The IRS issued Notice 2022-53 on October 7, providing relief under the required minimum distribution (RMD) rules of Section 401(a)(9) of the Internal Revenue Code (Code). The Notice provides that excise taxes and tax disqualification will not apply to failures by beneficiaries to take annual distributions under the RMD 10-Year Rule (defined below) for calendar years 2021 and 2022. The Notice also provides that the final RMD regulations will not apply before calendar year 2023.
10-Year Rule Relief
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) made significant changes to the RMD requirements that apply upon the death of the employee (or IRA owner)1. With certain exceptions for eligible designated beneficiaries, such as spouses, distributions upon death may no longer be stretched over the beneficiary’s lifetime but must be paid out within 10 years following the employee’s death regardless of whether the employee died before or after their required beginning date (10-Year Rule). The new RMD timing requirements are generally effective with respect to employees who died after 2019.
On February 24, 2022, the IRS issued proposed RMD regulations, which state that in the case of an employee who dies after their required beginning date, designated beneficiaries not only have to satisfy the 10-Year Rule but also must take annual distributions under the “at least as rapidly” rule which otherwise would have applied before the SECURE Act. This requirement created issues for designated beneficiaries who had interpreted the 10-Year Rule to replace the “at least as rapidly rule,” such that they would not be required to continue annual distributions during the 10-year period following the employee’s death. Because the proposed regulations state that the final regulations would apply retroactively to the 2022 calendar year, designated beneficiaries who thought they had 10 years to comply with RMD requirements would potentially have been subject to a 50% excise tax for the missed RMD in 2022 and possibly in 2021 (RMDs were waived for 2020 under separate legislation.)
In recognition of this ambiguity about the mechanics of the 10-Year Rule, the Notice provides relief to defined contribution plans and taxpayers for failure to make a “specified RMD” for 2021 and 2022. A “specified RMD” is defined as any distribution that, under the proposed regulations’ interpretation of the 10-Year Rule, would have been required to be made in 2021 or 2022 for two classes of individuals:
- A designated beneficiary of an employee, if the employee died (1) in 2020 or 2021 and (2) on or after the required beginning date. The Notice also provides that such designated beneficiary cannot already be taking lifetime or life expectancy payments pursuant to Code section 401(a)(9)(B)(iii) (the “stretch” rule).
- A beneficiary of an eligible designated beneficiary, if the eligible designated beneficiary (1) died in 2020 or 2021 and (2) was taking lifetime or life expectancy payments under the stretch rule.
Under the Notice, a defined contribution plan that failed to make a “specified RMD” will not be treated as having failed to satisfy Code section 401(a)(9) merely because it did not make the RMD. In addition, to the extent that a taxpayer failed to take a “specified RMD,” the IRS will not impose the 50% excise tax, and any taxpayer who paid the excise tax for 2021 can request a refund.
Extension of Effective Date of Final RMD Regulations
The Notice provides that the final RMD regulations will apply “no earlier than the 2023 distribution calendar year.” Before this extension, the proposed regulations stated that the final regulations were to apply to RMDs for the 2022 calendar year.
Taxpayers were required to apply a reasonable, good faith interpretation of the SECURE Act for 2021. Neither the Notice nor the proposed regulations contemplate what standards apply with respect to RMDs for the 2022 calendar year.
___________
1 References to employees in this legal alert include IRA owners.
[View source.]
