Proposed Regulations Greatly Expand Guidance on Required Minimum Distributions
The Internal Revenue Service (IRS) issued expansive proposed regulations (the Proposed Regulations) on Feb. 24, 2022, reflecting the required minimum distribution (RMD) rules as set out in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and providing significant additional guidance. The Proposed Regulations impact a broad spectrum of retirement plans, including qualified defined benefit plans and defined contribution plans (such as 401(k) plans), tax-sheltered annuity plans under Section 403(b) of the Internal Revenue Code (the Code), eligible deferred compensation plans under Code Section 457, and individual retirement accounts (IRAs). Plan documents, Summary Plan Descriptions and administrative practice should be reviewed and updated where needed to comply with the Proposed Regulations, which are generally to be effective on and after Jan. 1, 2022.
Reflecting the SECURE Act
The Proposed Regulations restate the prior RMD regulations to reflect changes enacted through the SECURE Act, including:
- For employees who attain age 70½ on or after Jan. 1, 2020, postponing the mandatory start date for RMDs to April 1 of the calendar year following the calendar year in which occurs the later of 1) the date the employee retires or 2) the employee's attainment of age 72.1
- For employees who die on or after Jan. 1, 2020, eliminating the ability to stretch out distributions over a designated beneficiary's life or life expectancy, except for beneficiaries who are the employee's surviving spouse, disabled, chronically ill or no more than 10 years younger than the employee. For a designated beneficiary who is not covered by one of these exceptions, distributions must generally be completed by the end of the calendar year that includes the 10th anniversary of the employee's death. There is a special rule for minor children, whose distributions need to be completed only by the end of the calendar year that contains the 10th anniversary of reaching their age of majority. (Distributions to non-designated beneficiaries must still be completed by the end of the calendar year that includes the fifth anniversary of the employee's death.)
Significant Additional Guidance
The Proposed Regulations significantly expand the guidance on RMDs from the rules that were provided in the SECURE Act. This new guidance includes:
- rules to determine if a beneficiary is disabled, with special rules for a beneficiary who is under age 18
- required documentation to establish that a beneficiary is disabled or has a chronic illness, and the timelines for when such documentation must be provided to the plan sponsor
- clarification that in most cases, the age of majority for the RMD rules is 21 years old (however, defined benefit plans that that treated a child as under the age of majority if the child has not completed a specified course of education and is under age 26 may continue to do so)
- application of the RMD rules when there are multiple beneficiaries
- how to apply the RMD rules when a beneficiary is a trust, with special rules for pass-through trusts
- when and how distribution restrictions triggered by underfunding preempt the RMD rules
The Proposed Regulations also confirm that an actuarial increase must be provided under a defined benefit plan if benefits commence after a participant's attainment of age 70½ (not 72), but clarify that this actuarial increase only applies to non-5 percent owners.
The Proposed Regulations would generally apply for purposes of determining RMDs for calendar years beginning on or after Jan. 1, 2022. For the 2021 distribution calendar year, RMDs are to be determined under the current RMD regulations but taking into account a good faith interpretation of how these regulations were amended by the SECURE Act.
The Proposed Regulations are lengthy and go into far greater detail than what was specified by the SECURE Act. Although many plan sponsors have amended their plans and/or their administrative practices to comply with the RMD requirements under the SECURE Act (which requires that most plans be amended by the end of the 2022 plan year), plan documents and Summary Plan Descriptions may need to be further amended and RMD administration updated to reflect the new RMD guidance. The Proposed Regulations are subject to public comment until May 25, 2022, and a public hearing is scheduled for June 15, 2022.
The Proposed Regulations contain many compliance pitfalls for the unwary. If you would like assistance understanding how these new rules can affect distributions from your plans, contact the authors or another member of Holland & Knight's Executive Compensation and Benefits Team.
1 For 5 percent owners and IRA account holders, April 1 of the calendar year following the calendar year in which the employee attains age 72.