IRS issues final required minimum distribution regulations for SECURE and SECURE 2.0 Act changes

On July 18, 2024, the U.S. Treasury Department (Treasury) and Internal Revenue Service (IRS) issued final regulations to update the required minimum distribution (RMD) rules for changes made by the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and certain changes made by the SECURE 2.0 Act, and concurrently issued proposed regulations for certain other SECURE 2.0 Act RMD changes not addressed in the final regulations. This bulletin summarizes the key RMD provisions of the final regulations for employer-sponsored retirement plans, including qualified defined benefit (DB) plans and defined contribution (DC) plans, 403(b) plans, and 457(b) plans. Our bulletin summarizing the concurrently issued proposed regulations can be found here.

These regulations finalize the proposed RMD regulations published on February 24, 2022 (as corrected on March 21, 2022, and May 20, 2022), and generally follow those earlier proposed regulations without substantial change.

This bulletin includes:

• DC plan updates
• DB plan updates
• Updates affecting DC and DB plans
• Other RMD reminders
• Applicability date

DC plan updates to RMDs following SECURE and SECURE 2.0

RMDs from designated Roth accounts (Section 325 of the SECURE 2.0 Act)

The SECURE 2.0 Act exempts designated Roth accounts from the RMD requirements during the participant’s lifetime beginning in 2024 (except prior-year RMDs paid in 2024). The final RMD regulations provide that a participant’s designated Roth account is excluded when calculating RMDs through the calendar year of the participant’s death. If a participant has both designated Roth and non-Roth accounts, only the non-Roth accounts are included when calculating RMDs through the calendar year of the participant’s death. If a participant’s entire DC plan account is in a designated Roth account, then no RMDs are required to be made during the participant’s lifetime.

The final RMD regulations purposely do not include rules about how distributions made from a designated Roth account during the participant’s lifetime would not count toward satisfying the RMD requirement in calendar years for which the participant is required to take RMDs. Instead, the concurrently issued proposed RMD regulations cover those rules in proposed form in order to provide stakeholders a notice and comment period on those rules.

Purchase of annuity contract with a portion of the participant’s account (Section 204 of the SECURE 2.0 Act)

The final RMD regulations provide guidance on RMDs related to when a portion of a participant’s DC plan account balance is used to purchase an annuity contract. Instead of satisfying the RMD rules separately with respect to the annuity portion and the remaining account balance, the final rule permits plans to allow the participant to elect to satisfy the RMD rules by aggregating the fair market value of the annuity contract with the remaining account balance and treating payments under the annuity contract as RMDs from the remaining account balance.

The final RMD regulations purposely do not include rules about the operation of this alternative or any guidance about determining the fair market value of the annuity contract. Instead, the concurrently issued proposed RMD regulations cover those rules in proposed form in order to provide stakeholders a notice and comment period on those rules.

10-year rule for post-death RMDs to designated beneficiaries (Section 401 of the SECURE Act)

The SECURE Act made changes to the post-death RMD requirements for DC plans, affecting distributions to designated beneficiaries meaning individuals who are not eligible designated beneficiaries. These changes apply in the case of participants who die on or after January 1, 2020 (January 1, 2022, for governmental plans and certain collectively bargained plans) and generally require that a deceased participant’s benefit in a DC plan must be entirely paid to a designated beneficiary by the end of the calendar year that includes the 10th anniversary of the participant’s death (the 10-year rule). If the designated beneficiary is an eligible designated beneficiary, then RMDs can be made over the eligible designated beneficiary’s life or life expectancy instead of using the 10-year rule. If an eligible designated beneficiary dies before receiving the participant’s total benefit, any remaining benefits must be paid to their beneficiary by the end of the calendar year that includes the 10th anniversary of the eligible designated beneficiary’s death.

• Designated beneficiary means an individual designated as a beneficiary by the participant.
• Eligible designated beneficiary means a designated beneficiary who, as of the date of the participant’s death, is any of the following: the surviving spouse of the participant, a child of the participant who has not reached the age of majority (21st birthday), a disabled or chronically ill individual, or an individual who is not more than 10 years younger than the participant.
  • Child means a child by blood, stepchild, legally adopted child, or an eligible foster child.
  • Disability is based on whether an individual is unable to engage in substantial gainful activity. Individuals under 18 are required to have a medically determinable physical or mental impairment, which causes marked and severe functional limitations that can be expected to result in death or to be of long-continued and indefinite duration. The plan can use as a safe harbor alternative a Social Security determination of disability if that determination has been made by the date of the participant’s death.

  In general, only an individual (a person) can be a designated beneficiary or an eligible designated beneficiary. Thus, a nonperson beneficiary (e.g., a trust) is neither unless an exception applies. Absent an exception, after the participant’s death, RMDs to nonperson beneficiaries must be paid under the five-year rule by the end of the calendar year that includes the fifth anniversary of the participant’s death.

  In keeping with the IRS’s position in the proposed RMD regulations, the final regulations retain the requirement that annual RMDs must continue uninterrupted if a participant dies on or after the date their RMDs are required to start, the required beginning date (RBD), although several commenters to the proposed regulations disagreed with this position, believing it should be possible under the 10-year rule to temporarily cease annual post-death RMDs as long as full distribution of the deceased participant’s account is made by the end of the calendar year that includes the 10th anniversary of the participant’s death. The IRS’s own comments and explanation included with the final regulations indicate it does not think that the commenters’ interpretation is consistent with a plain reading of the statute. This means that the final regulations will require that, if a participant dies after their required RMD start date, then annual post-death RMDs must continue to be made to the participant’s designated beneficiary for calendar years after the calendar year in which the participant died, also requiring full distribution of the participant’s account to their designated beneficiary under the 10-year rule by the end of the calendar year that includes the 10th anniversary of the participant’s date of death, unless the designated beneficiary is an eligible designated beneficiary taking life expectancy RMDs. This treatment similarly applies if an eligible designated beneficiary who was taking life expectancy payments dies or if an eligible designated beneficiary who is a minor child of the participant and was taking life expectancy payments reaches the age of majority, requiring continued annual RMDs for up to 10 years after either of these instances.

  Transition relief through 2024. As the changes made by Section 401 of the SECURE Act generally apply to participants who die on or after January 1, 2020, the IRS has already provided relief from the continuing uninterrupted post-death annual RMD requirement through 2024 within IRS Notices 2022-53, 2023-54, and 2024-35 in response to comments requesting transition relief from this requirement. Under this relief, if a distribution would have been required to be made to certain beneficiaries if these final regulations had applied before January 1, 2025, then: “(1) a plan will not fail to be qualified for failing to make that distribution in 2021, 2022, 2023, or 2024; and (2) the taxpayer who failed to take the distribution will not be assessed an excise tax for failing to do so.” This relief applies to designated beneficiaries of participants who died in 2020, 2021, 2022, or 2023 after their RBD (other than an eligible designated beneficiary using the lifetime or life expectancy payments exception). Similar relief was included in the case of eligible designated beneficiaries taking annual life expectancy payments who died in 2020, 2021, 2022, or 2023, and that beneficiary’s own beneficiary failed to take a distribution in 2021, 2022, 2023, or 2024.

  DB plan updates to RMDs after changes to SECURE and SECURE 2.0

  Actuarial increases at age 70½ are unchanged

  An actuarial increase of benefits that are vested is required from the April 1 following the year in which the participant attains age 70½. While the RMD age increased due to the SECURE Act and SECURE 2.0 Act, the age at which actuarial increases apply was not changed, and is staying at 70½. This actuarial increase is required regardless of whether the plan provided the participant a suspension of benefits notice. Actuarial increases are not required until benefits become vested.

  A suspension of benefits notice informs participants that payment of their benefits has been suspended, explains the reasons for the suspension, and cites the plan provisions that authorize it. The notice may also indicate that benefits suspended after normal retirement age will not be actuarially increased during the suspension period. These notices are typically provided when a retiree returns to work or when a participant continues working beyond their normal retirement date with their employer (or, in the case of multiemployer plans, in the same industry, trade, or craft, and in the same geographic area).

  Actuarial increases do not apply to 5% owners, to DB plans sponsored by governmental entities, or to churches. For this purpose, a church plan is “a plan maintained by a church for church employees,” and a church in this context means any church or qualified church-controlled organization as defined in Internal Revenue Code (IRC) Section 3121(w)(3).

  Observation. Calculating benefits for retirees who return to work or participants who continue working past their normal retirement date can be complex. Factors such as the plan’s terms, whether the participant is in covered or non-covered employment, when (or if) the suspension notice is provided, and the number of hours worked each month may impact how the benefit is calculated. Plan sponsors are advised to consult their Milliman consultant for assistance or review the plan’s procedures for these calculations.

  SECURE and SECURE 2.0 updates affecting both DC and DB plans

  RMD age (Section 114 of the SECURE Act, as further amended by Section 107 of the SECURE 2.0 Act)

  In general, the required beginning date (RBD), i.e., the date the first RMD must be made from the plan, is April 1 following the calendar year in which the individual attains the RMD age. However, some plans may permit individuals who are not 5% owners to defer the start of RMDs to even later, so that the required beginning date is April 1 following the calendar year of the RMD age or the date the individual retires, if later. After the first RMD is made, subsequent payments that meet the minimum requirements are due by December 31 of each year.

  The RMD age was changed by the SECURE Act from 70½ for individuals born before July 1, 1949, to age 72 for individuals born on or after July 1, 1949, and before January 1, 1951. The SECURE 2.0 Act changed the RMD age again, this time in stages. The new ages are as follows:

  • Age 73 for individuals born on or after January 1, 1951, and before January 1, 1959
  • Age 75 for individuals born on or after January 1, 1960

  The final RMD regulations do not address the ambiguity in the RMD age for distributions made after December 31, 2022, to individuals born in 1959. Instead, the concurrently issued proposed RMD regulations address this in proposed form to offer stakeholders a notice and comment period on this clarification.

  Observation. Plans may not retain an earlier RBD. They can require participants to start distributions at an age earlier than the new RBD based on the increased ages (for example at age 70½ or at normal retirement age), but distributions made earlier than the statutory RBD are not considered RMDs. Note that the annuity starting date for DB plan distributions that start before the statutory RBD in the form of an annuity that would satisfy the RMD requirements will generally be treated as the RBD for purposes of satisfying the RMD requirements. Plans that choose to retain a mandatory start date earlier than the statutory RBD should review how these provisions are stated in the plan document, summary plan description, and all participant communications.

  Lower excise taxes for RMD failures (Section 302 of the SECURE 2.0 Act)

  Failure to take timely RMDs when due results in an excise tax being levied on the participant or beneficiary. The final regulations reflect the SECURE 2.0 Act changes, which provide that the penalty for failure to take RMDs is reduced from the previous level of 50% to the new level of 25% of the RMD shortfall due for the year (i.e., the difference between the amount actually distributed and the amount that should have been distributed). The excise tax may be lowered to 10% if the RMD shortfall is corrected within the correction window that begins from when the excise tax is imposed (i.e., when the RMD was due) and ends on the earliest of the following:

  • The date the IRS mails notice of the RMD shortfall
  • The date the excise tax is assessed
  • The last day of the second taxable year beginning after the taxable year in which the excise tax is imposed

  If an individual dies before satisfying their RMD requirement for a calendar year, the final regulations provide that the beneficiary has until the later of the tax filing deadline for the year the individual died, or the end of the following calendar year, to take the missed RMD and qualify for the automatic waiver of the excise tax.

  The final RMD regulations left open the treatment of distributions of prior years’ missed RMDs within the correction window that result in the reduced excise tax rate or the automatic waiver of the excise tax for a missed RMD for the year of an individual’s death, and how missed RMDs from previous years count toward satisfying current RMD requirements. Instead, the concurrently issued proposed RMD regulations clarify this issue in proposed form to allow stakeholders a notice and comment period on this clarification.

  Surviving spouse election (Section 327 of the SECURE 2.0 Act)

  A surviving spouse who is the only beneficiary of the participant may elect to be treated as if they were the participant for RMD purposes. This means they can defer until the participant would have attained the RMD age before starting their RMDs and, if they die before payments start, then their beneficiaries can be treated as if they were the beneficiaries of the participant. The final regulations reflect the statutory changes, but the details surrounding these elections were left to the concurrently issued proposed RMD regulations to allow stakeholders a notice and comment period on these rules.

  Other RMD reminders, unaffected by SECURE 2.0

  A few other items that were not changed by the SECURE 2.0 Act but are worthy of reminders:

  • RMD distributions cannot be rolled over into other tax-deferred accounts.
  • If more than the required amount is distributed in a given year, then the extra withdrawals do not count toward RMDs for future years.
  • RMD payments for multiple plans such as defined benefit, 401(k), and 457(b) plans cannot be combined. Each of these types of plans has a separate requirement for its respective RMD.

  What is the applicability date of the new RMD regulations?

  The applicability date of the final regulations is January 1, 2025, applying a reasonable, good faith interpretation for prior years. Specifically, the final regulations apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025, determining rollover eligibility of distributions on or after January 1, 2025, and the new lower excise tax structure for late RMDs for taxable years beginning on or after January 1, 2025.

  Please contact your Milliman consultant to discuss how the final rule may impact your plan(s).