As we discussed in prior e-alerts here and here, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0) each contained several provisions affecting the rules for required minimum distributions (RMDs) under Internal Revenue Code (Code) Section 401(a)(9). On July 19, 2024, the Internal Revenue Service (IRS) and the Department of Treasury released both final regulations (Final Regulations) and proposed regulations (Proposed Regulations) for compliance with the RMD rules. This client alert focuses on important developments under the Final Regulations and Proposed Regulations which impact administrators and participants/beneficiaries of qualified plans (both defined benefit and defined contribution), 403(b) plans, and 457(b) eligible deferred compensation plans. These Regulations also directly affect individual retirement accounts and annuities (IRAs), both traditional and Roth. While this alert does not focus on IRAs, we encourage you to contact us if you have specific concerns regarding the application of these rules to the IRA components of your plans.

Code Section 401(a)(9) sets forth a complex structure of requirements addressing both the timing and form of distributions from retirement plans/accounts. Additionally, Code Section 401(a)(9) prescribes both document compliance requirements and operational compliance requirements.

I. Final Regulations

As discussed in our prior alert, on February 24, 2022, the IRS issued proposed regulations (“2022 Proposed Regulations”) to address changes to the RMD rules as a result of the SECURE Act. The 2022 Proposed Regulations also updated the existing regulations under Code Section 401(a)(9) and related Code sections to incorporate the statutory amendments since the regulations were last issued (2004) and to clarify issues which had been raised by public comments and private letter ruling requests. While the Final Regulations generally reflect the 2022 Proposed Regulations, they also take into account comments which were received in response to the 2022 Proposed Regulations and incorporate rules to reflect certain provisions of SECURE 2.0.

Highlights:

• General Requirements: The Final Regulations continue to reflect that distributions from a qualified plan must commence by certain dates during the life of the employee and after the death of the employee and that the employee’s entire interest must be distributed within specific time frames. The Final Regulations confirm that, in addition to qualified plans, the RMD requirements, including incidental death benefit requirements, apply to 403(a) qualified annuity plans, 403(b) plans, IRAs under Code Section 408, and 457(b) plans.
• Governmental Plans: The Final Regulations continue to provide that governmental plans will be treated as complying with Code Section 401(a)(9) if the plan complies “with a reasonable, good faith interpretation of section 401(a)(9).”
• Applicable Age: The Final Regulations include that the applicable age for purposes of an employee’s required beginning date is:
  • 70 ½ for people born before July 1, 1949
  • 72 for individuals born on or after July 1, 1949, and before January 1, 1951
  • 73 for individuals born on or after January 1, 1951, and before January 1, 1959
  • 75 for individuals born on or after January 1, 1960
  • Individuals born in 1959 are addressed in the Proposed Regulations (discussed below)

However, a plan can optionally provide a uniform required beginning date of April 1 of the calendar year after the employee reaches age 70 ½ regardless of the employee’s date of birth.

• Beneficiaries: The Final Regulations confirm which designated beneficiaries are “eligible designated beneficiaries” as set forth in the SECURE Act: the surviving spouse of the employee; a child of the employee who has not reached age 21; a disabled or chronically ill beneficiary; or an individual who is not more than 10 years younger than the employee. For defined contribution plans, a member’s interest upon death must be distributed within specified time frames depending on the type of beneficiary, as follows:
  • within five years to a non-individual beneficiary; 
  • within 10 years to an individual designated beneficiary; and
  • within 10 years to an eligible designated beneficiary unless the eligible designated beneficiary elects distributions over the beneficiary’s life expectancy; provided that if the eligible designated beneficiary is a minor child, the interest must be fully distributed by age 31.

The Final Regulations adopt the position taken in the Proposed Regulations that, effective January 1, 2025, if a member dies on or after his or her required beginning date, distributions must not only be made within the 10 year period noted above, but annual RMDs must also be made each year during the 10 year period. Plans relying on the IRS’ transitional relief for 2021, 2022, 2023 and 2024, which allowed plan sponsors to disregard the requirement to make annual RMDs in this situation, must begin annual RMDs in 2025 but are not required to make up for missed RMDs during one or more of those years. There is no extension of the 10-year deadline by which full distribution is required to be made.

The Final Regulations also incorporate the special rules for surviving spouse beneficiaries under SECURE 2.0, under which a surviving spouse can elect to be treated as the participant for RMD purposes. The Proposed Regulations provide more guidance on this rule (discussed below).

The Final Regulations state that it is permissible to provide for different RMD rules to apply for the purpose of different classes of eligible designated beneficiaries, e.g., the life expectancy rule for spouses and the ten-year rule for other types of eligible designated beneficiaries.

• Roth Accounts: The Final Regulations reflect the SECURE 2.0 change eliminating RMDs for designated Roth accounts during the life of the employee. The Proposed Regulations further discuss the treatment of a distribution from a Roth account during the life of the employee.
• Public Safety Health Insurance Premium Deductions: The Final Regulations clarify that a distribution under Code Section 402(l) (distributions with respect to eligible retired public safety officers to pay health insurance premiums) will count towards the individual’s RMD for the applicable year.
• Annuity Contract Purchased Under a Defined Contribution Plan: The Final Regulations confirm that payments under an annuity contract purchased under a defined contribution plan cannot extend past the otherwise applicable full distribution deadline (i.e., for a designated beneficiary, the ten-year rule). This rule does not apply to an annuity paid under a defined benefit plan attributable to a direct rollover from a defined contribution plan.
• Increasing Payments Under Annuity Contracts or Defined Benefit Plans: The final regulations generally provide that permitted annuity payment increases under a defined benefit plan are also available under an annuity contract.
• Plans Maintained By More Than One Employer (MEPs and PEPs): The final regulations provide that if a plan is maintained by more than one employer, an employee who retires from employment with any of those employers but continues to be employed by another participating employer is not treated as having retired for RMD purposes.
• Excise Taxes: The Final Regulations confirm that the excise tax under Code Section 4974 for late RMDs is reduced from 50 percent to 25 percent for taxable years beginning after December 29, 2022. The excise tax is further reduced to 10 percent if a corrective distribution is made within a specific correction window. 
• Effective Date: The Final Regulations are effective for distributions for calendar years beginning on and after January 1, 2025. For earlier distribution years, plans must apply the 2022 Proposed Regulations with a reasonable and good faith interpretation of the SECURE Act and SECURE 2.0 provisions. Plan amendments are not required until before December 31, 2026 (December 31, 2029, for governmental plans).

II. Proposed Regulations

The Proposed Regulations address certain provisions under SECURE 2.0 which were reserved under the Final Regulations. The Proposed Regulations invite public comment by September 17, 2024 (60 days after publication in the Federal Register) and a public hearing is scheduled for September 25, 2024.

Highlights:

• Employees Born in 1959: Under Section 107 of SECURE 2.0, it was unclear whether the applicable age for RMDs for persons born in 1959 was age 73 or age 75. Under the Proposed Regulations, the applicable age for an individual born in 1959 would be age 73. 
• Distributions from Designated Roth Accounts: Section 325 of SECURE 2.0 established that RMDs no longer would be required from designated Roth accounts during an employee’s lifetime. The Proposed Regulations would establish that a distribution from a designated Roth account in a year in which the employee is required to take an RMD does not count toward the RMD requirement. Thus, the Roth distribution would be eligible to be rolled over to a Roth IRA if it otherwise meets the requirements for an eligible rollover distribution. 
• Corrective Distributions and Excise Taxes: Supplementing the provisions in the Final Regulations regarding reduced excise taxes for late RMDs, the Proposed Regulations would establish that a corrective distribution for a late RMD from a prior year (and which is eligible for a reduced excise tax from 25 percent to 10 percent under Code Section 4974) does not count toward the RMD for the year in which the corrective distribution is made. 
• Spousal Elections: Under Section 327 of SECURE 2.0, and as addressed in the Final Regulations, if a surviving spouse of an employee is the sole designated beneficiary and the employee dies before the employee’s required beginning date, the surviving spouse may be allowed the option to be treated as the employee for the purpose of RMDs from a defined contribution plan. The Proposed Regulations create a series of rules to be used for such spousal elections. The Proposed Regulations also provide an updated Uniform Lifetime Table for the calculation of RMDs. Last, the Proposed Regulations request comment on how Section 327 of SECURE 2.0 could apply to a defined benefit plan.
• Distributions to Trust Beneficiaries: The Proposed Regulations establish that, in certain cases, the RMD rules would be applied separately to multiple beneficiaries of a see-through trust. 
• Effective Date: The Proposed Regulations are proposed to apply for calendar years beginning on or after January 1, 2025.

For additional information regarding RMDs, the Final Regulations, the Proposed Regulations or other issues affecting your retirement plan(s), please contact Audra Ferguson, Rob Gauss, Lisa Harrison, Lindsay Knowles, Shalina Schaeffer, Tara Sciscoe or the Ice Miller benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.