On February 24, 2022, the Internal Revenue Service (IRS) published proposed regulations addressing the calculation and payment of required minimum distributions under qualified retirement plans (the Proposed Regulations). The Proposed Regulations are generally designed to address the changes to a participant's required beginning date and payment of death benefits enacted under the SECURE Act.
Applicable to all plan sponsors, the Proposed Regulations update existing regulations to account for the increase in a participant's required beginning date to age 72. Additionally, the Proposed Regulations confirm that non-governmental and church plan sponsors must provide actuarial benefit increases beginning at age 70-1/2 regardless of the plan's definition of required beginning date.
For defined contribution plan sponsors, the Proposed Regulations also provide needed clarifications on the calculation of death benefits.
As an initial matter, the Proposed Regulations provide additional detail on the definition of eligible designated beneficiaries. Under the SECURE Act, eligible designated beneficiaries are:
Recognizing plan sponsors may not be able to neatly apply these categories, the Proposed Regulations provide that:
See Through Trusts. The Proposed Regulations also provide extensive rules regarding payment of required minimum distributions to see-through trusts, which are designed to allow retirement assets to pass to a beneficiary following death.
Generally, a participant's benefit must generally be distributed to the participant's designated beneficiary by the last day of the tenth year following the year of the participant's death unless the beneficiary is an eligible designated beneficiary. Eligible designated beneficiaries are permitted to be paid over the beneficiary's life expectancy.
The Proposed Regulations now confirm that plan sponsors can apply either the 10-year rule or the life expectancy rule to an eligible designated beneficiary, provided the plan document is clear regarding the payment terms. For example, a plan document could provide that all non-spouse beneficiaries must be paid within 10 years of the death of the participant.
Additionally, if a participant designated multiple beneficiaries prior to his or her death, the Proposed Regulations clarify that all beneficiaries must be eligible designated beneficiaries in order for benefits to be paid over a beneficiary's life expectancy. If one or more beneficiaries is not an eligible designated beneficiary, then all beneficiaries must be paid by December 31 of the calendar year following the participant's death.
If a participant dies after commencing benefits or attaining his or her required beginning date, the beneficiary's benefit payments must be calculated based on the beneficiary's life expectancy. If the participant had no beneficiary designation on file, then the death benefits are calculated based on the participant's life expectancy. Additionally, the Proposed Regulations provide that benefits paid to eligible designated beneficiaries must be accelerated under the following circumstances:
Under Code section 402(c)(4), required minimum distributions cannot be rolled over to another eligible retirement plan or individual retirement account. However, not all benefit payments made after a participant's or beneficiary's required beginning date are required minimum distributions. The Proposed Regulations describe the method required to calculate the portion of a distribution deemed to be a required minimum distribution.
Additionally, the Proposed Regulations clarify the portion of death benefit payments that are deemed to be a required minimum distribution noting that it generally depends upon the period of payment:
While the Proposed Regulations are not final, the IRS directs plan sponsors to calculate distributions in accordance with the Proposed Regulations beginning January 1, 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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