IRS finalizes SECURE 1.0 RMD rule changes, proposes 2.0 changes 

August 16, 2024

 

IRS final regulations reflect changes to the Internal Revenue Code’s (IRC’s) required minimum distribution (RMD) rules for tax-favored employer-sponsored retirement plans and individual retirement arrangements (IRAs). The changes address provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (Div. O of Pub. L. No. 116-94) (SECURE 1.0). The final regulations also reflect some — but not all — of the RMD revisions under the SECURE 2.0 Act of 2022 (Div. T. of Pub. L. No. 117-328). Proposed regulations issued simultaneously with the final regulations cover other SECURE 2.0 RMD changes. (Throughout this article, these proposed regulations are referred to as the 2024 proposed regulations. The earlier proposal on which the new final regulations are based are referred to as the 2022 proposed regulations.)

IRC Section 401(a)(9) requires retirement benefits to start by a participant’s required beginning date (RBD). The RBD is the April 1 after the year the participant reaches a certain age, although employer-sponsored plans (but not IRAs) can let participants who work longer delay taking RMDs until after they retire (unless they’re 5% owners). The age that triggered a participant’s RBD had been 70-1/2, but SECURE 1.0 raised it to 72, and SECURE 2.0 incrementally increased the age to 73 or 75, depending on a participant’s birth year  These changes are reflected in the final regulations as follows:

• For participants born before July 1, 1949, the triggering age is 70-1/2.
• For participants born on or after July 1, 1949, and before Jan. 1, 1951, the age is 72.
• For participants born on or after Jan. 1, 1951, and before Jan. 1, 1959, the age is 73.
• For participants born on or after Jan. 1, 1960, the age is 75.

Participants born in 1959. The final regulations include a placeholder for participants born in 1959 because SECURE 2.0 can be interpreted as assigning both age 73 and 75 as the applicable age for these participants. The 2024 proposed regulations would make 73 the applicable age for these participants. This is consistent with a draft SECURE 2.0 technical corrections bill currently being considered in Congress.

DB plan actuarial increases required after age 70-1/2. IRC Section 401(a)(9)(C)(iii) requires defined benefit (DB) plans to provide actuarial increases to participants retiring after age 70-1/2 (except for 5% owners and participants in government or certain church plans.) When SECURE 1.0 amended this provision, it arguably could be read as not requiring actuarial increases for participants retiring after age 70-1/2 and before the new RBD triggering age. The proposed regulations clarified that these participants must get actuarial increases from the April 1 after turning 70-1/2 until their retirement date, and the final regulations retain this language. The final regulations also confirm that actuarial increases apply only to vested benefits.

Plans can require benefits to start earlier. Sponsors of DB plans that pay generous actuarial increases may prefer to retain 70-1/2 as the age that triggers RMDs for all participants, regardless of their birth dates. Although the final regulations don’t specifically permit using 70-1/2 as a uniform age to trigger RMDs, IRS acknowledges in the preamble that doing so is allowed.

Under SECURE 1.0, only certain “eligible designated beneficiaries” (EDBs) of defined contribution (DC) plans can receive payments over their life expectancies after a participant’s death (the rule also applies to IRAs, but not DB plans). All other designated beneficiaries must be paid within 10 years of the participant’s date of death. This “10-year rule” applies to distributions to beneficiaries of participants who die after Dec. 31, 2019 (Dec. 31, 2021, for union plans subject to collective bargaining agreements ratified before Dec. 19, 2020, or governmental plans). Beneficiaries who are not designated beneficiaries (eligible or otherwise) must be paid in full within five years of the participant’s death.

Section 401(a)(9)(E)(ii) defines an EDB as any of the following:

• Participant’s surviving spouse
• Participant’s minor child
• Disabled individual
• Chronically ill individual
• Any other individual not more than 10 years younger than the participant

When EDB status is determined. Whether a designated beneficiary is an EDB is generally determined as of the participant’s date of death. However, the final regulations include a special rule for when a participant dies after commencing benefits in the form of a joint-and-survivor annuity. In this case, the determination of EDB status is made as of the participant’s annuity starting date. A change in circumstances after the annuity starting date — such as the participant and spouse getting divorced — won’t change the beneficiary’s status as an EDB on the participant’s death.

Minor children. The final regulations clarify that a “child” for purposes of determining EDB status has the same definition that applies when determining a taxpayer’s dependent children. This means a participant’s biological child, adopted child, stepchild and eligible foster child. However, a participant’s minor child will cease being an EDB on reaching the age of majority — defined by the regulation as age 21, regardless of any state or local definition — unless the child satisfies another category of EDB (e.g., the child is also disabled) when the determination of EDB status is made.

Determining disability. Under SECURE 1.0, a beneficiary is considered disabled if unable to engage in any substantial gainful activity because of any medically determinable physical or mental impairment expected to result in death or continue indefinitely. The regulations include two special rules for determining whether this standard is met:

• Under a safe harbor, a beneficiary is deemed disabled if the beneficiary has a determination of disability from the Social Security Administration (SSA), which uses a similar standard for disability due to the inability to engage in substantial gainful activity. Because this is a safe harbor, beneficiaries without a SSA disability determination may still be considered disabled under the general standard.
• A beneficiary younger than 18 is considered disabled if the impairment results in “marked and severe functional limitations” rather than an inability to engage in substantial gainful activity. IRS included this definition in the regulations in response to comments that the statutory standard may be difficult to apply to beneficiaries younger than 18.

Determining chronic illness. The final regulations use essentially the same as the definition of “chronically ill” as the SECURE Act. A designated beneficiary is considered chronically ill if any of the following apply:

• A loss of functional capacity prevents the beneficiary from performing at least two activities of daily living without substantial assistance for an indefinite period that is reasonably expected to be lengthy.
• A level of disability results in a loss of functional capacity similar to what’s described in the preceding bullet.
• A cognitive impairment requires substantial supervision to protect against threats to the beneficiary’s health and safety.

Documentation required for disability and chronic illness. Disabled and chronically ill EDBs under DC plans (but not IRAs) must provide documentation of their disability or chronic illness to the plan administrator by Oct. 31 of the calendar year after the year of the participant’s death. However, under a transition rule for beneficiaries of participants who died in years 2020 through 2023, the deadline is Oct. 31, 2025. The final regulation doesn’t specify any particular documentation requirements for disabled EDBs. However, for chronically ill EDBs, the documentation must include a certification by a licensed healthcare practitioner. If a participant’s minor child is also disabled or chronically ill, the child still must provide the necessary documentation of disability or chronic illness by Oct. 31 of the year after the participant’s death to remain an EDB after reaching the age of majority.

When payments start to a beneficiary depends on whether the participant dies before or after the RBD. Before SECURE 1.0, when a participant died before the RBD, beneficiaries were paid under either the life-expectancy rule or the five-year rule. Under the life-expectancy rule, payments had start within a year of the participant’s death, except in the case of a surviving spouse, whose payments were delayed until the participant’s RBD. But under the five-year rule, beneficiaries could delay payment up to five years as long as the beneficiaries were paid in full by the fifth year after the participant’s death. If the participant died after the RBD, payments had to continue to the beneficiary at least as rapidly as made to the participant before death (this is sometimes referred to the “at least as rapidly” rule).

After SECURE 1.0, these timing rules generally still apply but with the added wrinkle of the 10-year rule for DC plans and IRAs. After SECURE 1.0’s enactment, many administrators and practitioners thought payment under the 10-year rule could be delayed until the 10th year after the participant’s death — similar to what had been allowed under the five-year rule. That delay is allowed under the 10-year rule when the participant dies before the RBD. However, IRS took the position in the 2022 proposed regulations that the “at least as rapidly” rule still applies when the participant dies after the RBD, even if the beneficiary is subject to the 10-year rule. The final regulations confirm this position, despite the comments IRS received on the proposal.

No more relief for missed payments. Due to the initial confusion about the 10-year rule, IRS issued several notices granting relief for missed RMDs that should have been made in 2021 through 2024 to beneficiaries of participants who died after their RBD in 2020 through 2023. IRS will not consider plans or beneficiaries as having violated Section 401(a)(9) because of these missed payments. However, payments must resume in 2025. A footnote in the final regulations’ preamble clarifies that the original 10-year period still applies, meaning benefits must be completely paid by the end of the year that includes the 10th anniversary of the participant’s death. Beneficiaries don’t have to make up their missed payments, which instead must be paid by the end of the 10-year period, along with any remaining account balance.

The 10-year rule applies to annuity contracts purchased with DC plan benefits. If the beneficiary would have been subject to the 10-year rule if the assets had stayed in the plan, annuity payments can’t extend beyond the end of the 10th year after the participant’s death.

Exemption for preenactment annuities. SECURE 1.0 includes an exception for commercial annuity contracts purchased before Dec. 20, 2019, that meet certain conditions. One condition is that annuity payments must have begun before Dec. 20, 2019, or the participant must have made an irrevocable election before that date as to the method and amount of the payments. Modification of an exempt contract that hasn’t started payments (for example, the participant pays additional premiums or changes the start date) will cause the annuity to lose its exemption. However, the preamble to the final regulations clarifies that a participant’s ability to modify the contract after Dec. 20, 2019, will not cause loss of the exemption. The participant must actually exercise the right.

Rollovers to DB plans. In a footnote to the preamble, IRS acknowledges that the 10-year rule ceases to apply to a participant’s benefit if the participant directly rolls the benefit over to a DB plan and then receives the benefit in an annuity form under the DB plan.

EDBs must receive benefits under the life-expectancy rule unless a plan document specifies otherwise. Sponsors have the following options when drafting EDB distribution provisions:

• Plans can (but don’t have to) let participants or EDBs choose life-expectancy payments or the 10-year rule. When offered, the election is due by the end of the calendar year in which distributions to the EDB have to begin, and the election must become irrevocable at that time. If no election is made, the life-expectancy rule applies unless the plan specifies a different rule for EDBs who don’t make an election.
• Plans can specify that different rules apply to different participants and EDBs. For example, a plan could let surviving spouses elect either life-expectancy payments or the 10-year rule but limit all other EDBs to the 10-year rule.

The final regulations include some of SECURE 2.0’s changes to the RMD rules, even though the 2022 proposed regulations didn’t include those changes (because the law was enacted after IRS issued that proposal). IRS believes these statutory changes can be clearly applied without a notice-and-comment period or are a “logical outgrowth” of the 2022 proposed regulations. Other more substantive SECURE 2.0 changes are covered in the 2024 proposed regulations, discussed below.

Increases in RBD triggering age. As noted above, SECURE 2.0 increased the RBD triggering age to 73 for participants born on or after Jan. 1, 1951, and to 75 for participants born on or after Jan. 1, 1960.

Elimination of predeath RMDs from Roth accounts. SECURE 2.0 eliminated the requirement to take RMDs from DC plan Roth accounts before death, starting in the 2024 tax year. The final regulations reflect this change and clarify that if a participant’s entire account balance is Roth, the participant is treated as dying before the RBD, regardless of age. (Therefore, for example, a beneficiary subject to the 10-year rule could delay payment until the end of the 10th year after the participant’s death.)

Elimination of RMD penalty on partial annuities. SECURE 2.0 added an alternative method for calculating RMDs from a DC plan account when the participant purchases an annuity with a portion of the account balance. Before SECURE 2.0, the annuity contract and DC plan account had to separately satisfy the RMD rules. But now plans can (but don’t have to) let participants count their annuity payments toward the plan’s RMD. The final regulations reflect the statutory language that RMDs under this alternative method are determined based on the sum of the fair market value of the annuity contract and remaining account balance. However, details of these calculations are addressed in the 2024 proposed regulations.

Spousal election for treatment as participant. Before SECURE 2.0, a surviving spouse was treated as if the participant when the spouse was the sole beneficiary and entitled to life-expectancy payments. This meant RMDs didn’t have to begin until the participant’s RBD, and if the spouse died before then, the RMD beneficiary rules applied as if the spouse was the participant. SECURE 2.0 says spouses may elect this treatment. However, the preamble to the final regulations says this treatment applies automatically if the participant dies before the RBD and the spouse is the sole beneficiary and entitled to life-expectancy payments. IRS addresses this further in the 2024 proposed regulations (see below).

Commercial annuity increases. The RMD rules generally require annuities to be nonincreasing, with certain exceptions listed in the regulations. Under the prior regulations, the exceptions were subject to restrictions that generally made these options difficult to offer for commercial annuities purchased with DC plan benefits. The final regulations reflect SECURE 2.0’s changes relaxing the restrictions on commercial annuities that increase or accelerate payments in any of the following forms (thus generally conforming the rules for these annuities with the rules for DB plans):

• Annuities that increase by a constant percentage that doesn’t exceed 5% and is applied at least annually
• Lump sum payments that shorten the payment period or result in a full or partial commutation or acceleration of future payments
• Annuities that include dividend payments and similar distributions
• Return of premium payments upon the annuitant’s death

Relaxed QLAC requirements. A qualified longevity annuity contract (QLAC) is a deferred annuity purchased with DC plan or IRA benefits. QLAC payments can begin as late as age 85 and still be excluded from a participant’s account balance when calculating RMDs if certain conditions in the regulations are met. The final regulations reflect SECURE 2.0’s direction to Treasury to make the following changes to the QLAC requirements:

• Eliminate the requirement that premiums not exceed 25% of a participant’s account balance
• Increase the dollar limitation on premiums to $200,000 in 2023 (from $145,000 in 2022), indexed for inflation starting in 2024
• Allow former spouses to receive spousal benefits pursuant to a qualified domestic relations order (QDRO) or, if applicable, a similar divorce or separation instrument in the case of a plan not subject to the IRC’s or ERISA’s QDRO rules (as addressed in the proposed regulations)
• Allow provisions that let the participant rescind the contract up to 90 days after the date of purchase

Reduced excise tax on missed RMDs. IRS also updated the IRC Section 4974 regulations to reflect that SECURE 2.0 reduced the excise tax on missed RMDs to 25% (from 50%) and to 10% if correction of the missed RMD occurs before the earliest of the following:

• The date IRS mails a notice of deficiency to the participant
• The date the excise tax is assessed
• The last day of the second taxable year that begins after the taxable year in which the missed RMD should have been made

The 2024 proposed regulations reflect the following SECURE 2.0 changes to the RMD rules that IRS determined should be subject to a notice-and-comment period. Comments are due by Sept. 17.

• RBD age for participants born in 1959. The proposal would confirm that the RBD triggering age for participants born in 1959 is 73. As noted earlier, SECURE 2.0 can be read as saying the RBD age for these participants is both 73 and 75.
• Valuing partial annuities for DC plan RMDs. Under the new alternative method for calculating RMDs for a DC plan participant who has purchased an annuity with a portion of the plan account balance, the annuity’s fair market value would be determined as of Dec. 31 of the year before the year for which the RMD is owed.
• Corrective distributions that reduce excise tax. The proposal would clarify that when a corrective distribution is made to reduce the excise tax on missed RMDs to 10%, the distribution counts only toward the missed RMD and not toward the RMD due for the year in which the correction occurs.
• RMDs for participants with pretax and Roth accounts. RMDs from Roth accounts are no longer required. However, for participants with both pretax and Roth accounts, the proposal would clarify that payments from the Roth account during the participant’s life would not count toward the RMD owed from the pretax account.
• Surviving spouse treated as participant. As noted above, under SECURE 2.0, a surviving spouse who is the sole beneficiary and entitled to life-expectancy payments may elect to be treated as the participant for determining RMDs. The proposal says this treatment is automatic if the participant dies before the RBD but not if the participant dies after the RBD. However, the plan may make this treatment the default election for death after the RBD.
• Impact of divorce on QLACs. A former spouse may continue to be the designated beneficiary of a QLAC with a joint-and-survivor feature if required by QDRO or other separation agreement. The proposal would clarify that other separation agreements satisfy this requirement only if the plan isn’t subject to either the IRC or ERISA’s QDRO rules.

• Final regulations, Required minimum distributions (IRS, July 19, 2024)
• Proposed regulations, Required minimum distributions (IRS, July 19, 2024)
• Div. T. of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)
• Div. O of Pub. L. No. 116-94, the SECURE Act of 2019 (Congress, Dec. 29, 2019)

• User’s guide to SECURE 2.0 (regularly updated)
• IRS sets 2025 for final RMD rules, extends 10-year rule relief (April 19, 2024)
• Lawmakers release SECURE 2.0 corrections bill for beta testing (Jan. 12, 2024)
• IRS again delays final RMD rule, gives new relief for SECURE acts (July 19, 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)