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Required Minimum Distributions, 26 C.F.R. Parts 1 and 54 (2022)

On February 24, 2022, the IRS issued proposed regulations addressing required minimum distributions (RMDs) from retirement plans, providing additional clarity on some points, but raising questions regarding some others.

One unexpected provision is the apparent requirement that designated beneficiaries under retirement plans who inherit an IRA from the owner of the plan who dies after reaching age seventy-two and who are subject to the ten-year rule under the SECURE Act must take distributions every year throughout the ten-year period, with a full distribution on December 31 of the tenth year. The proposed regulations include the following example:

If an employee died after the required beginning date with a designated beneficiary who is not an eligible designated beneficiary, then the designated beneficiary would continue to have required minimum distributions calculated using the beneficiary’s life expectancy as under the existing regulations for up to nine calendar years after the employee’s death. In the tenth year following the calendar year of the employee’s death, a full distribution of the employee’s remaining interest would be required.

Many attorneys and commentators had previously thought that designated beneficiaries subject to the ten-year rule would be permitted to wait until December 31 of the tenth year following the calendar year of the decedent’s death to take a distribution.

In addition, some commentators have noted that the proposed regulations, at least in some circumstances, seem to allow distributions to be made using the life expectancy rule instead of the ten-year rule when the beneficiary named by the employee is an accumulation trust established for eligible designated beneficiaries who are not disabled or chronically ill. The proposed regulations include the following example:

. . . assume an employee names a see-through trust as the sole beneficiary, the trust permits specified amounts to be paid to the employee’s niece until the niece reaches age 31 (age of majority plus 10 years), and those specified amounts are not required to include the immediate payment of plan distributions made to the trust. The trust is scheduled to terminate with a full distribution of all trust assets to the niece when the niece reaches age 31, but if the niece dies before this scheduled termination, then the amounts remaining in the trust will be paid to the employee’s sibling. In that case, the only beneficiary designated under the plan for purposes of section 401(a)(9) and these regulations is the employee’s niece because the employee’s sibling is disregarded under the exception described in the preceding paragraph. However, if the see-through trust terms do not require a full distribution of amounts in the trust representing the employee’s interest in the plan until the niece reaches age 35, then this exception does not apply, and both the employee’s niece and sibling are treated as beneficiaries designated under the plan for purposes of section 401(a)(9) and these regulations.

The following are some additional important clarifications included in the proposed regulations:

  • For the purposes of Internal Revenue Code § 401(a)(9)(E)(ii)(II) and (F), the child of an employee is considered to have reached the age of majority on the child’s twenty-first birthday. However, defined benefit plans that have used the prior definition of age of majority may retain that plan provision.
  • A trust will not fail to satisfy identifiability requirements merely because an individual, i.e., the power holder, has the power to appoint a portion of the employee’s interest in the retirement plan to one or more individuals who are not identifiable.
  • A see-through trust will not fail to satisfy the identifiability requirements merely because the trust is subject to state law that permits the trust terms to be modified after the death of the employee.

Takeaways: The proposed regulations apply for purposes of determining RMDs for calendar years on or after January 1, 2022. Compliance with the regulations will satisfy the requirement that taxpayers consider a reasonable, good-faith interpretation to the SECURE Act’s amendments to the RMD rules. Comments on the proposed regulations must be submitted by May 15, 2022. Join us for our Retirement Planning Workshop on April 7 and 8, 2022, where Natalie Choate will provide her insights on the proposed regulations.