July 2023 Compliance News

Limited RMD Relief

The IRS has issued Notice 2023-54, which extends relief for certain 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 (SECURE 2.0).

Background

The SECURE Act and SECURE 2.0 raised the age used in determining the required beginning date (RBD) of the RMD for a retirement plan participant or IRA owner (referred to collectively as the employee) from 70 ½ to 72, 73, or 75, depending on an individual’s date of birth.

Also, part of the RMD changes within the SECURE Act included extending the 5-year rule to 10 years for a defined contribution retirement plan or IRA. In other words, with some exceptions, once the employee dies, the remaining account balance must generally be paid within 10 years to the designated beneficiary.

The SECURE Act also established the definition of an eligible designated beneficiary (EDB), which includes the employee’s surviving spouse, the employee’s children, a disabled or chronically ill beneficiary, or an individual not more than 10 years younger than the employee. EDBs may receive RMDs for their lifetime; however, at their death, the designated beneficiary for 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 RBD, 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 (2022 Notice) issued in October of last year provided excise tax relief for certain beneficiaries that should have received RMDs from a retirement plan or IRA under the 10-year rule described above.

10-year Rule Tax Relief

In response to comments, the IRS is extending the waiver announced in the 2022 Notice of the excise tax that a beneficiary may ordinarily be subject to if certain RMD payments were missed.

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

The employee died in 2020, 2021, or 2022,
The employee died after their RBD, 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, or 2022 and
The EDB was taking a lifetime or life expectancy payments.

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 missed in 2020, 2021, or 2022.

Required Beginning Date and Rollovers

The IRS also received feedback that due to the short timeline given to update automated payment systems for retirement and IRA providers, payments could be issued to employees and beneficiaries born in 1951 that are not truly RMDs. As a result, an employer or plan administrator will not be treated as failing to satisfy withholding, direct rollover, or notice requirements related to mischaracterized RMDs made between January 1, 2023, and July 31, 2023, to employees and beneficiaries born in 1951.

Additionally, the 60-day rollover period individuals normally receive after payment of an eligible rollover distribution has been extended to September 30, 2023, for employees born in 1951 who received a mischaracterized RMD from January 1, 2023, through July 31, 2023. This relief also includes the employee’s surviving spouse who would have received an eligible rollover distribution had the RBD age been updated for the new rules.

For IRA owners and their spouses, the 60-day rollover extension described above is available even if they already received their one-rollover-per-year limit within the last twelve months. However, making a rollover of the mischaracterized RMD amount will count as a rollover for purposes of this limit and no new rollovers will be allowed for the next twelve months.

Final RMD Regulations

The IRS also included an announcement that they intend to issue final RMD regulations that will apply no earlier than the 2024 distribution calendar year. 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 or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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