Required Minimum Distributions for Plans and IRAs

Final Regulations under the SECURE Act. – The IRS has issued final regulations interpreting the SECURE Act of 2019. The regulations are effective for tax years beginning on or after January 1, 2025. Because of the complexity of the SECURE Act and its unavoidable ambiguities, the IRS has had the opportunity to choose between alternative interpretations of many provisions of the Act. Unfortunately, the IRS has in some instances chosen interpretations that were largely unanticipated by practitioners. See Chapter 8 of the treatise.

The Regulations Were Completely Rewritten. – More broadly, the IRS decided to completely rewrite the regulations rather than simply amend them to the extent necessary to conform to the SECURE Act. In the rewriting, the IRS made other changes, some of which do not seem to be wholly necessary to implement the provisions of the SECURE Act. For example, the IRS (1) provided new rules for determining which beneficiaries of a see-through trust are designated beneficiaries, (2) revamped the method for identifying designated beneficiaries in the case of powers of appointment, reformations, and decanting, (3) simplified the determination of who is a minor, (4) introduced a new definition of disability for individuals under age 18, and (5) introduced two exceptions (for minors and AMBTs) to the rule that all beneficiaries of a plan must be eligible designated beneficiaries for the plan to qualify for life-expectancy distributions. See Chapter 8 of the treatise.

Challenges to the Regulations in the Current Non-Chevron Environment. – The final regulations were drafted when the Chevron doctrine applied. That doctrine gave the IRS wide latitude to write regulations that interpret ambiguous statutory language, provided the Service’s interpretation was one of the possible “reasonable” interpretations of the statute. However, the Supreme Court has since overruled Chevron. Henceforth, courts must use traditional methods of statutory construction to find the “best” interpretation of a statute. In doing so, courts may not give deference to regulations (although the courts may consider the possible persuasiveness of the regulations). The SECURE Act, and the previous Code provisions that the Act amended, contain many ambiguities that the regulations attempt to resolve. Because the regulations under the SECURE Act were drafted in the more lenient Chevron environment, the IRS likely overreached in some cases. Consequently, these regulatory interpretations may now be easier to challenge than they would have been in the previous Chevron environment. Note that a retiree who is challenging the validity of a regulation should file Form 8275-R, Regulation Disclosure Statement, with his or her return. (Loper Bright Enter. v. Raimondo, 603 U.S. ___ (2024); Chevron U.S.A. Inc. v. Nat. Res. Defense Council, Inc., 467 U.S. 837 (1984).) See Chapter 8 of the treatise.

Continuation of Life Expectancy Distributions Until Final Ten-Year Distribution. – Practitioners had expected that the new ten-year distribution rule applicable to designated beneficiaries would entirely supersede the old rule that required life-expectancy distributions to be made to a designated beneficiary when a participant died on or after his or her required beginning date. Practitioners had also expected that the new successor ten-year distribution rule would entirely supersede the old rule requiring continuation of life-expectancy distributions after the death of a designated beneficiary. Instead, in both cases, the final regulations continue to apply the old rules requiring continued life-expectancy distributions. The new ten-year distribution rules are treated simply as limitations superimposed over the old life-expectancy distribution requirements. Fortunately, for the years 2021 through 2024, the IRS is not penalizing failures to make life-expectancy distributions to beneficiaries who were subject to the new ten-year rules. (Notice 2022-53, 2022-44 I.R.B. 437; Notice 2023-54, 2023-31 I.R.B. 382; Notice 2024-35, 2024-19 I.R.B. __.) See Chapter 8 of the treatise.

The Applicable Age for the Start of Required Minimum Distributions. – The regulations recognize that the applicable age for the start of required minimum distributions is 73 for years after 2023 and before 2033, and the applicable age is 75 for years after 2034. There are no required beginning dates during the years 2023, 2033 and 2034. Because of an error in drafting the statutory language, a retiree born in 1959 would technically satisfy the requirements for both age 73 and age 75 beginning dates. However, proposed regulations specify that the applicable age for that year is 73. (The SECURE 2.0 Act, Pub. L. No. 117165, Div. T, Title I, § 107; Treas. Reg. § 1.401(a)(9)-2(a)(3)(ii); Prop. Treas. Reg. § 1.401(a)(9)-2(b)(2)(v).) See Chapter 8 of the treatise.

Surviving Spouse’s Election to be Treated as the Participant. – For minimum distributions that are required to begin after 2023, a defined contribution plan may provide that a surviving spouse who is the sole beneficiary can elect to be treated as the participant in the plan. An electing spouse is entitled to use the Uniform Lifetime Table for determining required minimum distributions based on the spouse’s age in each distribution year. For a surviving spouse who dies before minimum distributions are required, the proposed regulations apply the primary ten-year rule and the life-expectancy rule to the spouse’s designated beneficiaries as if the spouse were the plan participant. (IRC § 401(a)(9)(B)(iv); Treas. Reg. § 1.401(a)(9)-5(g)(3)(i).) See Chapter 8 of the treatise.

Catch-up Minimum Distributions for Surviving Spouse Making Late IRA Ownership Election. – A surviving spouse taking distributions from an IRA under the ten-year rule may elect to take ownership of the IRA even after the later of (1) the calendar year following the retiree’s death or (2) the calendar year the spouse attains age 73 (age 75 after 2034). However, the spouse must first take a catch-up distribution equal to hypothetical minimum distributions that would have been required in prior years assuming the spouse owned the IRA, less the actual distributions received by the spouse. A surviving spouse cannot circumvent this rule by rolling over the funds in the IRA to his or her own IRA. (Treas. Reg. §§ 1.402(c)-2(j), 1.408-8(c)(1), (d).) See Chapter 8 of the treatise.

Special Rules for Minor Children of a Plan Participant. – Before issuance of the regulations, there was a concern that a minor child could not be an eligible designated beneficiary if there were another plan beneficiary who was not an eligible designated beneficiary. Fortunately, the regulations expressly state that a minor who qualifies as an eligible designated beneficiary will not cease to be eligible merely because other designated beneficiaries are not eligible. However, those other ineligible designated beneficiaries generally must be taken into consideration in determining the oldest designated beneficiary on whose life expectancy distributions are based. On the other hand, the successor ten-year rule is always measured from the earlier of (1) the year the youngest minor child reaches majority or (2) the year of death of the last surviving minor child. (Treas. Reg. § 1.401(a)(9)-4(e)(2)(ii); Treas. Reg. § 1.401(a)(9)-5(f)(1)(i), (f)(2)(ii).) See Chapter 8 of the treatise.

Division of a See-Through Trust into Separate Trusts. – The IRS has finally acknowledged by regulation that required minimum distribution rules can apply separately to two or more trusts resulting from the division and termination of a see-through trust. The division must be required, (by the terms of the trust) immediately upon the death of the plan participant. However, there can be no discretion regarding the allocation to the separate trusts of post-death distributions from the plan. Further, trust receipts (during a reasonable administrative period preceding the actual division and termination of the trust) must be allocated to the separate trusts as if they were separated as of the date of death of the retiree. (Treas. Reg. § 1.401(a)(9)-8(a)(1)(iii)(B), (C).) See Chapter 8 of the treatise.

Charitable Beneficiary of an Applicable Multi-Beneficiary Trust. – An applicable multi-beneficiary trust (an AMBT) will qualify as such only if all the beneficiaries are designated beneficiaries. However, certain types of charitable organizations can be treated as designated beneficiaries for this purpose, thus allowing the charities to be named as remainder beneficiaries. (IRC §§ 401(a)(9)(H)(v), 408(d)(8)(B)(i); Treas. Reg. § 1.401(a)(9)-4(g)(3).) See Chapter 8 of the treatise.

Termination of the Interest of a Disabled or Chronically Ill Beneficiary in an AMBT. – The terms of an AMBT may allow the termination of the interest of a disabled or chronically ill beneficiary (e.g., if necessary to protect government assistance for that beneficiary). But, in such case, the trust terms must continue to provide that beneficiaries who are not disabled or chronically ill do not have any right to plan benefits until the death of all the disabled or chronically ill beneficiaries. (Treas. Reg. § 1.401(a)(9)-4(g)(2).) See Chapter 8 of the treatise.

Election to Treat Annuity Distributions as Non-Annuity Distributions. – If a defined contribution plan purchases a life annuity contract, the required minimum distribution rules applicable to annuities apply to the annuity contract. If less than the entire balance in a defined contribution plan is used to purchase the annuity, distributions from the remainder of the balance (not used for the purchase) must generally meet the minimum distribution requirements applicable to non-annuity distributions. However, a plan may now allow a retiree to elect to aggregate the value of the annuity and the remaining account balance and treat all distributions as non-annuity distributions. (The SECURE 2.0 Act, Pub. L. No. 117-164, Div. T, Title II, § 204; Treas. Reg. § 1.401(a)(9)-5(a)(5)(iv).) See Chapter 8 of the treatise.

The SECURE Act Applies to 457 Tax-Exempt Organization Plans. – The IRS has concluded that the new minimum distribution rules under the SECURE Act apply to 457 tax-exempt organization plans that provide (1) an individual account for each participant and (2) benefits based only on amounts in the account (even though the account is not funded). (I.R.C. § 414(i); T.D. 10001, Preamble V.) See Chapter 8 of the treatise.

Documentation of Disabled or Chronically Ill Status. – The regulations require that a beneficiary who is disabled or chronically ill submit documentation of his or her condition to the trustee of his or her retirement plan. However, this documentation need not be provided to the trustee of an IRA. (Treas. Reg. §§ 1.401(a)(9)-4(e)(7), 1.408-8(b)((4)(i).) See Chapter 8 of the treatise.

Minor Child Includes Stepchild, Adopted Child, and Foster Child. – The regulations clarify that a minor child of a plan participant includes a stepchild, an adopted child, or a foster child. (IRC § 152(f)(1); Treas. Reg. § 1.401(a)(9)-4(e)(1)(ii).) See Chapter 8 of the treatise.

Extended Rollover Period for Plan Participants Attaining Age 72 in 2023. – If a participant in a qualified plan or IRA reached age 72 in 2023, the participant had until September 30, 2023 to roll over a distribution received from the plan or IRA during the period January 1, 2023 to July 31, 2023. (Notice 2023-54, 2023-31 I.R.B. ___) See Chapter 8 of the treatise.

The Percentage Limitation on QLAC Premiums Repealed and the Dollar Limitation Reset. – A retiree may defer the starting date of qualifying longevity annuity contracts (QLACs) until age 85 without violating minimum distribution rules. However, in past years, the aggregate QLAC premiums paid during a retiree’s lifetime by all his or her plans and IRAs could not exceed a dollar amount ($145,000 for 2022). Nor could cumulative premiums paid by any one plan exceed 25 percent of the plan’s account balance. Congress has now repealed the percentage limitation and reset the dollar limitation to $200,000 (for 2023 and adjusted for inflation thereafter). (SECURE 2.0 Act, Pub. L. No. 117-164, Div. T, Title I, § 202.) See Chapter 8 of the treatise.

Reduction of Penalty for Failure to Make Required Minimum Distributions. – After 2022, the penalty for failure to make required minimum distributions is decreased from 50 percent of the undistributed amount to 25 percent. The penalty may be further reduced to 10 percent if failure to take a required minimum distribution is timely corrected. (SECURE 2.0 Act, Pub. L. No. 117-164, Div. T, Title I, § 302.) See Chapter 8 of the treatise.

Conformance of Treatment of RMDs from Designated Accounts to the Treatment of Roth IRAs. – After 2023, minimum distributions from a designated Roth account are not required during the lifetime of the participant. This change conforms the minimum distribution treatment of designated Roth accounts to the treatment of Roth IRAs. (SECURE 2.0 Act, Pub. L. No. 117-164, Div. T, Title I, § 325.) See Chapter 8 of the treatise.

Minimum Distribution Flexibility for Certain Government Plans. –  Proposed regulations indicate that qualified governmental plans and eligible state/local plans have more latitude in complying with minimum distribution requirements than other types of plans. The proposed regulations treat these government plans as satisfying minimum distribution requirements if the plans comply with a reasonable and good faith interpretation of the Code – apparently, even if that interpretation is contrary to regulatory provisions. (Prop. Reg. § 1.401(a)(9)-1, Q&A 2(d).) See Chapter 8 of the treatise for minimum distribution requirements.

Separate Accounts Unavailable When Beneficiary Is a Decedent’s Estate. –Beneficiaries of a decedent’s estate may not treat as separate accounts their interests in a plan or inherited IRA held by them indirectly through the estate. “See through” rules do not apply to an estate. Thus, required minimum distribution rules are applied to such a plan or inherited IRA as a whole. The minimum distribution rules are applied in the aggregate even if funds in the plan or inherited IRA are directly transferred to several new inherited IRAs, each for the benefit of an individual beneficiary of the estate. (Ltr. Rul. 201128036.) See Chapter 8 of the treatise.

Non-Spouse’s Minimum Distribution Election Under Personally Purchased Annuity. – The tax law requires that a non-spouse beneficiary receive minimum distributions under a personally purchased annuity contract. However, the IRS has ruled that those minimum distribution requirements may be satisfied if a non-spouse beneficiary merely elects to be treated for tax purposes as if he or she had received the entire value of the annuity contract as of the retiree’s death. (Ltr. Rul. 201302015.) See Chapter 16 of the treatise for a discussion of personally purchased annuities.

Deaths of Decedent and Surviving Spouse in Quick Succession. – A retiree and his or her surviving spouse may both die within a short period of time, with the longer living spouse being the designated beneficiary of the retiree’s IRA. In that case, a disclaimer of the IRA by the executor of the now deceased surviving spouse may allow IRA distributions over the life expectancy of a younger successor beneficiary (e.g., their son) rather than the shorter life expectancy of the surviving spouse. However, the life expectancy distribution would be available only if the successor beneficiary qualified as an “eligible” designated beneficiary (i.e., the son was a minor, disabled, or chronically ill). (IRC § 401(a)(9)(H); Ltr. Rul. 201202042.) See Chapters 8 and 20 of the treatise for a discussion of disclaimers and minimum distributions.

Delayed Minimum Distribution Payments. – Tax-favored plans and arrangements generally must begin making minimum distributions to a retiree or beneficiary by a specified date. The IRS cannot  waive a delay in the making of a payment. However, the IRS may waive a penalty resulting from the delay if the delay was due to reasonable error that the retiree or beneficiary is taking reasonable steps to correct. (Ltr. Rul. 201417027.) See Chapter 8 of the treatise.

Purchase of Qualifying Longevity Annuity Contracts (QLACs). – New regulations authorize “qualifying longevity annuity contracts” (QLACs) that provide additional tax deferral for certain retirement plans and IRAs. The regulations allow deferral of QLAC payments until an advanced age. In addition, earlier required minimum distributions are necessarily smaller because the regulations exclude the value of QLACs from the account balance used to compute minimum distributions. Perhaps most importantly, QLACs provide some additional financial security for participants who outlive their life expectancies or suffer downturns in the equity markets.

A QLAC may be purchased for a plan participant by a qualified defined contribution plan, an eligible state/local government plan, or an IRA (other than a Roth IRA). A QLAC may start no later than the first day of the month after the participant attains age 85. The aggregate premiums for all QLACs benefiting a participant may not exceed certain dollar limitations. The QLAC must also satisfy all the usual minimum distribution requirements for annuities (other than starting by the required beginning date). (Treas. Reg. § 1.401(a)(9)-6, Q&A 17.) See Chapter 8 of the treatise.

New Life Expectancy Tables and a New Uniform Lifetime Table. – New life expectancy tables and a new Uniform Lifetime Table providing longer distribution periods apply for required minimum distribution purposes for calendar years beginning after 2021. Furthermore, if a post-2021 minimum distribution to a nonspouse beneficiary is required to be determined by reference to a life expectancy initially determined for a year before 2022, that life expectancy is redetermined under the new tables as if the new tables were effective for the pre-2022 year of initial determination. The new life expectancy period is then reduced by one for each year elapsed since the pre-2022 year of the initial determination. For a surviving spouse, however, the distribution period is determined anew under the new tables for each distribution year after 2021. (Treas. Reg. § 1.401(a)(9)-9.) See the Appendix to the treatise.

The new tables also apply to the safe harbor methods for computing substantially equal periodic payments that avoid the penalty on premature distributions from IRAs, retirement plans, and commercial annuities. However, the new tables are generally not applicable until years after 2022 for this purpose. Nevertheless, taxpayers have the option to use the new tables for substantially equal payments beginning in 2022. Furthermore, in any year after 2021, taxpayers may change to the new tables even if substantially equal payments commenced before 2022. (Rev. Rul. 2022-6, 2002-5 I.R.B. ___.)

Suspension of Minimum Distribution Requirements for 2020. – Congress has eliminated minimum distribution requirements for 2020 for tax-favored plans that are individual account plans (i.e., are not defined benefit plans). Thus, a retiree who chooses to take distributions in 2020 from such a tax-favored plan may roll over even the portion that would have been a required minimum distribution absent the suspension of the requirement. Although the plan is not required to make trustee-to-trustee transfers of such amounts, it may do so if it chooses. In addition, the direct distribution of such amounts to a retiree by the plan is not subject to the normal 20 percent tax withholding, and the retiree may elect to eliminate other types of withholding tax.

In addition, a retiree whose required beginning date (RBD) is April 1, 2020 need not take a minimum distribution for 2019, unless the retiree already did so in 2019. After 2020, the retiree’s RBD must be determined in the usual way without regard to the 2020 suspension. The retiree’s beneficiary must also use the retiree’s normal RBD to determine the applicable method for determining minimum distributions. In addition, if the five-year minimum distribution rule applies to a beneficiary, the beneficiary does not count 2020 as one of the five years. For example, the five-year period ends in 2023, instead of 2022, for a retiree who died in 2017. The new ten-year distribution period for designated beneficiaries is unchanged. (I.R.C. §§ 401(a)(9)(I), 402(c)(4).) See Chapter 8 of the treatise for a discussion of required minimum distributions.