Proposed Regulations on RMDs

The SECURE Act changed some of the rules for required minimum distributions (RMDs). It increased the starting age to 72 for those born after June 30, 1949. It effectively killed the “stretch IRA” by imposing a new 10-year rule for beneficiaries inheriting accounts from decedents dying after 2019 and who do not qualify as “eligible designated beneficiaries.” These and other SECURE Act changes are explained in proposed regulations (REG-105954-20, 2/23/22).

A major surprise in the proposed regulations concerns application of the 10-year rule. If the account owner dies before his/her required beginning date (see below), beneficiaries who are not “eligible designated beneficiaries” (see below) must empty the account by the end of the 10th year following the year of the owner’s death, but no distributions are required prior to the 10th year. Most tax practitioners thought this is how the 10-year rule would work regardless of when the account owner dies. However, the proposed regulations say that if the owner dies on or after the required beginning date, a non-eligible designated beneficiary must receive RMDs under the life expectancy method in years one through nine, and withdraw the balance of the account by the end of the 10th year.

Required beginning date. For an employee other than an 5% owner or an IRA owner, the required beginning date is April 1 of the calendar year following the later of (1) the calendar year of attaining age 72 or (2) the calendar year in which the employee retires. For 5% owners and all IRA owner, retirement does not impact the required beginning date; it is April 1 of the year following the year in which age 72 reached.

Eligible designated beneficiaries. These are beneficiaries who are not subject to the 10-year rule and can take RMDs over their life expectancy. Eligible designated beneficiaries include the account owner’s surviving spouse or child under the age of majority, beneficiaries who are disabled or chronically ill, or beneficiaries who are no more than 10 years younger than the account owner. The proposed regulations clarify some of the rules for determining who is an eligible designated beneficiary:

• A minor child is defined as one who has not reached age 21 (although a defined benefit plan may keep whatever definition of “minor” it has been using). Once the child reaches this age, the 10-year rule begins to apply.
• To be considered disabled, if the designated beneficiary is under age 18 when the account owner dies, the designated beneficiary must have a “medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or be of long-continued and indefinite duration.” If the designated beneficiary is older, then the definition of disability is the same as the one used for early distribution penalty purposes (i.e., being unable to engage in substantial gainful activity). There is also a safe harbor that uses the Social Security definition of disability, which includes chronic illness.

Subsequent beneficiaries. If the employee died before 2020 and the employee had only one designated beneficiary who also died before 2020, the beneficiary of the designated beneficiary is subject to the 10-year rule. If the employee died after 2019 with an eligible designated beneficiary and the eligible designated beneficiary dies before the employee’s interest is entirely distributed, the remainder of the employee’s interest must be distributed within 10 years after the death of the eligible designated beneficiary. If the employee died before 2020 and had more than one designated beneficiary, whether the SECURE Act amendments apply depends on when the oldest beneficiary dies.

Effective date. Generally, the changes in the proposed regulations would apply retroactively to January 1, 2022. Distributions for 2021 should reflect existing regulations with a good faith observance of the SECURE Act changes.