IRS and Treasury Department Issue Final and Proposed Required Minimum Distribution Regulations

On July 18, 2024, the IRS and Treasury Department published long-awaited regulations on required minimum distributions (RMDs) from qualified plans and IRAs. The regulation package contains final regulations and proposed regulations.

 

Impacted plans: 401(a), 401(k), 403(b), and 457 as well as traditional and Roth IRAs.

 

Effective date: Final regulation apply for purposes of determining RMDs for calendar years beginning on or after January 1. 2025. For prior calendar years, the previously issued final regulations apply and presume a reasonable, good faith interpretation of amendments issued under SECURE and SECURE 2.0.

 

Final Regulations

The final regulations generally reflect amendments to the RMD rules that Congress made as part of the SECURE Act of 2019 (“SECURE”), but also include some provisions from the SECURE 2.0 Act of 2022 (“SECURE 2.0”), which were not reflected in the 2022 proposed regulations including:

 

  • provisions reflecting the increased RMD age,
  • clarification of RMD age for individuals born in 1959,
  • the application of “at least as rapidly” to the 10 year payout rule for beneficiaries,
  • rule allowing surviving spouses to use the Uniform Lifetime Table to calculate their RMDs as beneficiaries,
  • the lifetime RMD exemption for in-plan Roth accounts,
  • the provision eliminating the “minimum income threshold test” for increasing annuity payments,
  • the reforms to the rules for qualifying longevity annuity contracts, some aspects of the new relief for “partial annuitization,” and
  • the rule that reduces the RMD excise tax for timely corrections.

 

Proposed Regulations

Generally, the proposed rules focus on various provisions from SECURE 2.0 that IRS/Treasury determined could not be addressed in final regulations without first being published in proposed form with a comment period. The proposed regulations were published separately from the final regulations on July 18, 2024, and once finalized, would apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025. Comments on the proposed regulations will be due in 60 days from date of publication in the Federal Register by September 17, 2024. A public hearing on the proposed regulations is scheduled for September 25, 2024. Some of the proposed regulations are addressed where applicable below.

 

We will continue to monitor the proposed regulations as they go through their comment period and are eventually finalized.

 

Highlights – Final regulations

Applicable dates and relief for reasonable, good faith interpretations

  • The final regulations apply for distribution calendar years beginning on or after January 1, 2025.
  • For earlier distribution calendar years, taxpayers must apply the 2002 final regulations and 2004 final regulations (not the 2022 proposed regulations) considering “a reasonable, good faith interpretation” of the relevant amendments under SECURE 1.0 and SECURE 2.0.

Interpretation of 10-year rule retained from 2022 proposed rule

  • For deaths on or after Required Beginning Date – The 10 year rule applies. Beneficiaries must take out at least the RMD amount each year of the 10-year window, and any remaining balance by the end of the 10th year as applicable
    • For any designated beneficiary if the employee dies on or after their required beginning date (RBD) because the “at-least-as-rapidly” rule applies in such case, and
    • following the death of an eligible designated beneficiary (EDB) who is “stretching” the benefits they inherited from an employee who died before the RBD.
  • Several IRS notices between 2020 and 2024 provided relief from this rule. As such, this interpretation does not apply for calendar years 2021-2024. This prior relief ends with the 2024 calendar year.

Required beginning date for individuals born in 1959

  • The proposed regulations would clarify that the “applicable age” for individuals born in 1959 is age 73.

Plans may have different RMD rules for different types of EDBs (Eligible Designated Beneficiaries)

  • A plan can choose to provide for “stretch” distributions for spouses and for beneficiaries who are not more than 10 years younger than the employee, while limiting other types of EDBs to the 10-year rule.

In-plan Roth accounts

  • Final regulations indicate that for post-death RMD rules for in-plan Roth accounts, an employee is always deemed to have died before their RBD.
  • In-plan Roth account is not counted as part of the “account balance” for purposes of applying the lifetime RMD rules to any non-Roth account in the plan.

Uniform Lifetime Table for surviving spouses

  • The final regulations provide that DC plans “may include a provision” under which the surviving spouse who is the employee’s sole beneficiary may elect this new rule – so it is not required.
  • The final regulations also clarify that no separate election is required if that treatment otherwise would apply to the spouse.

NEW - 20% mandatory withholding for non-spouse beneficiaries

  • The final regulations provide that 20% mandatory withholding applies to distributions (other than RMDs) from a plan to a non-spouse beneficiary, even though the beneficiary would not be permitted to roll over such a distribution.

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