The SECURE Act, which was passed in late 2019, provided several mandatory changes affecting defined contribution plans. While plans do not have to adopt their SECURE Act amendments until December 31, 2022, plans have already been administering many of the provisions. And while many plans have already been amended and have applied its provisions without significant complications, one area where we have seen issues arise is from the SECURE Act changes to required minimum distributions (“RMDs”).
Last week the IRS issued proposed regulations for RMDs incorporating the changes made by the SECURE Act in an attempt to resolve many of those issues. Although these proposed regulations do not have the force and effect of law until finalized, the IRS has announced that complying with the proposed regulations will be a reasonable, good faith interpretation of the SECURE Act provisions and the current regulations for RMDs made in the 2021 calendar year.
As a recap, the RMD rules require participants and beneficiaries to begin distributions under the Plan by their required beginning date. Plans may be designed to force distribution earlier than the RMD rules require, but not later. The SECURE Act increased the required beginning date for distributions from 70 ½ to 72, introduced a new 10-year rule for distributions to beneficiaries, and provided beneficiaries that met the definition of “eligible designated beneficiary” extended distribution options.
While the new RMD provisions of the SECURE Act are already effective, the current regulations do not always provide clarity on how the new provisions should be administered. For example, when a participant dies after the participant’s required beginning date, it was not clear before the proposed regulations whether benefits paid to a designated beneficiary: (a) must continue to be paid every year after the participant’s death with a final distribution 10 years after death; or (b) could suspend RMD payments as long as distribution of the participant’s entire account was made within 10 years of the participant’s death. The proposed regulations clearly provide that the answer is (a); the designated beneficiary must continue RMDs, calculated using the beneficiary’s life expectancy, for up to nine calendar years with a full distribution of the remaining account balance in the tenth calendar year. Questions have also arisen on the administration of the RMD rules to the newly created “eligible designated beneficiaries.” The proposed regulations clarified that a defined contribution plan may provide that: (i) either the 10-year rule or life expectancy rule applies to eligible designated beneficiaries; or (ii) both rules are available, and the eligible designated beneficiary may elect between receiving distributions under the 10-year rule or the life expectancy payment rule.
We are still unpacking the 250 pages of proposed regulations, and will provide follow-up posts on further insights on the proposed regulations as well as an update when the final regulations are issued. If you have questions on the administration or plan document requirements of the proposed regulations, please contact any of the attorneys in our Employee Benefits group.
