Relief Extended from Certain Required Minimum Distribution Requirements for Beneficiaries

The IRS on April 16, 2024, released Notice 2024-35, which extends previously issued temporary relief from certain required minimum distribution (RMD) requirements for beneficiaries under qualified defined contribution plans through Dec. 31, 2024.

Background

Qualified plans must make RMDs to plan participants starting by a participant's required beginning date, which is generally April 1 following the later of 1) the year a participant reaches the applicable age (i.e., age 75 for a participant born after 1959, age 73 for a participant born 1951-1959, age 72 for a participant born from July 1, 1949, through Dec. 31, 1950, and age 70½ for a participant born before July 1, 1949) or 2) the year in which the participant retires. Beneficiaries are also subject to RMD requirements.

The Setting Every Community Up for Retirement Act of 2019 (SECURE Act) made significant changes to the RMD rules for beneficiaries under defined contribution plans. Prior to the SECURE Act, a participant's vested account balance had to be distributed to most beneficiaries either 1) by Dec. 31 of the fifth calendar year following the calendar year of the participant's death (Five-Year Rule), or 2) over the life or life expectancy of the beneficiary (Life Expectancy Rule). Under the Life Expectancy Rule, distributions to beneficiaries generally must begin by Dec. 31 of the calendar year following the calendar year of the participant's death; however, distributions to surviving spouses may begin by Dec. 31 of the year the participant's required beginning date would have occurred, if later.

Under the SECURE Act, the Life Expectancy Rule continues to apply to "Eligible Designated Beneficiaries" (i.e., surviving spouses, minor children – under age 21 pursuant to proposed regulations – disabled or chronically ill persons, or any person who is not more than 10 years younger than the participant). However, the Life Expectancy Rule and the Five-Year Rule no longer apply to designated beneficiaries who are not Eligible Designated Beneficiaries. Such beneficiaries must now receive a full distribution of the participant's account balance by Dec. 31 of the 10th calendar year following the year of the participant's death (Ten-Year Rule). Designated beneficiaries of Eligible Designated Beneficiaries and minor children once they reach majority are also subject to the Ten-Year Rule instead of the Life Expectancy Rule.

Proposed Regulations

Until proposed regulations were issued in February 2022, it was assumed by many that the Ten-Year Rule worked just like the Five-Year Rule. However, the proposed regulations stated that under the Ten-Year Rule, if a participant in a qualified defined contribution plan dies on or after the participant's required beginning date, a designated beneficiary who is not an Eligible Designated Beneficiary must continue to take RMDs each year during the 10-year period. This is different than the Five-Year Rule, which permitted the beneficiary to wait until the end of the five-year period to take a distribution of the participant's account balance.

Temporary Relief Under Notice 2024-35

In response to concerns raised during the public comment period on the proposed regulations, the IRS issued Notice 2022-53 and 2023-54, which provided that if a participant died in 2020, 2021, 2022 or 2023 after the participant's required beginning date with a designated beneficiary who is not taking benefits under the Life Expectancy Rule, the IRS would not disqualify a plan that failed to make annual distributions under the Ten-Year Rule in 2021, 2022 or 2023 and would not assess a penalty tax on the missed RMDs.

Notice 2024-35 extended this relief window for another year. Under the most recent guidance, if a participant died in 2020, 2021, 2022 or 2023 after the participant's required beginning date and the designated beneficiary is not receiving distributions under the Life Expectancy Rule, the IRS would not disqualify a plan that failed to make annual distributions under the Ten-Year Rule in 2024 and would not assess a penalty tax on the missed RMDs.

Final regulations governing this issue are expected to be in effect for calendar years beginning on and after Jan. 1, 2025, which may end this welcome relief in the future.

If you or your business maintains a qualified retirement plan and would like assistance navigating if, when and how your qualified plan must pay RMDs, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.