IRS Proposes Updates to the RMD Rules

On February 24, 2022, the IRS issued proposed regulations incorporating the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) into the required minimum distributions (“RMDs”) regulations. The IRS is accepting comments until May 25, 2022, and then holding a public hearing on June 15, 2022. The proposed regulations, if finalized as currently drafted, generally would be effective for required minimum distributions that occur on and after January 1, 2022.

SECURE Act RMD Reminder

The SECURE Act was adopted in December of 2019 and modified RMDs by:

  • Changing the required beginning date for participants who reach age 70½ on or after January 1, 2020, to the April 1st of the year following the year in which a participant attains age 72 (or, if later, the date on which the participant retires), and
  • Changing the distribution timing requirements for a participant’s beneficiary for deaths that occur on or after January 1, 2020.

The SECURE Act also limited lifetime distributions for defined contribution plan beneficiaries to spouses, minor children, disabled dependents, chronically ill individuals or beneficiaries who are not more than 10 years younger than the owner of the retirement account (referred to in the SECURE Act as an “Eligible Designated Beneficiary”).

Any other individual beneficiary of a defined contribution plan decedent who is not eligible for a lifetime distribution must take a distribution of the entire account no later than the December 31st that follows the 10-year anniversary of the participant’s death. The general distribution rule for non-individual beneficiaries (e.g., estates and trusts) remains unchanged at a five-year period to take full distribution.

Brief Overview of Proposed RMD Regulations

The proposed regulations provide guidance on the following RMD-related issues:

  • Eligible Designated Beneficiaries: The proposed regulations cover a variety of issues related to defined contribution plan beneficiaries who are eligible for lifetime distributions, including:
    • Age of majority for a minor child (generally age 21);
    • Determination of a disabled beneficiary;
    • Documentation requirements for disabled or chronically ill beneficiaries;
    • Pass-through trust beneficiaries; and
    • Treatment of multiple beneficiaries (notably, if there are two beneficiaries, one of whom is not an Eligible Designated Beneficiary, then neither beneficiary is treated as an Eligible Designated Beneficiary, unless an exception applies).
  • RMDs Must Continue After Participant’s Death. If a defined contribution plan participant dies after commencing their RMDs, the proposed regulations generally require the continued payment of RMDs each year. Thus, for example, a designated beneficiary of a participant who commenced RMDs and who must make a complete distribution by the end of the year in which the 10th anniversary of the participant’s death occurred, must also take an RMD for each year, with payment completed within that 10-year period.
  • Pension Plans Must Make an Actuarial Adjustment for Distributions Commencing After Age 70½. The SECURE Act did not change the requirement to actuarially increase a pension benefit for distributions commencing after age 70½, even though the RMD age was increased to 72. The proposed regulations confirm that the actuarial adjustment is required and provide relevant guidance.
  • Rollover Rules. The proposed regulations update the rollover rules to include the SECURE Act provisions.

When finalized, the proposed regulations may impact how RMDs are handled by a qualified retirement plan in 2022. Plan sponsors may wish to consider adjustments to their administrative practices in order to be ready for a final rule. Please contact your Faegre Drinker benefits attorney for more assistance with preparing for the final RMD regulations.

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