New Rules Offer More Clarity on Retirement Plan Distributions

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The IRS has issued further guidance on required minimum distributions (RMDs) releasing both final regulations and more proposed regulations amplifying provisions of the Secure 2.0 Act. The 79 pages of regulations, affecting plan administrators, participants, IRA and annuity owners and beneficiaries, address the more complicated timing issues that have arisen during transition to the new laws.

Final Regulations

The final regulations follow the proposed regulations issued in 2022, covering rules for effective dates for RMDs, the definition of eligible beneficiaries and multiple beneficiaries, excise tax waivers and various aspects of the 10-year rule. This rule requires that an inherited retirement account must be fully distributed by the end of the 10th year after the year of the owner’s death. The regulations incorporate the original enactment date of December 20, 2019 for the first Secure Act as a key benchmark for many important provisions, as explained below.

The IRS made a few changes in response to some of the 155 public comments on the proposed regulations. For example, commenters requested a clarification of the qualified annuity exception to the 10-year rule. The final rules say the mere ability to pay an additional premium or change the beginning date of benefits under an annuity contract after December 20, 2019 does not cause the contract to lose its exception. However, if a beneficiary actually makes payments or changes the beginning date after that time, the exception from the 10-year rule will not apply. Additionally, the final rules make clear that the exception applies if a beneficiary made an irrevocable election on the method and amount of annuity payments after the employee’s death, but before December 20, 2019.

Some requested changes were not made, such as the suggestion that the final regulations eliminate the requirement for continued annual distributions if an employee dies on or after the employee’s required beginning date. Beneficiaries must continue receiving annual distributions, and the employee’s entire interest in the plan must be fully distributed by the end of the calendar year that marks the 10th anniversary of the employee’s death.

Distributions During an Employee’s Lifetime

When an employee works for more than one employer, special rules apply. One commenter asked for clarification of the treatment of a less than 5% employee who participates in a plan offered by more than one employer when the employee retires from one of the jobs. The final regulations add language clarifying that the employee will not be treated as having retired in this situation.

Excise Tax

The final rules expand automatic waivers of the excise tax for failing to take RMDs. One key change extends the deadline for a beneficiary to take a missed distribution and still qualify for the automatic waiver. The new deadline is the later of the beneficiary’s tax filing deadline for the year of the participant’s death or the end of the following calendar year.

Effective Dates

The transition rules for the new RMD regulations are complex due to the timing of the two Secure Acts and the additional IRS regulations issued in between. The final rules apply for distribution calendar years beginning on or after January 1, 2025. For earlier distribution calendar years, taxpayers must apply the earlier regulations and try to keep within a reasonable interpretation of the amendments made by the Secure Act provisions in effect at the time.

Proposed Rules

The new proposed regulations fill in the gaps on myriad changes made by Secure Act 2.0. Here’s a brief rundown of some of those changes.

  • ­Determination of Applicable Age for Employees Born in 1959. The proposed rules clarify that the applicable age for an employee who was born in 1959 would be age 73, for purposes of the beginning date of RMDs.
  • Purchase of Annuity Contract with Portion of Employee’s Individual Account; Aggregation Option. Where a portion of an employee’s defined contribution plan is used to purchase an annuity contract, the Secure Act 2.0 allows employees to add the fair market value of the annuity contract to the remaining account balance and treat payments under the annuity as distributions from the employee’s individual account. The proposed rules state that the fair market value of the annuity contract would be determined as of December 31 of the calendar year preceding the distribution calendar year.
  • Distributions from Designated Roth Accounts. A distribution from a designated Roth account made in a calendar year in which the employee is required to take a distribution under the plan would not count towards satisfying that requirement. The proposed regulations provide that this type of distribution is not treated as an RMD and can be rolled over to a Roth IRA if it otherwise meets the requirements to be an eligible rollover distribution.
  • Corrective Distributions and Waiver of Excise Tax. For purposes of the reduced excise tax for failure to take RMDs, if a missed RMD is corrected by a distribution made in a subsequent calendar year, the distribution for later years must be made in addition to the corrective distribution. The corrective distribution is not eligible for rollover.
  • Spousal Elections. The final regulations allow the spouse of an employee in a defined contribution plan, who dies before the RMD start date, to choose between receiving the beneficiary’s interest under the 10-year rule or as annual payments based on the beneficiary’s life expectancy. The proposed rules assume that if the spouse is the sole beneficiary, they automatically choose to take distributions based on their life expectancy.
  • Divorce after Purchase of Longevity Annuity Contract. If there is a divorce after the purchase of a longevity annuity contract, it will not affect the joint and survivor benefits if a qualified domestic relations order (QDRO), separation agreement or divorce order is in place.
  • Outright Distribution to Trust Beneficiary. The proposed regulations explain how multiple beneficiaries in a see-through trust will be allowed separate application of the 10-year distribution rule. Specifically, the separate interests of the beneficiaries will not fail to be eligible for separate treatment if, upon termination of that trust, a beneficiary’s separate interest is to be held directly by that beneficiary rather than being held by a separate trust.

Effective Date

The proposed rules apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2025.

Conclusion

As the Secure Act changes and new regulations unfold at a rapid pace, staying compliant with the updated deadlines for retirement distributions is crucial. Given the technical nature of these changes, it would be beneficial to consult with a team of experienced tax advisors, such as Frazier & Deeter, to ensure you fully benefit from the updated RMD rules and avoid missing critical deadlines. Our expert estate planning CPAs are here to provide the knowledge and guidance needed to make informed decisions. For more information, please visit our website or contact us here.