IRS finalizes RMD rules

On July 18, 2024, IRS released final required minimum distribution (RMD) rules, together with proposed rules addressing certain supplementary issues. In this article we note some of key elements of the new rules applicable to qualified retirement plans, with an emphasis on changes affecting DC plans. Topline – what’s new

• Revised “applicable age”/”required beginning date.” (SECURE 1.0 section 114, SECURE 2.0 section 107) 

Table 1. Applicable age for purposes of “required beginning date”

*For individuals born in 1959, this rule is part of the proposed regulation. 

• Revision of DC plan RMD rules. (SECURE 1.0 401) The new rules generally require DC balances to be distributed within 10 years of the employee’s death, except where the participant’s beneficiary is the spouse or another “eligible designated beneficiary” (see below). 

• Retains the controversial “at least as rapidly” rule. This rule, first announced in the proposed regulations, requires that, where the employee dies after the required beginning date, payments must continue to the beneficiary, even where the 10-year rule (full distribution within 10 years of death) applies. This interpretation applies as of 2025.  

• Treatment of Roth account balances. (SECURE 2.0 section 325) Provides that Roth account balances are generally disregarded for purposes of the RMD rules while the employee is alive. 

• Surviving spouse may elect employee treatment. (SECURE 2.0 section 327) Allows a surviving spouse who is the sole beneficiary of the employee to elect to be treated as the employee for certain purposes. 

• Increasing annuity payments. (SECURE 2.0 section 201) Allows certain increases to payments under an annuity contract. 

• Changes to QLAC rules. (SECURE 2.0 section 202) Eliminates the benefit percentage limit and increases (to $200,000) the dollar limit on qualifying longevity annuity contracts. 

• Partial annuitization. (SECURE 2.0 section 204) Allows/provides rules for “partial annuitization” of an employee’s benefit. 

Effective date The new rules generally apply to “distribution calendar years beginning on or after January 1, 2025.” With respect to earlier periods, the preamble states: For earlier distribution calendar years, taxpayers must apply the 2002 final regulations and 2004 final regulations, but taking into account a reasonable, good faith interpretation of the amendments made by sections 114 [RMD age increase] and 401 [revised treatment of DC distributions] of [SECURE 1.0]. For the 2023 and 2024 distribution calendar years, taxpayers must also take into account a reasonable, good faith interpretation of the amendments made by sections 107 [further RMD age increases], 201 [elimination of certain barriers to distribution of life annuities], 202 [QLAC changes], 204 [new partial annuitization rules], and 337 [RMD rules for special needs trust] of [SECURE 2.0]. 

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In what follows, we very briefly outline the revised RMD regime applicable to DC plans (where the most significant changes have been made). We’re going to leave out a number of issues, e.g., the treatment of distributions to trusts, distributions to minor children, and many of the nuances with respect to annuity distributions. We begin with some basic concepts. Basic conceptsGeneral Rule: Under Tax Code section 401(a)(9), payments must start on the “required beginning date,” defined as April 1 of the calendar year following the later of: 

1. The calendar year in which the employee attains the applicable age; and  

2. The calendar year in which the employee retires from employment with the employer maintaining the plan. 

Rule (ii) is not available to 5% owners. Applicable age:The “applicable age” depends on when the participant was born (see the Table 1 above). 

Eligible designated beneficiary: The employee’s surviving spouse; a child of the employee who has not reached the age of majority; an individual who is disabled; a chronically ill individual; an individual who is not more than 10 years younger than the employee. (Oversimplifying somewhat, only eligible designated beneficiaries are eligible for life expectancy payments under a DC plan.) 

RMD rules for DC plans

Employee

The amount required to be distributed the employee is generally determined based on the employee’s life expectancy under the (updated in 2020) IRS Uniform Lifetime Table, redetermined each year, until the employee’s death. (There is an exception to this rule where the employee’s benefit is distributed as an annuity purchased with his account balance.) 

Payments to beneficiaries where payments have not begun – 

Surviving spouse

Option 1 – defer for 10 years. In this case, the account balance must be paid out by “the calendar year that includes the tenth anniversary of the date of the employee’s death.” 

Option 2 – life expectancy payments. In this case, the account balance is paid out over the spouse’s life expectancy (recalculated each year), beginning with the calendar year in which the employee would have attained the “applicable age.” 

Option 3 – the plan may allow the spouse to elect to be treated as the employee. (See the discussion above of treatment of the employee.) 

Eligible designated beneficiary

Option 1 – defer for 10 years. (Same as for spouse.) 

Option 2 – life expectancy payments. In this case, the account balance is paid out over the beneficiary’s life expectancy (not recalculated), beginning with the calendar year following the year in which the employee dies. 

Non-eligible designated beneficiary

Option 1 – defer for 10 years. (Same as for spouse.) 

Payments to beneficiaries where payments have begun – 

Surviving spouse

Option 1 – life expectancy payments continue. Payments after the participant’s death are determined based on the longer of the participant’s or spouse’s life expectancy (recalculated each year). 

Option 2 – the plan may allow the spouse to elect to be treated as the employee. (See above.) 

Eligible designated beneficiary

Option 1 – life expectancy payments continue. Payments after the participant’s death are determined based on the longer of the participant’s or eligible designated beneficiary’s life expectancy. 

Non-eligible beneficiary

Option 1 – life expectancy payments continue, full payout after 10 years. Payments after the participant’s death are determined based on the longer of the participant’s or eligible designated beneficiary’s life expectancy. The entire account balance must be paid out by “the calendar year that includes the tenth anniversary of the date of the employee’s death.”  

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It would be difficult to overemphasize the complexity of the new rules. Sponsors will want to consult with counsel, their recordkeeper(s), and their actuary to determine what changes to current procedures/plan documents are required. 

We will continue to follow this issue.