October 2022 Compliance Article

Limited Required Minimum Distribution Excise Tax Relief

The Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2022-53 that provides excise tax relief for certain beneficiaries of a 2021 or 2022 defined contribution required minimum distributions (RMDs) from a retirement plan or individual retirement arrangement (IRA).

Background

RMD requirements were amended as part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). 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 retirement plan participant, or IRA owner (referred to collectively as the employee) dies, the remaining account balance generally must 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 or EDB dies on or after the employee’s required beginning date, the beneficiary must continue to receive annual RMDs in the first calendar year following the year the employee died with full distribution made no later than the 10th calendar year following the employee’s death.

Tax Relief

In response to several comments received after the proposed regulations were published, the IRS is waiving the 50% excise tax that a beneficiary may ordinarily be subject to if certain RMD payments were missed in the 2020 and 2021 tax years.

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

Employee died in 2020 or 2021,
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 EDB beneficiary may also be subject to an excise tax waiver if the following is true:

EDB died in 2020 or 2021 and
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 or 2021.

Final Regulations

The IRS also included an announcement that they intend to issue final RMD regulations that will apply no earlier than the 2023 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.

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

Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com, Principal^®, Principal Financial Group^® and the Principal logo design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and service marks of Principal Financial Services, Inc., in various countries around the world.

PQ11296OCT22-1