Proposed Changes to Required Minimum Distributions

The IRS issued proposed regulations this year addressing RMD questions raised by the SECURE Act for qualified plans, 403(b) plans, IRAs and 457 eligible deferred compensation plans. While final regulations have not yet been issued, the regulations are retroactive and apply for the 2022 calendar year and later RMDs to comply with the SECURE Act. The extensive guidance has estate planning implications for participants who die after the SECURE Act was passed.

The Act raised the age to start Required Minimum Distributions (RMDs) to 72 from 70.5 and eliminated the ability for beneficiaries who do not qualify as “Eligible Designated Beneficiaries” to stretch RMDs over their lifetime and replaced it with a 10-year draw-down period. 

An Eligible Designated Beneficiary (EDB) is entitled to more distribution options than a beneficiary who is not an EDB.  As defined by the SECURE Act, an EDB is a beneficiary who, on the participant’s death, is the surviving spouse, a child under age 21, a disabled or chronically ill individual, or a beneficiary no more than 10 years younger than the participant. To qualify as disabled or chronically ill, the beneficiary must meet the criteria on the date of the participant’s death.

If the participant had not started receiving RMDs at the time of death, an EDB may take distributions over their life expectancy. A minor child, who is not disabled or chronically ill, must begin taking RMDs by the year following the participant’s death and distribute the entire account within 10 years of turning 21. If a beneficiary does not qualify as an EDB (for example, an adult child who is not disabled or chronically ill), then the account balance must be distributed within 10 years of the participant’s death.  

If the participant had started receiving RMDs at the time of death, the RMD in the year of death is the same as if the participant had survived but it is paid to the beneficiary(ies).  The beneficiaries who do not qualify as EDBs must continue annual RMD payments during years 1-9 following the participant’s death and make sure the entire account balance is distributed by the end of the 10-year period. The plan document can also mandate shorter payout periods than the maximum required by the regulations, so it is important beneficiaries understand plan-specific distribution options.