IRS Guidance Signals RMD Rules are Here to Stay
The IRS issued Notice 2022-53 last Friday to give qualified plan beneficiaries relief from 2021 and 2022 excise tax penalties due to noncompliance with certain provisions of the required minimum distribution (“RMD”) rules. Determining when a participant or beneficiary is required to make a distribution under IRS guidance, and in compliance with all plan provisions, can be a complicated process. This process has become even more daunting with changes made to the RMD rules by the SECURE Act and the subsequently issued proposed regulations. The relief granted by the Notice is welcome, but it highlights the complexity of RMDs. Plan administrators should take this Notice as a warning to pause and assess whether RMDs are being distributed correctly.
Generally, the RMD rules set requirements for when a qualified plan participant and beneficiary must receive a distribution from the plan, and the amount of such distributions. If the amount distributed during a taxable year of a participant or beneficiary is less than the amount required under the RMD rules, then a 50% excise tax is imposed on the amount that the minimum required distribution exceeds the amount actually distributed for the taxable year.
The SECURE Act made several changes to the RMD rules in the IRS Code (e.g., increased the required beginning date for distributions from 70 ½ to 72, introduced a new 10-year rule for distributions to beneficiaries, provided beneficiaries that met the definition of “eligible designated beneficiary” extended distribution options), but the current regulations did not always provide clarity on how the new provisions should be administered. Earlier this year, the IRS issued proposed regulations (see more on the proposed regulations from our prior blog post) that answered some questions, but some of these answers came as a surprise.
The proposed regulations provided that when a participant dies on or after the participant’s required beginning date (i.e., the date RMD payments begin), payments must continue to be paid to a designated beneficiary every year after the participant’s death. The IRS received comments on this interpretation of the proposed regulations, where commenters believed that, regardless of when an employee died, there would not be any RMD due for a calendar year until the last year of the 5 or 10-year period following the death of the employee.
The IRS is signaling with the Notice that the commenter’s interpretation was not persuasive, and the proposed regulation interpretation will make it into the final regulations. The proposed regulations clearly provide that a designated beneficiary must continue RMDs, calculated using the beneficiary’s life expectancy, beginning in the year following the participant’s and continuing for up to nine calendar years, with a full distribution of the remaining account balance in the tenth calendar year. Similarly, an eligible designated beneficiary must continue RMDs, calculated using the beneficiary’s life expectancy, but may elect to receive distribution either under the 10-year rule or the life expectancy rule.
Although the IRS is not wavering on its interpretation, it is providing some leniency for 2021 and 2022 RMDs. The Notice provides that when final regulations are issued, they will not apply earlier than 2023, and provides relief for specified RMD payments to beneficiaries that do not comply with the proposed regulations. The IRS will not assess the excise tax on distributions required to be made under the proposed regulations for 2021 and 2022 under a qualified plan if that distribution would be required to be made to (1) a designated beneficiary of an employee if that employee died in 2020 or 2021 on or after the employee’s required beginning date, and the designated beneficiary is not taking distributions under the life expectancy rule as an eligible designated beneficiary, or (2) a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020 or 2021, and that eligible designated beneficiary was taking life expectancy payments.
The complexity of the RMD rules and subsequent proposed regulations has created confusion in administering plan provisions. The IRS has given qualified plan beneficiaries relief from the excise tax through 2022, but RMDs must be administered correctly going forward. Although the SECURE and CARES Act amendment deadlines have been pushed back until 2025, this Notice provides a reminder that plan sponsors need to apply the amendment elections correctly prior to the amendment deadline. If you have any questions on any of the changes made by the SECURE Act, required amendments, subsequent IRS guidance, or administering RMDs, please contact any of the attorneys in our Employee Benefits group.