We have good news for our industry! RITA’s Washington, DC legal team has been successful in appealing to the IRS to extend the RMD regulation deadlines.
One of the issues that RITA identified in its comment letter to the IRS on the RMD requirements was that the IRS had adopted a surprising interpretation of the new 10-year rule. RITA asked IRS to change that in the final regulation. But the letter also said that regardless of where the IRS final regulation comes out, the IRS should provide relief for prior years for IRA beneficiaries. As described in more detail below, the IRS has provided that relief for 2021 and 2022. This is a good result for RITA’s advocacy and demonstrates the value of RITA weighing in with comment letters on issue of importance to the members and their clients!
This is, of course, only limited relief. We are still awaiting the final regulations, but as noted below, they will not apply for 2022, and “no earlier” than 2023 RMDs. But it’s a good win on a Friday.
Today, the IRS released Notice 2022-53, which provides relief for failures in 2021 and 2022 to comply with the IRS interpretation of the “10-year rule” as reflected in the recently-proposed regulations under Code section 401(a)(9), regarding required minimum distributions (RMDs). The Notice also states that final regulations will apply no earlier than the 2023 distribution calendar year. A copy of the Notice is linked here. The Notice is very hard to follow, so many thanks to my partner Bryan Keene who drew the short straw and put together this summary.
Relief from the Proposed Regulation’s Interpretation of the 10-Year Rule
Background
The SECURE Act generally imposes a 10-year deadline for making distributions to beneficiaries under defined contribution (DC) plans and IRAs who are not “eligible” designated beneficiaries (EDBs). There has been considerable confusion about the scope of the 10-year rule, namely, whether distributions are required to continue throughout the 10-year period in cases where the 10-year rule is triggered after RMDs have already commenced to the employee or a beneficiary. (Our references herein to an “employee” include an IRA owner.) The proposed regulations provide that distributions indeed must continue during the 10-year period (1) for any designated beneficiary if the employee dies on or after their required beginning date (RBD) because the “at-least-as-rapidly” rule of Code section 401(a)(9)(B)(i) applies in such case, and (2) following the death of an EDB who, pursuant to Code section 401(a)(9)(B)(iii), is “stretching” the benefits they inherited from an employee who died before the RBD.
Prior to the proposed regulations being released, a number of commentators and financial advisers thought that the 10-year rule would be interpreted as not requiring any distributions during the 10-year period, regardless of when or how the 10-year rule is triggered. Under this alternative interpretation, if an employee died on or after their RBD, no distributions would be required until the end of the 10th year after their death. Likewise, if an employee died before the RBD, their beneficiary timely commenced “stretch” distributions over their life or life expectancy, and the beneficiary then died, no distributions would be required until the end of the 10th year after the beneficiary’s death.
The overwhelming majority of comments submitted on the proposed regulations focused on this alternative interpretation, including RITA’s comment letter, demonstrating how widely it was held. Thus, it seems likely that at least some (and perhaps many) taxpayers adopted the alternative interpretation and therefore did not take RMDs in 2021 (and have not taken RMDs in 2022) in cases where the proposed regulations require distributions to be made.
Relief Under Notice 2022-53
The Notice provides relief for retirement plans and taxpayers who adopted the alternative interpretation of the 10-year rule for 2021 or 2022. Under the relief, a DC plan that failed to make a “specified RMD” will not be treated as having failed to satisfy section 401(a)(9) merely because it did not make the required distribution. Likewise, to the extent that a taxpayer failed to take a “specified RMD,” the IRS will not impose the 50% excise tax that otherwise applies to RMD failures (and any taxpayer who paid that excise tax for 2021 can get a refund).
For these purposes, the Notice defines a “specified RMD” as any distribution that, under the proposed regulations’ interpretation of the 10-year rule, would be required to be made in 2021 or 2022 with respect to individuals described in (a) or (b) below:
a. Beneficiaries of deceased employees. A designated beneficiary of an employee if:
- the employee died in 2020 or 2021 and on or after the employee’s RBD, and
- “the designated beneficiary is not taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii).”
With respect to item (2) above, we observe that the reference to section 401(a)(9)(B)(iii) is a reference to the “stretch” rule that applies in cases where an employee dies before their RBD. This contrasts with the reference in item (1) to the employee dying on or after their RBD. It would seem that if an employee dies on or after their RBD as contemplated in item (1), they could not be taking stretch distributions pursuant to the rules that apply to death before the RBD. In this sense, it is not entirely clear to us why item (2) was needed. We have inquired with the IRS and will share any insights we obtain.
b. Beneficiaries of deceased EDBs – A beneficiary of an EDB if:
- the EDB died in 2020 or 2021, and
- that EDB was taking distributions pursuant to the “stretch” rule of Code section 401(a)(9)(B)(iii).
With respect to item (1) above, the Notice clarifies that “EDB” includes a designated beneficiary who is treated as an EDB pursuant to section 401(b)(5) of the SECURE Act. That section provides that if an employee dies before the effective date of the SECURE Act (generally 1/1/2020, but two years later for governmental and collectively-bargained plans), and their designated beneficiary dies on or after that date, the beneficiary is treated as an EDB so that the 10-year rule applies upon their death. Thus, the Notice’s relief applies in cases where the successor to that deceased beneficiary failed to take an RMD in 2021 or 2022.
Effective Date of Final Regulations
Background
The proposed regulations were issued on February 24, 2022, and state that they are proposed to apply with respect to RMDs for the 2022 calendar year. See, e.g., Prop. Treas. Reg. section 1.401(a)(9)-1(d). For 2021, taxpayers were required to apply the existing regulations, but reflecting a reasonable, good faith interpretation of the SECURE Act. The proposed regulations did not extend this good faith relief to RMDs that are due in 2022. (Relief is not needed for 2020 because the CARES Act waived RMDs for that year.)
Extension Under Notice 2022-53
The Notice provides that final RMD regulations will apply “no earlier than the 2023 distribution calendar year.” The Notice does not elaborate on what standards apply with respect to the 2022 distribution calendar year, other than by providing the relief described above regarding the 10-year rule. For example, the Notice does not state that taxpayers can apply a “reasonable, good faith interpretation” of the SECURE Act for 2022.