The IRS recently issued final regulations regarding retirement plan and IRA Required Minimum Distributions (RMDs) in connection with changes made under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0 Act). The IRS also issued proposed regulations with respect to certain RMD provisions under the Secure 2.0 Act. Many of the rules under these regulations relate to the RMD requirements applicable to beneficiaries, and, with only a few exceptions, the final regulations generally follow the original 2022 proposed regulations.

The aspect of the final regulations that has received the most attention relates to the RMDs of certain beneficiaries of a defined contribution plan participant or IRA owner (Participant) where the Participant died after being required to commence RMDs (Required Beginning Date). Under this provision, commencing with 2025 RMDs, if the Participant died after their Required Beginning Date, most non-spouse beneficiaries who are required to take the Participant’s entire balance over a 10-year period following the Participant’s death will also be required to take RMDs for the first nine years of that period. Pending the issuance of final regulations, the IRS waived this special requirement for 2021-2024 RMDs.

Below is a brief summary of the primary RMD rules applicable to beneficiaries, updated for both the final regulations and the new proposals. The summary does not address any of the provisions applicable to defined benefit retirement plans or trusts.

RMD Required Beginning Date

The current RMD Required Beginning Date is the end of the calendar year in which the Participant attains the “applicable age” (the first RMD can be taken as late as the following April 1; however, that would result in two RMDs for the same tax year). The applicable age is:

• 70 1/2, if born before July 1, 1949.
• 72, if born on or after July 1, 1949, but before 1951.
• 73, if born between 1951 through 1959 (73 as the applicable age for Participants born in 1959 is a correction under the new regulations).
• 75, if born after 1959.

 RMDs for beneficiaries

There are three categories of beneficiaries, with different RMD rules applicable depending upon whether the Participant died having an Eligible Designated Beneficiary:

• Eligible Designated Beneficiary – an individual designated as a beneficiary under the plan or IRA who is (1) the spouse or minor child (younger than 21) of the Participant, (2) disabled or chronically ill, or (3) not more than 10 years younger than the Participant (e.g., a sibling). If there are multiple beneficiaries and more than one beneficiary is not an Eligible Designated Beneficiary, then no beneficiary is considered an Eligible Designated Beneficiary; however, this does not apply where there are multiple children who are beneficiaries, and at least one of them is a minor. An unnamed individual can qualify as a designated beneficiary if identifiable by the designation (e.g., “all children in equal shares”).
  
  For an Eligible Designated Beneficiary of a Participant who:
  • Died before the Participant’s Required Beginning Date – the Eligible Designated Beneficiary can choose to either (1) base their RMDs on their own life expectancy, or (2) take the entire plan account or IRA interest by the end of the calendar year which includes the 10th anniversary of the Participant’s death (for a minor beneficiary or beneficiaries, by the end of the calendar year which includes the 10th anniversary of their/the youngest beneficiary’s attainment of age 21), with the entitlement to take any amount or no amount prior to that time. If there are multiple Eligible Designated Beneficiaries, the life expectancy of the eldest beneficiary is used. 
  • Died on or after the Participant’s Required Beginning Date – the Eligible Designated Beneficiary can base their RMDs on the longer of their own life expectancy or the life expectancy of the Participant (this would only be relevant for an Eligible Designated Beneficiary who is older than the Participant, such as an older disabled sibling).

• Non-Eligible Designated Beneficiary – an individual designated as a beneficiary under the plan or IRA who is (1) not the spouse or minor child of the Participant, (2) not disabled or chronically ill, or (3) more than 10 years younger than the Participant.
  
  For a Non-Eligible Designated Beneficiary of a Participant who:
  • Died before the Participant’s Required Beginning Date – the Non-Eligible Designated Beneficiary must take the entire amount by the end of the calendar year which includes the 10th anniversary of the Participant’s death, with the entitlement to take any amount or no amount prior to that time.
  • Died on or after the Participant’s Required Beginning Date – the Non-Eligible Designated Beneficiary must take the entire amount by the end of the calendar year which includes the 10th anniversary of the Participant’s death, and, beginning in 2025, must take a minimum distribution for each of the first nine years, based on the Beneficiary's or the Participant's life expectancy, whichever is longer.

• Non-Designated Beneficiary – any non-individual beneficiary (e.g., the Participant’s estate or a charity), or an individual not designated as a beneficiary under the plan or IRA but who is entitled to a benefit (e.g., under the terms of the will).
  • A Non-Designated Beneficiary must take the entire interest by the end of the calendar year that includes the fifth anniversary of the Participant’s death.

Undistributed RMD for year of death

When a Participant dies, an RMD must be made for the year of their death. If the RMD for that year was not already taken by the Participant prior to their death, it must be taken by the Participant’s beneficiary. If there are multiple beneficiaries, the RMD can be made by one or any combination of the beneficiaries, as there is no requirement that each beneficiary must take a proportional amount. The year of death RMD is not required to be taken until Dec. 31 of the following year.

Special rule for spouse beneficiary

A surviving spouse that is the sole beneficiary generally can transfer the funds credited to the Participant’s plan account or IRA to their own IRA, in which case, as the IRA owner rather than the beneficiary of the Participant’s IRA, the surviving spouse may be able to use their own life expectancy for RMD purposes. (If the Participant died before their Required Beginning Date, the surviving spouse can use their own life expectancy, but if the Participant died on or after their Required Beginning Date, the surviving spouse must use the longer of their own life expectancy or the remaining life expectancy of the Participant.) Under the final regulations, a deadline provided for under the prior proposed regulations has been eliminated, permitting a spouse to implement such a transfer at any time. 

Where a surviving spouse beneficiary initially uses the 10-year rule and then subsequently decides to instead treat the Participant’s account as their own, the final regulations have retained the somewhat controversial new concept under the proposed regulations that to do so, the surviving spouse beneficiary must first take the RMDs they would have been required to take had they not used the 10-year rule at all. These RMDs are referred to as hypothetical RMDs.

What does CohnReznick think?

Perhaps the most significant aspect of the changes made by the regulations is that beginning in 2025, a Non-Eligible Designated Beneficiary of a Participant who died on or after their Required Beginning Date must use the 10-year rule described above and, unlike a Non-Eligible Designated Beneficiary of a Participant who died prior to their Required Beginning Date, must continue to take annual RMDs for each of the first nine years during that 10-year period. In this regard, it is noteworthy that waiting for year 10 to take the Participant’s entire benefit is often not the best approach for tax purposes, as it would result in taxation of the entire interest in a single tax year. 

Another important consideration resulting from the continued application of the five-year distribution requirement for Non-Designated Beneficiaries is that it is critical that Participants be sure to formally designate their beneficiary or beneficiaries for plan or IRA purposes. 

Finally, the new hypothetical RMDs requirement for certain surviving spouse beneficiaries will add significant planning complexities to an already complex area.

_{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.}