The IRS released proposed regulations regarding certain changes to the required minimum distribution (RMD) rules for retirement plans resulting from the passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019).  The proposed regulations impact a broad range of retirement plans, including qualified defined benefit plans and defined contribution plans (such as 401(k) plans), tax-sheltered annuity plans under IRC Section 403(b), eligible deferred compensation plans under IRC Section 457, and individual retirement accounts (IRAs).

The SECURE Act fundamentally changed the existing rules governing IRAs and retirement plans.  Some of the key changes include:

  • Increasing the starting age for RMDs from 70½ to 72.
  • Eliminating the “stretch” provision for many beneficiaries. As a result, beneficiaries will no longer be able to take RMDs based on their life expectancy unless they fall into one of these categories (referred to as “eligible” beneficiaries):
    • The account owner’s surviving spouse;
    • A person who is disabled or chronically ill;
    • A person who is not more than 10 years younger than the account owner;
    • A minor child of the account holder.
  • For a designated beneficiary who is not covered by one of these exceptions, distributions must generally be completed by the end of the calendar year that includes the 10th anniversary of the account holder’s death.

The proposed regulations provide significant guidance on RMDs rules as enacted by the SECURE Act. Some of the new guidance includes:

  • Rules to determine if a beneficiary is disabled. The proposed regulations provide a safe harbor for the determination of a disabled beneficiary.  More specifically, a beneficiary is considered disabled if, at the time of the account owner’s death, the Commissioner of Social Security has determined that the beneficiary is disabled. There are special rules for a beneficiary who is under age 18.
  • Documentation for disabled or chronically ill beneficiaries. The proposed regulations provide that disabled or chronically ill beneficiaries must provide proper documentation of their condition to the plan administrator by October 31 of the year following the account owner’s death.
  • Age of Majority. The proposed regulations provide clarification that in most cases, the age of majority for the RMD rules is 21 years old.  In addition to taking a lump sum distribution at any time, minor children may take annual payments based on their life expectancy, but only until they reach the age of majority. Once they reach age 21, they must follow the 10-year rule.
  • Multiple beneficiaries. Under the proposed regulations, the separate accounting for beneficiaries is still permissible. A beneficiary’s status is still determined as of September 30 of the year following the account owner’s death. So long as separate accounts are created and maintained for multiple beneficiaries by December 31 of the year following the account owner’s death, each beneficiary will be treated as the sole beneficiary of that account. Therefore, even if there are different beneficiary categories with different payout options, separate accounting will preserve the available options for each beneficiary.
  • Trust as beneficiary. The proposed regulations still allow for “see-through” trusts.  The see-through trust concept allows the underlying beneficiaries of such trusts to be treated as designated beneficiaries—or eligible designated beneficiaries—if the trust meets certain requirements.

Even though the SECURE Act became effective on January 1, 2020, these regulations are anticipated to become effective as of January 1, 2022.  For 2021, compliance with the proposed regulations will be satisfied so long as the taxpayer applied the existing regulations and exercised a “reasonable, good faith interpretation” of the increased RMD age and 10-year distribution rule created by the SECURE Act. Comments on the proposed regulations are due by May 25, 2022 and a public hearing is schedule for June 15, 2022.

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