The Internal Revenue Service (IRS) has issued final regulations for required minimum distributions (RMDs) from certain retirement plans, including tax-qualified plans, Internal Revenue Code (Code) section 403(b) plans, individual retirement accounts (IRAs) and Code section 457(b) eligible deferred compensation plans. The regulations implement changes put into law by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0).

The final regulations apply for distribution calendar years beginning on or after January 1, 2025. However, as some of the RMD changes addressed in the final regulations already have taken effect in accordance with the effective dates set forth in the SECURE Act and SECURE 2.0, plan sponsors should review current plan operations for compliance.

The final regulations largely follow the proposed regulations on RMDs that were issued in 2022, as described in a prior client alert, with some changes made in response to public comments on the proposed regulations. The final regulations include the following highlights:

• RMD beginning date: Consistent with the SECURE Act and SECURE 2.0, the final regulations state the rules for determining an employee’s “applicable age” for purposes of the “required beginning date” under Code section 401(a)(9).¹  Notably, the final regulations do not resolve the SECURE 2.0 ambiguity for employees born in 1959.  The final regulations reserve treatment of employees born in 1959 to be addressed in the proposed regulations that were released concurrently with the final regulations, as discussed further below.
• Participant death before RMDs begin under defined contribution plans: The final regulations clarify rules regarding RMDs made to “eligible designated beneficiaries” (generally, a participant’s spouse or minor child, or a beneficiary who is disabled, chronically ill, or no more than 10 years younger than the participant) versus “designated beneficiaries” (generally, a person who doesn’t qualify as an eligible designated beneficiary) when a participant dies before the required beginning date.  Specifically, the final regulations confirm that, if the participant had begun annual RMDs prior to their death, a designated beneficiary must continue annual RMDs during the 10-year period following the death, and the remaining balance will be paid out at the conclusion of the 10-year period.

The final regulations also address when a plan is required to specify a default election rule for RMDs when a participant dies before their required beginning date and how to determine who is an eligible designated beneficiary or a designated beneficiary.

• Designated Roth accounts: The final regulations provide that any portion of a participant’s account balance that is in a designated Roth account is excluded when calculating RMDs required during the participant’s lifetime.
• Certain distributions to surviving spouses: The final regulations retain the special “hypothetical RMD” rule introduced in the proposed regulations intended to limit the ability of a surviving spouse to defer required annual distributions beyond the year RMDs would have been required to commence if the surviving spouse had done a spousal rollover to their own IRA upon the participant’s death. However, the final regulations limit the application of the hypothetical RMD rule to surviving spouse beneficiaries in defined contribution plans, since the loophole intended to be closed by this rule arises in connection with spousal elections of the 10-year rule.

As noted above, on the same day the RMD final regulations were published, the IRS also released proposed regulations addressing other issues under SECURE 2.0, including:

• The “applicable age” for an employee born on or after January 1, 1959, and before January 1, 1960 (the applicable age for such individuals would be 73, not 75).
• The treatment for RMD purposes of amounts distributed from a participant’s Roth account in years the participant is required to take an RMD.
• The treatment for RMD purposes of corrective distributions that give rise to a reduction or waiver of the excise tax under Code section 4974.
• The spousal election to be treated as the employee for RMD purposes following an employee’s death before their required beginning date.

Although the deadline to amend most plans for the SECURE Act and SECURE 2.0 RMD changes has been extended until December 31, 2026, plan sponsors should review plan operations, as many of the RMD changes are currently in effect or will take effect in 2025. With additional guidance on the horizon, we will continue to monitor this topic as the rulemaking process proceeds.

Footnotes

1. The final regulations define the applicable age as follows:

• 72 for employees born on or after July 1, 1949, and before January 1, 1951
• 73 for employees born on or after January 1, 1951, and before January 1, 1959; and
• 75 for employees born on or after January 1, 1960.