April 2024 Compliance News

Extension of Limited RMD Relief

The IRS has issued Notice 2024-35, which extends relief for certain beneficiaries of required minimum distribution (RMD) rules that were changed under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE), proposed RMD regulations issued in February 2022, and the SECURE 2.0 Act of 2022.

Background

SECURE extended the RMD’s 5-year rule to 10 years for certain beneficiaries of a defined contribution plan or individual retirement arrangement (IRA). As a result, and with some exceptions, once the participant or IRA owner (referred to collectively as the employee) dies, the remaining account balance must generally be distributed within 10 years to the designated beneficiary.

SECURE also established the definition of an eligible designated beneficiary (EDB), which includes the employee’s surviving spouse, the employee’s children under the age of 21, a disabled or chronically ill beneficiary, or an individual no more than 10 years younger than the employee. EDBs may receive RMDs for their lifetime; however, at their death, the designated beneficiary of the EDB must receive the remaining account balance generally by the end of the 10th year following the EDB’s death.

Proposed regulations issued on February 24, 2022, clarified that if the employee dies on or after the employee’s required beginning date, the beneficiary must continue to receive annual RMDs at least as rapidly each year, with full distribution made no later than the 10th calendar year following the employee’s death. This is also true for payments to a beneficiary of an EDB following the EDB’s death.

IRS Notice 2022-53 provided excise tax relief for certain beneficiaries that should have received RMDs from a retirement plan or IRA under the 10-year rule. Notice 2023-54 (issued last year) and Notice 2024-35 has extended such relief.

10-year Rule Relief

In response to comments to the proposed RMD regulations, the IRS is extending the waiver of the excise tax that a beneficiary may ordinarily be subject to if certain RMD payments were not made.

The excise tax waiver applies if the following is true for a beneficiary of an employee:

The employee died in 2020, 2021, 2022 or 2023,
The employee died after their required beginning date, and
The beneficiary is not taking a lifetime or life expectancy payment of the RMD (available to EDBs only)

The beneficiary of an EDB may also be subject to an excise tax waiver if the following is true:

The EDB died in 2020, 2021, 2022 or 2023 and
The EDB was taking a lifetime or life expectancy payment.

Additionally, a defined contribution plan that failed to make either of the RMDs outlined above will not be treated as having failed to satisfy the Internal Revenue Code merely because that distribution was not made in 2020, 2021, 2022, or 2023.

Final RMD Regulations

Notice 2024-35 also included an announcement that final RMD regulations, when released, will apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025. We will continue to monitor all developments and provide additional updates as new information becomes available.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Company^®, a member of the Principal Financial Group^®, Des Moines, IA 50392.

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