The Setting Every Community Up for Retirement Enhancement Act of 2019 (Secure Act) and proposed regulations issued under the Secure Act in 2022 made changes to certain death-related Required Minimum Distributions (RMDs) requirements. 

Under these rules, IRAs and the following plans (collectively, Plan) must fully distribute their entire interest for which there is a designated beneficiary within 10 years of the Plan participant’s or IRA owner’s death:

• Section 401(a) tax-qualified defined contribution retirement plan
• Section 403(a) annuity contract
• Section 403(b) plan
• Section 457(b) plan 

It’s important to note that a five-year distribution requirement continues to apply if there is no designated beneficiary. The 10-year distribution requirement applies regardless of whether RMDs began prior to or after the Plan participant’s or IRA owner’s death. An exception is provided for RMDs payable to an “eligible designated beneficiary” (a spouse or minor child of the deceased Plan participant or IRA owner, a disabled or chronically ill individual, or an individual who is not more than 10 years younger than the Plan participant or IRA owner). This permits distributions to be made over the eligible designated beneficiary’s lifetime or life expectancy, provided that the RMDs begin in the first calendar year following the Plan participant’s or IRA owner’s death. Further, where an eligible designated beneficiary dies before having received the entire Plan or IRA interest, that person’s own beneficiary must receive the remaining portion of the Plan or IRA interest within 10 years of the death of the original Plan participant or IRA owner.

In this regard, public comments provided in connection with the proposed regulations highlighted confusion as to the mechanics of the 10-year payout requirement, specifically as to whether it was permissible for no payments to be made until the tenth year, or, alternatively, whether payments were required throughout the 10-year period. Due to this apparent confusion, the IRS has previously provided exceptions to these RMD requirements and the related Section 4974 excise tax applicable to 2021-2023. The IRS has now extended these exceptions to 2024, and advised that when final regulations are issued, they will first be applicable to RMDs payable in 2025.

IRS Notice 2024-35:

The IRS has issued Notice 2024-35 (Notice), which provides for the extension to RMDs paid in 2024 of the relief provided by the IRS for certain RMDs that were payable in 2021, 2022, or 2023 following the death of a Plan participant, IRA owner, or beneficiary. In addition, the Notice provides that the effective date for anticipated final regulations addressing certain death-related RMD requirements will continue to be delayed, with the result that such final regulations will first be applicable to RMDs payable in 2025. 

Consequently, according to the Notice, for 2024:

• A Plan or IRA that does not make a “specified” RMD will not be treated as violating Section 401(a)(9) for that failure
• An individual who does not take a “specified” RMD from a Plan or IRA will not be subject to the Section 4974 (25%) excise tax for the failure to take the required RMD

Under the Notice, a “specified” RMD is one that would otherwise have been required to be made in 2024 under the existing proposed regulations under a Plan or IRA in connection with the death of the Plan participant, IRA owner, or designated beneficiary, if the RMD would be made to:

• A designated beneficiary of a Plan participant or IRA owner where:
  • The Plan participant or IRA owner died in 2020, 2021, 2022, or 2023, and on or after the Plan participant’s or IRA owner’s RMD required beginning date, and 
  • The designated beneficiary is not using the lifetime or life expectancy payments exception; or
• A beneficiary of an “eligible designated beneficiary” (a spouse or minor child of the deceased Plan participant or IRA owner, a disabled or chronically ill individual, or an individual who is not more than 10 years younger than the Plan participant or IRA owner), where the eligible designated beneficiary: 
  • Died in 2020, 2021, 2022, or 2023, and
  • Was using the lifetime or life expectancy payments exception

What does CohnReznick Think?

Many taxpayers and tax advisors had believed that like the prior five-year rule, under the changes made by the Secure Act, no RMDs were required until the end of the tenth year following the Plan participant’s or IRA owner’s death, provided that the full amount was paid by the end of the tenth year. However, the 2022 proposed regulations generally provide that the beneficiary of a Plan participant or IRA owner who died after the Plan participant’s or IRA owner’s RMD required beginning date, must take an annual RMD beginning in the calendar year next following the calendar year of the Plan participant’s or IRA owner’s death, and then must continue to take annual distributions until the entire interest is distributed by no later than the tenth year following the Plan participant’s or IRA owner’s death, according to the Notice. The IRS intends to address the public’s confusion by issuing final regulations, which regulations will not be effective for pre-2025 RMDs. Consequently, as has been the case under prior IRS guidance for RMDs payable in 2020-2022, failure to follow the 10-year requirement for RMDs payable in 2024 under the proposed regulations will not result in a violation of the RMD rules or a Section 4974 (25%) excise tax on the beneficiary.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}