RMD Evolution: Part 1
The rules behind required minimum distributions (RMDs) are changing again, and this is not that end. Section 401(a)(9) was enacted in 1984, and for 35 years remained mostly unchanged. Generally, participants were permitted to delay distributions from qualified plans, 403(b) and governmental 457(b) plans until April 1 after the year in which the participant attained age 70 ½ or retired. The long-standing RMD rules were far from simple, but plan administrators had certainty and consistency in applying the law. But over the last three years there has been a whirlwind of legislative and regulatory amendments to the governing laws beginning with the enactment of the SECURE Act in late 2019 (see our past articles on the SECURE Act, Proposed IRS Regulations, and IRS relief on administering the new rules). We will cover the changes to the RMD rules made by SECRUE 2.0 through several blog posts, and will provide further updates when anticipated future guidance is issued.
SECURE 2.0 increased the RMD triggering age, decreased excise taxes, eliminated distribution requirements for certain Roth accounts, provided a new election for surviving spouses, and made changes to the rules on annuities to promote lifetime income distribution options. Not only are these changes voluminous, but they also have different effective dates. SECURE 2.0 contains statutory glitches, was not considered in the Proposed Regulations that were issued in February 2022, and leaves many administrative questions unanswered. We are not out of the woods yet on RMD guidance, but are hopeful guidance will be issued quickly to answer some of these questions.
The headliner change made by SECURE 2.0 is the increase in the triggering age for RMDs. The pre-SECURE Act required beginning date that participants had to begin taking distributions was the later of April 1st following the year that the participant attained age 70 ½ or retired*. The SECURE Act changed the age that the required beginning date is based off of from 70 ½ to 72 for participants who attain age 70 ½ after December 31, 2019. SECURE 2.0 increases this to age 73 for individuals who attain age 73 in 2023 and before 2033, and age 75 for individuals who attain age 74 after 2032**. Because of the increase in the statutory required beginning date, 2023 will not trigger the start of RMDs for most participants; those that turned 72 in 2022 or in prior years have already started their distributions and must continue, and participants that turn 72 in 2023 will not have attained the new statutory required beginning date. However, plan administrators should pay close attention and look out for RMDs in 2023 that are triggered due to participant retirements. It is also important to keep in mind that these changes increase the statutory required beginning date, but plans can force payments to start earlier. Plans are not required by the SECURE Act or 2.0 to adopt the permitted changes, and many plan sponsors of defined benefit plans have opted to continue requiring distributions at age 70 ½.
The complexity of the RMD rules and seemingly ever-changing guidance has created confusion in administering plan provisions. In addition, plan amendments for most plans are not due for the SECURE Act or 2.0 until 2025, but plans must comply with the new laws prior to the amendment deadline. If you have any questions on any of the changes made by the SECURE Act, SECURE 2.0, required amendments, subsequent IRS guidance, or administering RMDs, please contact any of the attorneys in our Employee Benefits Group.