On July 19, 2024, the Internal Revenue Service (IRS) and Treasury Department issued new final and proposed regulations regarding changes to the Internal Revenue Code (IRC) Section 401(a)(9) required minimum distribution (RMD) rules for tax-qualified plans, IRAs, and 403(b) and 457(b) plans under the SECURE Act of 2019 and SECURE 2.0 Act of 2022.

Background

The SECURE and SECURE 2.0 Acts made significant changes to the longstanding RMD rules, eliminating so-called "stretch" treatment of RMDs for most non-spousal beneficiaries, requiring them to fully distribute inherited retirement accounts by the end of the 10th year following a plan participant's death.

The IRS issued its initial proposed regulations under the new RMD rules in 2022 with a new twist – if a plan participant had been subject to RMDs prior to death, the beneficiary must also take RMDs both within the 10-year period and ”at least as rapidly” as the participant.

Final and Proposed Regulations

The final and new proposed regulations retain most aspects of the prior proposed regulations, with new additions and clarifications, including:

• adding changes to the required beginning ages to 73 and 75 under the SECURE 2.0 Act, although plans may still use age 70½;
• an employee who separates from one participating employer but continues to be employed by another participating employer in a multiple or pooled employer plan is not considered retired;
• a waiver of excise taxes for some missed RMDs;
• the age used for the spousal beneficiary’s life expectancy;
• a minor child (including a stepchild, adopted child, or certain foster children) must continue taking annual payments from ages twenty-one to thirty-one;
• documentation requirements regarding disability and chronic illness (two categories of beneficiaries eligible to stretch distributions over their lifetimes);
• rules for distributions from designated Roth accounts;
• the treatment of corrective distributions for missed RMDs;
• pension benefits are not required to be actuarially increased until they are vested;
• applying missed “hypothetical RMDs” to a rollover for spouses that had previously elected the 10-year rule under the plan;
• allowing certain assumptions regarding spousal rollovers; and
• requiring 20% withholding for non-spouse distributions that aren’t rolled over.

Effective Date

The final and proposed regulations are effective for RMDs on and after January 1, 2025.  In the meantime, plan sponsors may rely on reasonable, good faith interpretations of SECURE and SECURE 2.0 Acts.

Plan Amendments and Administration

Plan amendments under these rules must generally be made by December 31, 2026. In the interim, plan sponsors will need to determine how they desire to incorporate the new rules to assure proper plan administration and plan participant communications and disclosures.

For more information on this topic, or to learn how Godfrey & Kahn can help, contact a member of our Employee Benefits practice.