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IRS provides guidance and transition relief for certain required minimum distributions
July 2023
In brief
The IRS on July 14 released Notice 2023-54 (the Notice), which provides guidance regarding required minimum distributions (RMDs) under Section 401(a)(9) pursuant to Section 107 of the SECURE 2.0 Act of 2022 (SECURE 2.0). SECURE 2.0 made numerous changes to retirement plan tax rules, including those relating to RMDs, catch-up limits, qualified charitable deductions, and early withdrawals. (See our prior Insight, Impact on individuals of the Secure 2.0 retirement plan changes for additional information).
The Notice provides transition relief for plan administrators, payors, plan participants, IRA owners, and beneficiaries relating to the RMD changes, as well as certain specified RMDs for 2023. Finally, the Notice indicates that final regulations (once issued) regarding RMDs under Section 401(a)(9) will apply for calendar years beginning no earlier than 2024.
Observation: Notice 2022-53 previously had indicated that final regulations related to RMDs under Section 401(a)(9) would apply no earlier than the 2023 distribution calendar year; the Notice further extends the implementation of the new RMD rules to tax year 2024 at the earliest.
In detail
Relief relating to the change in required beginning date under SECURE 2.0
Background
Prior to the enactment of SECURE 2.0, taxpayers were required to start receiving RMDs by April 1 of the calendar year following the year in which the individual turned age 72 (or, if later, April 1 of the calendar year following termination of employment with regard to employer-sponsored retirement plans). SECURE 2.0 (which was enacted December 29, 2022) modified this rule to increase the RMD age to 73 for those born between 1951 and 1959, and to age 75 for those born in 1960 or later.
Plan administrators and other payors had expressed concern that the payment system updates needed to reflect changes made under SECURE 2.0 would take time and, if not made timely, could mischaracterize certain RMDs that previously were scheduled or initiated prior to the enactment of SECURE 2.0, making them ineligible for rollover. For example, individuals born in 1951 (who would have turned age 72 in 2023) may have scheduled an RMD distribution for early January 2023, even though such taxpayers no longer were required to take RMDs as a result of SECURE 2.0.
In response to comments received from plan administrators, plan participants, and other stakeholders, the Notice provides the following guidance and relief:
Payor and plan administrator guidance
A payor or plan administrator will not be considered to have failed to satisfy the requirements of Sections 401(a)(31), 402(f), and 3405(c) merely because of a failure to treat certain distributions (i.e., those mischaracterized as RMDs) as eligible rollover distributions. This relief applies to any distribution made from a plan between January 1, 2023, and July 31, 2023, to a participant born in 1951 (or that participant’s surviving spouse) that would have been an RMD but for the change in the required beginning date under Section 107 of SECURE 2.0.
Extension of 60-day deadline for rollover of certain distributions
The 60-day rollover period for distributions made between January 1, 2023 and July 31, 2023 that were mischaracterized as RMDs has been extended. Plan participants now will have until September 30, 2023 to roll over the mischaracterized portion of such distributions.
Extension of 60-day deadline for rollover of RMDs previously distributed from an IRA
Distributions made from an IRA between January 1, 2023 and July 31, 2023 to an IRA owner born in 1951 (or that individual’s surviving spouse) that would have been RMDs but for the change in the required beginning date under Section 107 of SECURE 2.0 are eligible for an extended 60-day rollover period. The deadline for rolling over that portion of the distribution will be September 30, 2023. As noted in the Notice, the “rollover is permitted even if the IRA owner or surviving spouse has rolled over a distribution within the last twelve months. However, making such a rollover of the portion of an IRA distribution mischaracterized as an RMD will preclude the IRA owner or surviving spouse from rolling over a distribution in the next twelve months.”
Observation: Individuals born in 1951 who inadvertently received distributions mischaracterized as RMDs may not have rolled over such distributions within the applicable 60-day rollover period. The Notice provides such individuals with additional time to roll these funds back into their retirement plan.
Specified RMDs for 2023
Background
The SECURE Act of 2019 made a significant change to Section 401(a)(9) related to post-death RMDs for inherited defined contribution plans. Prior to its enactment, if a plan participant died before their required beginning date, then the balance of the plan had to be distributed to the beneficiary within five years of the participant’s death. The SECURE Act of 2019 changed this five-year payout requirement to a 10-year payout requirement.
However, proposed regulations issued by Treasury and the IRS in February 2022 introduced an unexpected change by requiring distributions from inherited plans to begin immediately in the year after the participant’s death. Under the old five-year rule, the balance of the plan could have been distributed in one lump-sum payment at the end of the fifth year.
Some taxpayers originally misunderstood the new 10-year payout requirement, believing that it would operate in the same manner as the former five-year rule did. As a result, taxpayers who were beneficiaries of an inherited defined contribution plan in 2020 or 2021 may not have taken an RMD prior to the issuance of the proposed regulations. In response to these concerns, the IRS issued Notice 2022-53 in October 2022, which provided transitional relief to beneficiaries of defined contribution plans who failed to take RMDs in 2021 or 2022 under the new 10-year payout requirement.
Scope of additional relief
The Notice expands upon Notice 2022-53 and extends additional relief to ‘specified RMDs’ for tax year 2023. For purposes of the following two measures, the Notice defines ‘specified RMD’ as any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to Section 401(a)(9) in 2023 under a defined contribution plan or IRA that is subject to the rules of Section 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
- a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee or IRA owner died in 2020, 2021, or 2022, and on or after the employee’s or IRA owner’s required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception under Section 401(a)(9)(B)(iii); or
- a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to Section 401(b)(5) of SECURE 2.0) if: (1) the eligible designated beneficiary died in 2020, 2021, or 2022, and (2) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Section 401(a)(9)(B)(iii).
Defined contribution plans that did not make a specified RMD
A defined contribution 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 that distribution.
Taxpayers who did not take a specified RMD
To the extent a taxpayer did not take a specified RMD, the IRS will not assert that an excise tax is due under Section 4974.
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