On February 24, 2022, the Internal Revenue Service (IRS) published proposed regulations regarding the calculation and payment of required minimum distributions (RMD’s) under qualified retirement plans. The Proposed Regulations update existing regulations to account for the increase in a participant’s required beginning date to age 72. Specifically for our ESOP and 401(k) clients, these proposed regulations also provide helpful clarifications on the calculation of death benefits.
Payment of Benefits to Beneficiaries if Participant Died Prior to Commencing Benefits
Generally, a participant’s benefit must 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 (which include spouses, children under 21, disabled and chronically ill people and people less than 10 years younger than the participant) 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. If the plan is silent the default is to make payments using the life expectancy rules.
Payment of Benefits to Beneficiaries if Participant Died After Commencing Benefits
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 beneficiary is not an eligible designated beneficiary, any remaining benefit amount must be paid by the close of the tenth calendar year following the year of the participant’s death, however the proposed regulations clarified that a non-eligible designated beneficiary must receive annual RMD’s each year. This means if a participant died after attaining Age 72, there is no way to delay RMD payments for designated beneficiaries, since payments must continue at least as rapidly as they were paid prior to the participants death.
If the beneficiary is a non-designated beneficiary (a nonperson such as a trust or an estate), the remaining benefit must be paid by the close of the fifth calendar year following the year of the participants death.
Changes Impacting Rollovers of Required Minimum Distributions
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.
If the 10-year rule applies, then no amount distributed before the tenth calendar year following the participant’s death is deemed to be a required minimum distribution. Any amount distributed during the tenth calendar year following the participant’s death is considered a required minimum distribution. This means beneficiaries subject to the ten-year rule can roll over their entire distribution if it’s not paid in the 10th and final year.
If the participant dies on or after his or her required beginning date or the life expectancy rules applies, then the amount deemed to be a required minimum distribution is determined based on the beneficiary’s life expectancy. This means the RMD portion of the distribution cannot be rolled over, but the remainder of the distribution can be.
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. These proposed regulations do not extend the deadline for plan amendments to reflect these changes, which are currently due at the end of the 2022 plan year. They also have not yet provided model language for drafting these required amendments, which they have historically done.
If you are considering modifying the RMD rules in your plan, please make sure to discuss this with your Blue Ridge administrator to make sure your plan document is consistent with our normal process to calculate RMD’s. In particular, the RMD’s due for beneficiaries of deceased participants can be challenging, so it is very important when one of your participant’s dies to provide your Blue Ridge administrator with beneficiary information so we can properly determine whether an RMD is required for the beneficiary.