In Notice 2024-35, the IRS announced that the regulations on required minimum distributions (RMDs), which were proposed in 2022, are expected to apply beginning with the 2025 calendar year. Our understanding is that the regulations are in clearance and will be issued soon.
The notice also extends previously issued RMD transition relief to certain beneficiaries to cover payments that should have been made during 2024 under the interpretation of the “10-year rule” in the proposed rule. This relief generally provides that if during 2024 an RMD under the 10-year rule is not made to a beneficiary, the plan would not be treated as violating tax law and the beneficiary would not be subject to an excise tax for failing to receive an RMD.
The Internal Revenue Code generally provides rules for RMDs from qualified retirement plans and section 403(b) plans, including with regard to the timing for participants and beneficiaries to start payment and the maximum period over which the benefit may be distributed. Under the SECURE Act, the age associated with the required beginning date (RBD) increased from 70 1/2 to 72, and the death benefit requirements that apply to defined contribution (DC) plans were revised.
Under the revised death benefit rules, if an employee in a DC plan dies and has a designated beneficiary who is not an eligible designated beneficiary (EDB), benefits must be distributed within 10 years rather than five years; this 10-year rule applies regardless of whether the employee dies before or after the RBD. (Previously, if the employee died after the RBD, the beneficiary had to receive payments “at least as rapidly” as the employee had been receiving them.)
There is an exception to the 10-year rule for EDBs (such as spouses) who can elect to have payments made over their lifetime or life expectancy, but if the EDB dies before all assets are distributed, the 10-year rule would apply to the EDB’s beneficiary at that point. Also, when an EDB who is a minor child of the employee reaches the age of majority (i.e., age 21 under the proposed regulations), that child will no longer be considered an EDB, and the remainder of that child’s portion of the employee’s interest in the plan must be distributed within 10 years of that date.
In 2022, the Proposed Rule incorporated the changes required under the SECURE Act and other guidance and clarified existing rules.
Regarding situations where the employee dies after the RBD, the proposed regulations indicated that distributions to designated beneficiaries had to satisfy both the new 10-year rule and the “at least as rapidly” rule. To satisfy both requirements, the proposed rules provided that if an employee dies after the RBD with a designated beneficiary who is not an EDB, annual RMDs must continue to be taken beginning in the first calendar year after the calendar year of the employee’s death, with a full distribution required by the end of the 10th calendar year following the calendar year of the employee’s death.
This surprised many commenters on the proposal who had thought that regardless of when an employee died, the 10-year rule would operate like the five-year rule had for deaths that occurred before the RBD, such that there would not be any RMD due for a calendar year until the last year of the five- or 10-year period following the death of the employee, the death of the EDB or the attainment of the age of majority for the employee’s child who is an EDB.
In response to comments, the IRS provided relief in Notice 2022-53 ensuring the updated final regulations would not apply before 2023. Limited transition relief was also provided for DC plans that failed to make RMDs during 2021 and 2022 to designated beneficiaries if the participant died during 2020 or 2021 and beneficiaries of an EDB if the EDB died in 2020 or 2021.
The SECURE 2.0 Act of 2022 increased the RBD age from 72 to 73 for participants (and their surviving spouses) who attained (or would have attained) age 72 during or after 2023.
In 2023, the IRS issued Notice 2023-54, which:
Notice 2023-54 did not cover deaths during 2023 or RMDs that are not made in 2024, likely because the final regulations were expected to apply during 2024.
Notice 2024-35 extends the relief for certain RMD-related failures originally provided in the previous two notices. The new relief further delays the effective date for the updated final regulations, with the final regulations “anticipated to apply” beginning with the 2025 calendar year.
Additional relief is provided for DC plans that failed to make RMDs during 2024 to designated beneficiaries if the participant died on or after the participant’s RBD during 2020 to 2023 (where the designated beneficiary is not an EDB or is an EDB using the lifetime or life expectancy payments exception). Such relief is also provided to beneficiaries of EDBs if 1) the EDB died between 2020 and 2023, and 2) the EDB was using the lifetime or life expectancy payments exception.
Under this relief:
The relief provided by the notice is limited, and many of the underlying requirements remain in effect; therefore, plan sponsors should still consider taking the following actions:
