ extended
SECURE 1.0 changed the requirements for DC plans paying benefits after a participant’s death. DC plans generally now must distribute benefits to a designated beneficiary within 10 years of the participant’s death, although an exception applies for “eligible designated beneficiaries,” who can elect to receive payments over their lifetime as an alternative to the 10-year rule. (These new rules also apply to IRAs but don’t apply to defined benefit plans.) The 10-year rule is generally effective for distributions to beneficiaries of participants who died after Dec. 31, 2019 (governmental plans and certain collectively bargained plans have a later effective date).
Before SECURE 1.0, distribution of a deceased participant’s benefit depended on whether the participant died before or after the required beginning date (RBD). If the participant died after the RBD, the beneficiary had to receive payments at least as rapidly as the participant had been receiving them. If the participant died before the RBD, the benefit had to be distributed within five years of the participant’s date of death, or the plan could allow payments to stretch over a period not exceeding the designated beneficiary’s life expectancy. (The five-year rule still applies after SECURE 1.0 if the participant has no designated beneficiary or the beneficiary isn’t an individual.)
Proposal caught some plans and beneficiaries off guard. The proposed regulations would require payments under the 10-year rule to begin the year after the participant’s death when a participant dies after the RBD. The preamble explains that this is because the “at least as rapidly” rule still applies. The 10-year rule means that any remaining benefit must be paid in full by the end of the 10th year after the participant’s death. Until IRS published the proposal, many plan administrators and taxpayers believed the 10-year rule would work like the five-year rule, which allows delaying all payments until the end of the fifth year after the participant’s death.
Under the proposal, once the 10-year rule took effect, DC plans that hadn’t paid RMDs to beneficiaries of participants who died after reaching their RBDs would have violated Section 401(a)(9), and the beneficiaries could face a 50% excise tax under IRC Section 4974. (SECURE 2.0 reduced the tax to 25% starting in 2023, or 10% if the error is fixed with a specified correction window.)
Earlier relief extended. Notice 2023-54 grants relief for RMDs that should have been paid from a DC plan (or IRA) under the 10-year rule in 2023 to designated beneficiaries of participants who died after their RBDs in 2020, 2021 or 2022. This is an extension of the relief provided in Notice 2022-53 for RMDs that should have been paid in 2021 or 2022. A DC plan won’t be treated as violating Section 401(a)(9) merely because it failed to make these distributions, and beneficiaries won’t be subject to an excise tax on their missed RMDs.
Related resources
Non-Mercer resources
- Notice 2023-54 (IRS, July 14, 2023)
- Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)
- Notice 2022-53 (IRS, Oct. 7, 2022)
- Proposed RMD regulations (Federal Register, Feb. 24, 2022)
- Div. O of Pub. L. 116-94, the SECURE Act of 2019 (Congress, Dec. 20, 2019)
Mercer Law & Policy resources
- Congress pens letter to Treasury, IRS on SECURE 2.0 corrections (June 26, 2023)
- SECURE 2.0 brings more changes to required minimum distribution rules (Feb. 7, 2023)
- IRS delays final RMD regulation, gives relief for new 10-year rule (Oct. 14, 2022)
- IRS proposes updates to RMD rules for SECURE Act and more (April 20, 2022)
- SECURE, CARES Acts change rules on required minimum distributions (April 7, 2020)
Other Mercer resource
- SECURE 2.0 where to focus and where to begin (March 20, 2023)