BLOG POST

ML BeneBits

EXAMINING A RANGE OF EMPLOYEE BENEFITS
AND EXECUTIVE COMPENSATION ISSUES

Post-Death Required Minimum Distribution Relief in 2021 and 2022 Under 10-Year Rule

In response to confusion regarding the “10-Year Rule” that was added to the required minimum distribution (RMD) rules by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), the US Internal Revenue Service (IRS) has provided relief to defined contribution plan beneficiaries and individual retirement account beneficiaries. In Notice 2022-53, the IRS provides two forms of relief: (1) the proposed RMD regulations, including the application of the 10-Year Rule, if finalized, will not apply earlier than 2023, and (2) the failure to distribute “Specified RMD” payments in 2021 and 2022 will not be treated as a plan qualification failure or trigger the 50% excise tax for the Specified RMDs.

Rules Before the SECURE Act

Before the SECURE Act, if a defined contribution plan participant died before their age 70½ required beginning date, a plan could provide that the participant's designated beneficiary (1) could receive annual distributions over the beneficiary’s life expectancy, beginning within a year after the participant’s death, or (2) could take the entire benefit in a lump sum within five years following the participant’s death (the Five-Year Rule). Under the Five-Year Rule, the beneficiary was not required to receive any payments in the first four years after death as long as full payment of the benefit was made by the end of the fifth year.

If a defined contribution plan participant died after their age 70½ required beginning date, distributions to the designated beneficiary were required to continue “at least as rapidly” as prior to the participant’s death (the At Least as Rapidly method). However, defined contribution plans could require distributions to occur more quickly than what the IRS rules required.

Changes Made by the SECURE Act

The SECURE Act added the 10-Year Rule to the RMD rules, mandating payment of the entire defined contribution plan benefit by the end of the 10th calendar year following the year of death, unless the payee is an “eligible designated beneficiary” (i.e., a surviving spouse, a child of the employee before reaching the age of majority, a disabled person, a chronically ill person, or any person not more than 10 years younger than the participant).

The 10‑Year Rule applies to a child upon reaching the age of majority, as well as the beneficiary of an eligible designated beneficiary who dies before receiving a distribution of all plan benefits. It also applies to a designated beneficiary regardless of whether the beneficiary dies before or after the participant’s required beginning date (which was extended from age 70½ to age 72 by the SECURE Act).

On February 24, 2022, the IRS issued proposed RMD regulations, which were originally to take effect beginning in 2022. The proposed regulations explicitly state that designated beneficiaries of participants who died after their required beginning date must continue to receive distributions from the defined contribution plan under the At Least as Rapidly method and, further, must receive a full distribution of benefits under the 10-Year Rule. This made clear that designated beneficiaries of participants who died after their required beginning date could not stop receiving distributions and wait until the end of the 10th year to take the entire benefit (which was how the Five‑Year Rule operated for beneficiaries of participants who died prior to their required beginning date).

Comments and Confusion Over the IRS Proposed Regulations

Comments to the IRS regarding the proposed regulations expressed confusion about the application of the 10-Year Rule to designated beneficiaries of participants who died after their required beginning date, and to designated beneficiaries of eligible designated beneficiaries. Expecting the 10-Year Rule to be applied similarly to the Five-Year Rule, some commenters who were beneficiaries of participants who died in 2020 (after the participants’ required beginning date) stated that they did not take a 2021 RMD and are unsure whether they are required to take a 2022 RMD.

In response, the IRS issued transition relief providing that (1) the proposed RMD regulations, if finalized, will not apply earlier than 2023, and (2) the failure to distribute Specified RMDs in 2021 and 2022 will not constitute a plan qualification failure or cause the 50% excise tax to apply with respect to the Specified RMD.

A Specified RMD is a payment from a defined contribution plan that would be required under the IRS’s proposed regulations to

  • a designated beneficiary of a participant if (1) the participant died in 2020 or 2021, (2) the participant died on or after the participant’s required beginning date, and (3) the designated beneficiary is not taking lifetime or life expectancy payments (e.g., a contingent annuitant of a joint and survivor annuity); or
  • a beneficiary of an eligible designated beneficiary if (1) the eligible designated beneficiary died in 2020 or 2021, and (2) that eligible designated beneficiary was taking lifetime or life expectancy payments.

This relief provides welcome flexibility for plan sponsors and their administrators for 2021 and 2022. Plan administrators should discuss this relief with recordkeepers and third-party administrators to confirm whether their plans need to take advantage of this relief or whether they have been administered in line with the proposed regulations.

In addition, plan administrators should consider whether changes to summary plan descriptions or other participant communications may be desirable. Plan administrators should also talk to recordkeepers and plan administrators about whether any changes are needed to administration for 2023 to reflect the 10-Year Rule.

If you have any questions about this IRS relief, or about the application of the post–SECURE Act RMD rules to your plans, please contact any of the authors or your regular Morgan Lewis benefits contact.