IRS Proposal Conforms 401(k) Required Withdrawals with the SECURE Act

The IRS issued a proposed rule updating existing regulations for retirees' required minimum distributions (RMDs) from 401(k) and similar employer-sponsored retirement plans, and from non-Roth individual retirement accounts (IRAs) and tax-deferred annuities. 

The proposed rule, Required Minimum Distributions, was published in the Feb. 24 Federal Register. It conforms regulations on taking RMDs and other plan distributions with statutory changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed at the end of 2019.

The proposal would "revamp the current regulations—issued nearly 20 years ago," according to an overview by the Groom Law Group, Chartered, in Washington, D.C. While most RMD requirements remain the same, "there are plenty of changes and a number of examples to help illustrate the rules," the attorneys noted. "Compliance with these rules will pose challenges of every type—communications, system redesign and plan documentation to name the major ones."

The IRS "decided to completely rewrite and reformat all the RMD regulations—to the tune of 275 pages of information," wrote S. Derrin Watson, an attorney and educator in Santa Barbara, Calif. "In addition, the proposal updates rollover regulations, which date back to 1995," he explained in a post for the Ferenczy Benefits Law Center.

Revisions Affect Plan Distributions

RMDs must be taken from both traditional and Roth 401(k) or similar employer-sponsored plans and from traditional IRAs. Roth IRAs are exempt from RMD requirements.

Among the many regulatory revisions that the proposed rule conforms to the SECURE Act are those that:

• Revise the starting date for RMDs from an employer-sponsored plan to April 1 of the year after the employee turns age 72 and is no longer employed by the plan sponsor. Before the SECURE Act's amendment, that age was 70-1/2. The higher age is effective for distributions required after Dec. 31, 2019, for individuals who turned age 70-1/2 after that date.
  

• Revise the RMD starting age for beneficiaries of an employee who died before reaching age 70-1/2 but would have reached that age on or after Jan. 1, 2020. In that case, the beneficiary may wait until the calendar year in which the employee would have reached age 72 to begin taking RMDs.
  

• Provide certain extensions and exceptions to the 60-day deadline by which funds withdrawn from a 401(k) or similar employer plan must be rolled over to another eligible retirement plan, such as an IRA. The deadline relief is available if the delay was caused by a disaster or other event beyond the reasonable control of the plan participant.
  

• Eliminate "stretch" IRAs requiring distributions taken by nonspouse beneficiaries (except for certain "eligible designated beneficiaries") be completed within 10 years following a plan participant's death instead of over the beneficiary's lifetime.
  

• Define "eligible designated beneficiaries" (EDBs) who may take advantage of the exception to the 10-year rule as (in addition to the employee's surviving spouse) the employee's child under the age of 21, a disabled or chronically ill beneficiary, or someone no more than 10 years younger than the employee.

"It is easy to overlook the fact that a beneficiary who is not more than 10 years younger than the employee is an EDB," Watson noted. "This would cover most romantic relationships, as well as distributions to siblings or parents."

Application Dates

The proposed regulations, if finalized, would determine RMDs for calendar years beginning in 2022. For 2021 distributions, taxpayers could take into account a reasonable, good-faith interpretation of the SECURE Act amendments, the IRS said.

Plan amendments that reflect changes described in the rule are due at the end of the 2022 plan year. The proposed rule does not provide model language to be used in drafting plan amendments, although that might be included in the final rule.

The IRS is accepting comments through May 25, 2022, via Federal eRulemaking Portal at https://www.regulations.gov.

Next Steps

"Plan sponsors should review the new rules with their recordkeeper and/or third-party administrator and see what, if any, changes are necessary for 2022 to comply with these proposed regulations and consider next steps such as timing for updating [RMD] communications, distribution packages, plan document amendments, summary plan descriptions (or summary of material modifications), rollover procedures, etc.," the Groom Law Group advised. "With 275 pages of proposed regulations, there is an awful lot to wade through—and it is hard to predict the extent of the changes that might come with final regulations, and the timing of those regulations. All of this is a tight timeframe for provisions that, once finalized, will impact 2022 [RMD] payments."

Ascensus, a 401(k) plan administration firm based in in Dresher, Pa., advised that for 2021 distributions, "the existing regulations must be applied, along with a good-faith application of the increased RMD age and the change in beneficiary options." Plan sponsors have the option, however, of applying the newly proposed regulations for 2021 distributions, if they choose to do so, and that "will result in compliance with the good faith requirement."

As for when the proposed regulations might be finalized, Ascensus noted that "because written comments are being accepted until May 25, 2022, and a public hearing is scheduled for June 15, 2022, the anticipated timing of the final rule is likely to be late summer or fall—at the earliest."

Related SHRM Article:

DOL Guidance Focuses on 401(k)-to-IRA Rollover Advice, SHRM Online, April 2021