On Friday, October 7, 2022, the IRS issued Notice 2022-53 to reaffirm guidance for defined contribution (DC) plans on required minimum distributions (RMDs). In response to complaints and questions from beneficiaries subject to the 10-year rule plus the annual life expectancy RMD requirement who did not take RMDs for 2021 and 2022, the IRS waived the 50% excise tax that would otherwise apply.
Background
The SECURE Act was signed into law Dec. 20, 2019 with changes slated to go into effect in 2020. It included provisions eliminating the stretch IRA, which had permitted lifetime distributions to certain beneficiaries with respect to inherited DC plan and IRA balances. Under the legislation, inherited DC plan and IRA balances were generally required to be distributed to a beneficiary by the end of the 10th calendar year following the year of the participant’s or IRA owner’s death (with certain exceptions).
Section 401. Modifications to Required Minimum Distribution Rules
The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.
However, no additional guidance was released, and as such, many tax professionals have interpreted the law differently. (For example, many believed the new 10-year rule for RMDs would work like the old five-year rule. Under that rule, you could wait until the last year to take your distribution as a lump sum, and it would still qualify.) The proposed regulations regarding RMDs under Section 401(a)(9) had also specified that, when finalized, the regulations would apply beginning with the 2022 distribution calendar year—a date which now appears to be pushed back by a year.
Notice 2022-53
As a result of the confusion, the IRS issued Notice 2022-53, which indicates final regulations related to RMDs under Section 401 will be issued and “will apply no earlier than the 2023 distribution calendar year.” Additionally, it provides guidance related to certain provisions that apply for 2021 and 2022.
If a taxpayer did not take a specified RMD in response to this rule, the IRS will not impose the Section 4974 penalty. And, if a taxpayer has already paid the excise tax for a missed related RMD, the taxpayer can request a refund. This relief applies to those beneficiaries under a defined contribution plan or IRA where the employee or IRA owner died in 2020 or 2021 and on or after the employee’s or IRA owner’s required beginning date.
If a beneficiary is subject to the 10-year rule, the RMD will only apply in years one through nine if the original IRA owner died on or after his required beginning date (April 1 of the year after a person turns 72), and the RMD is calculated using the single life expectancy of the beneficiary. This factor is then reduced by one for years two through nine. By the end of year 10, the entire account must be emptied.
The relief doesn’t apply to certain beneficiaries, like spouses, who were not subject to the 10-year rule. It also doesn’t apply to taxpayers who were otherwise required to take their RMDs in 2021 or 2022.