IRS Final Regulations on Required Minimum Distributions Address Both Secure Acts

On July 19, 2004, the IRS released final regulations on required minimum distributions (“RMDs”) that address changes to the RMD rules made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) and the SECURE 2.0 Act of 2022 (“SECURE 2.0”). See the blogs listed below for general information:

• How Will The SECURE Act Affect Me?
• What Do I Need To Know About SECURE 2.0? (Part 1)
• What Do I Need To Know About SECURE 2.0? (Part 3)

The final regulations are effective September 17, 2024 and generally apply to RMDs made on or after January 1, 2025.

The IRS simultaneously released proposed regulations covering additional SECURE 2.0 changes that are not addressed in this article.

What are “Required Minimum Distributions?”

Generally stated, qualified retirement plans, including 401(k) plans, must distribute a portion of a participant’s account (a “required minimum distribution” or “RMD”) by no later than his or her “required beginning date,” which is generally the April 1st of the calendar year following the calendar year in which the participant attains a certain age (see below) or, if later, retires. The rules regarding RMDs are complex, and the specifics and numerical calculations are frequently undertaken by third-party administrators, accountants and/or ERISA attorneys.

What’s in the Final Regulations That I Need to Know About?

The following are but a few highlights of the provisions most likely to impact 401(k) plan administration:

Required Beginning Date / Applicable Age. The final regulations define the term “required beginning date” for a participant (other than a five-percent owner of the sponsoring employer), who has not yet retired, as the April 1^st of the calendar year following the calendar year in which he or she attains the “applicable age,” which is:

• • Age 70½ for participants born before July 1, 1949;
  • Age 72 if born on or after July 1, 1949 and before January 1, 1951;
  • Age 73 if born on or after January 1, 1951 and before January 1, 1959; and
  • Age 75 if born on or after January 1, 1960.

Payments Where Participant Dies Prior to His or Her Required Beginning Date. Under the final regulations, RMDs made prior to the death of the plan participant depend upon the type of beneficiary:

• • An “eligible designated beneficiary” (as defined below) generally may elect to receive:
    • • Payments beginning in the year after the participant’s death and extending over the beneficiary’s lifetime; or
      • The entire amount by the end of the calendar year that includes the 10th anniversary of the participant’s death.
  • A “designated beneficiary” (which is generally an individual who does not qualify as an “eligible designated beneficiary”) is required to receive the entire amount by the end of the calendar year that includes the 10th anniversary of the participant’s death.

Payments Where Participant Dies After His or Her Required Beginning Date. Under the final regulations, payments made after the death of the plan participant are also dependent upon the type of beneficiary:

• • The general rule is that, after a participant’s death, RMDs must continue to be paid to a “designated beneficiary” (see above) based upon the longer of: (i) the participant’s life expectancy, had the participant lived; or (ii) the “designated beneficiary’s” life expectancy.
  • However, if an “eligible designated beneficiary” (as defined below) dies, his or her beneficiary must receive all remaining amounts by the end of the calendar year that includes the 10th anniversary of such eligible designated beneficiary’s death.

• • • • If the “eligible designated beneficiary” is a minor child, the participant’s entire benefit must be paid out by the end of the 10th calendar year following the year the child reaches age 21.
      • There are special rules for cases where there are multiple minor children.

Determining the “Eligible Designated Beneficiary.” Under the final regulations, an “eligible designated beneficiary” is:

• • A surviving spouse;
  • A child of the participant who has not reached the age of majority as of the date of the participant’s death —
    • • The final regulations clarify that the term “child” includes stepchildren, adopted children, and eligible foster children; and
      • Provide that an employee’s child reaches the age of majority on his or her 21st birthday;
  • A disabled or chronically ill beneficiary; or
  • A beneficiary who is no more than 10 years younger than the participant.

Disabled or Chronically Ill Beneficiaries.The final regulations provide that, in order to be considered disabled or chronically ill, beneficiaries must provide the plan with certain required documentation by no later than the October 31st of the year after the participant’s death.

Other Topics. Among some of the other topics of interest addressed in the final regulations are:

• • Special rules for trusts or charities as beneficiaries;
  • Older beneficiaries;
  • Multiple beneficiaries;
  • Payout options;
  • Separate accounts; and
  • Final RMD payment.

CAUTION!  

The IRS has issued relief for certain “specified” RMDs that, under proposed regulations issued in 2022, would have been required to have been made in 2024 or years prior (see our blog for details). Plan administrators should be aware that the final regulations, which will apply to RMDs made on and after January 1, 2025, do not contain similar relief provisions for RMDs made under similar circumstances — meaning that the new SECURE Act rules regarding the timing of ten-year payouts will have to be followed to the letter to avoid possible excise taxes and other adverse consequences.

This article not meant to offer a detailed analysis of the final regulations or the complex legal rules relating to required minimum distributions applicable to 401(k) plans or other types of retirement plans (such as defined benefit plans, governmental plans, individual retirement accounts or 403(b) plans). As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.