The IRS recently issued guidance (Notice 2022-53) stating that it intends to issue final required minimum distribution (RMD) regulations under Section 401(a)(9) that would apply no earlier than the 2023 distribution calendar year. The IRS previously published proposed regulations on Feb. 24, 2022, that were proposed to apply beginning with the 2022 distribution calendar year.
Notice 2022-53 also provides transition relief with respect to the guidance in the proposed regulations that addresses the new “10-year rule” in Section 401(a)(9)(H), added by the “Setting Every Community Up for Retirement Enhancement (SECURE) Act,” enacted in 2019. Under the relief, taxpayers with inherited IRAs who failed to make RMDs in 2021 and 2022 can avoid penalties.
Generally, Section 401(a)(9) provides rules for RMDs from qualified retirement plans, Section 403(b) plans, IRAs and certain Section 457(b) plans during the life of the employee and after the death of the employee (or IRA owner in the case of an IRA—collectively referred to hereinafter as “employee”). The rules set forth a required beginning date for distributions and identify the period over which the employee’s entire interest must be distributed.
Under the general RMD rules before the SECURE Act changes, the entire interest of an employee in a qualified plan had to begin to be distributed no later than the employee’s required beginning date—generally April 1 of the calendar year following the calendar year in which the employee attains age 72, or retires, if later—over the life of the employee or over the lives of the employee and a designated beneficiary. If the employee died after RMDs have begun, then the employee’s remaining interest had to be distributed at least as rapidly as under the employee’s distribution method. However, if an employee died before the RMDs had begun, the employee’s interest was required to be distributed within five years after the death of the employee (the “five-year rule”), or distributed over the life or life expectancy of the designated beneficiary, with the distribution generally beginning no later than one year after the date of the employee’s death.
The SECURE Act added Section 401(a)(9)(H), which provides that, if an employee in a defined contribution plan has a designated beneficiary, the five-year period under the five-year rule is lengthened to 10 years and the new “10-year rule” applies regardless of whether the employee dies before the required beginning date. This new 10-year rule was intended, at least in part, to eliminate “stretch IRAs,” and similar practices under other defined contribution plans, which allowed an IRA owner to extend the RMD distribution period following his/her death to the pre-death joint-life-expectancy of the owner and his/her beneficiary.
With the new 10-year rule, the maximum distribution period following death of the owner is 10 years unless the beneficiary is an “eligible designated beneficiary” (generally the employee/IRA owner’s surviving spouse or minor child).
In interpreting the new 10-year rule, the proposed regulations provide, in part, that, in the case of an employee who dies after the employee’s required beginning date with a designated beneficiary who is not an eligible designated beneficiary, annual RMDs must continue to be taken after the death of the employee, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.
This position surprised many taxpayers who thought the new 10-year rule would operate like the five-year rule, under which there would not be any RMD due for a calendar year until the last year of the five-or-10-year period following the employee’s death. Because of this unexpected interpretation, some taxpayers did not take an RMD in 2021 and are unsure of whether they would be required to take an RMD in 2022.
As a result of this confusion, the notice provides transition relief for failure to take certain RMDs due in 2021 or 2022 under the proposed new 10-year rule with respect to employees who died in 2020 or 2021—referred to in the notice as “specified RMDs.” Under the transition relief, a defined contribution plan—including an IRA—that failed to make a specified RMD will not be treated as having failed to satisfy Section 401(a)(9) for the 2021 and/or 2022 distribution calendar years because it did not make that distribution.
In addition, to the extent a taxpayer did not take a specified RMD, the IRS will not assert that a 50% excise tax is due under Section 4974 for the failure to make such specified RMDs. If a taxpayer has already paid an excise tax for a missed specified RMD in 2021, the taxpayer may request a refund of that excise tax.
Taxpayers who might be affected by these RMD rules should examine the notice and additional pertinent guidance from the IRS to determine best next steps based upon their facts and circumstances.
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