The retirement plan industry has been wrestling with the changes to required minimum distribution (RMD) provisions made by the SECURE Act and SECURE 2.0. One issue in particular has caused considerable confusion. Section 401(a)(9) of the Code was amended to provide that, if a retirement plan participant dies after distributions have begun, such participant’s remaining interest must be distributed at least as rapidly as under the distribution method used by the participant as of the date of the participant’s death (referred to by the IRS as the “at least as rapidly” rule). In other words, a beneficiary of a participant, who was receiving RMDs prior to their death, must continue receiving distributions in the year following the participant’s death. The IRS issued proposed regulations in 2022 addressing the at least as rapidly rule, and received comments and questions on their interpretation. Although transition relief was provided for required distributions to beneficiaries between 2021-2024, the final RMD regulations issued late last month appear to end this relief and will require administration that complies with the IRS regulations beginning in 2025.
The SECURE Act made several changes to the RMD rules in the IRS Code, and more changes were made by SECURE 2.0 (see our prior posts here). The regulations at that time did not always provide clarity on how the new provisions should be administered. The IRS issued proposed regulations in response, but not all of the guidance received was expected. The proposed regulations provided that when a participant dies on or after the participant’s required beginning date (i.e., the date RMD payments begin), payments must continue to be paid to a designated beneficiary every year after the participant’s death. The IRS received comments and questions on this interpretation, where commenters believed that, regardless of when an employee died, there would not be any RMD due for a calendar year until the last year of the 10-year period following the death of the employee.
The final regulations adopt the interpretation of the proposed regulations, and clearly provide that a designated beneficiary must continue RMDs, calculated using the beneficiary’s life expectancy, beginning in the year following the participant’s death and continuing for up to nine calendar years, with a full distribution of the remaining account balance in the tenth calendar year. Similarly, an eligible designated beneficiary must continue RMDs in the year following the participant’s death, calculated using the beneficiary’s life expectancy, but may elect to receive distribution either under the 10-year rule or the life expectancy rule.
Understanding the confusion caused by this new rule, the IRS has issued transition relief, most recently through Notice 2024-35. Under this guidance, if a distribution would have been required to be made to beneficiaries under the at least as rapidly rule before January 1, 2025, then: (1) a plan will not fail to qualify for failing to make that distribution in 2021, 2022, 2023, or 2024; and (2) the taxpayer who failed to take the distribution will not be assessed an excise tax for failing to do so. This relief applies with respect to a beneficiary who is a designated beneficiary of an employee who died in 2020, 2021, 2022, or 2023, and after the employee’s required beginning date.
The final regulations signal the end of the transition relief. Plan sponsors have been put on notice that they must begin to administer RMDs to beneficiaries in compliance with the at least as rapidly rule. Special attention should be paid to monitor the deaths of any participant who is currently receiving annual payments subject to the IRS’ RMD regulations, and to initiate distribution to their beneficiaries beginning in 2025.
The complexity of the RMD rules and subsequent proposed and final regulations has created confusion in administering plan provisions. The IRS has given qualified plan beneficiaries relief from the excise tax through 2024, but RMDs must be administered correctly going forward. Although the SECURE Act/SECURE 2.0 amendment deadlines have been pushed back until 2026, the final regulations serve as a reminder that plan sponsors need to apply the law correctly prior to the amendment deadline.
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