The IRS and Treasury released proposed regulations Wednesday (REG-105954-20) that would update existing rules for required minimum distributions (RMDs) from qualified retirement plans and annuity contracts and related matters, largely to conform with a number of statutory changes.
The most prominent and recent of these changes were made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Division O of the Further Consolidated Appropriations Act of 2019, P.L. 116-94, enacted in December 2019.
Among other things, the SECURE Act revised the starting date for required minimum distributions (RMDs) from a qualified plan, generally to April 1 of the calendar year following the later of the calendar year in which the employee either turns age 72 or retires (Sec. 401(a)(9)(C)). Before the SECURE Act's amendment, that age was 70½. The higher age was effective for distributions required to be made after Dec. 31, 2019 (with respect to individuals who turned age 70½ after that date) (SECURE Act Section 114(a)).
Also, the SECURE Act eliminated "stretch" individual retirement accounts (IRAs) or plan distributions by requiring distributions to nonspouse beneficiaries (other than eligible designated beneficiaries) to be completed within 10 years following a plan participant or IRA owner's death (the 10-year rule) rather than, as before, over the beneficiary's life or life expectancy.
The SECURE Act defined eligible designated beneficiaries for purposes of the exception to the 10-year rule as the employee's surviving spouse, the employee's child under the age of majority, a disabled designated beneficiary, a chronically ill individual, or other individual no more than 10 years younger than the employee (Sec. 401(a)(9)(E)(i)).
These and many other statutory revisions are addressed in the proposed regulations that, with a summary, explanations, and other related material, cover 275 pages.
The AICPA submitted comments in 2020 to Treasury and the IRS making recommendations for needed guidance on various issues addressed in the proposed regulations, including the 10-year rule, the timing of IRA distributions to trusts, and the definition of a child who has not reached majority under Sec. 401(a)(9)(F).
Prop. Regs. Sec. 1.401(a)(9)-1 provides general rules for RMDs, including application of the 10-year rule where the employee dies, then the designated beneficiary also dies. If the employee died before Sec. 401(a)(9)(H)'s effective date for the plan and the employee had only one designated beneficiary who also died before that effective date, the beneficiary of the designated beneficiary is subject to the 10-year rule (and other SECURE Act amendments). If the employee's designated beneficiary died on or after that effective date, the 10-year rule does not apply to the beneficiary of the designated beneficiary. If the employee dying before the Sec. 401(a)(9)(H) effective date for the plan had more than one designated beneficiary, whether the SECURE Act amendments apply depends on when the oldest beneficiary dies.
The proposed regulations also address the SECURE Act RMD starting age of beneficiaries of an employee who died before reaching age 70½ but would have reached that age on or after Jan. 1, 2020. In that case, the beneficiary may wait until the calendar year in which the employee would have reached age 72 to begin RMDs.
Eligible designated beneficiaries
The proposed regulations also would further define the SECURE Act's new designations of eligible designated beneficiaries. The "age of majority" for the child of an employee has not been standardized previously but has been left up to each plan. The regulations would establish it as the child's 21st birthday (although they would still permit defined benefit plans to retain their prior definition).
Similarly, "disability" for this purpose would depend on the beneficiary's age: If under 18 at the time of the employee's death, the individual must have a "medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or be of long-continued and indefinite duration" (Explanation of Provisions, page 25). Older disabled beneficiaries are defined by reference to Sec. 72(m)(7), based on an inability to engage in substantial gainful activity. A safe harbor for determining disability is also available, based on a determination for Social Security benefit purposes, and the proposed regulations prescribe rules for documenting disabled or chronically ill status.
The proposed regulations retain existing "see-through" rules for trusts as beneficiaries but provide additional (and extensive) guidance on determining which of a see-through trusts' beneficiaries can be treated as beneficiaries of the employee.
Defined benefit plans
The proposed regulations also address an actuarial increase that defined benefit plans must take into account for the period after age 70½ in which the employee was not receiving benefits (Sec. 401(a)(9)(C)(iii)). The increase applies to an employee (other than a 5% owner) who retires in a calendar year after the calendar year in which the employee turns 70½.
Prop. Regs. Sec. 1.401(a)(9)-8 provides rules regarding separate account treatment for beneficiaries and updates the definition of "spouse" to reflect gender changes to Regs. Sec. 301.7701-18 made in response to Obergefell v. Hodges, 576 US. 644 (2015); eligible rollover distributions; and other matters.
The proposed regulations would generally apply for purposes of determining RMDs for calendar years beginning on or after Jan. 1, 2022, or to distributions on or after that date. For the 2021 distribution calendar year, taxpayers must apply the existing regulations but take into account a reasonable, good-faith interpretation of the SECURE Act amendments, which compliance with the proposed regulations will satisfy.
The proposed regulations are scheduled to be published in the Federal Register on Feb. 24.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.