IRS Releases Final And Proposed Regulations On RMDs
The IRS released much-anticipated regulations concerning required minimum distributions (“RMDs”) from retirement plans. The retirement industry has wrestled to adapt to legal changes concerning RMDs brought on by the SECURE Act of 2019 and 2022’s SECURE 2.0. Both final and proposed regulations were released by the IRS on July 18, 2024. The final regulations reflect SECURE Act and SECURE 2.0 changes affecting retirement plan participants and IRA owners, as well as their beneficiaries. The proposed regulations address additional RMD changes under SECURE 2.0.
Final Regulations
The final regulations should assist plan sponsors and administrators with key issues ensuring compliance for qualified plans, IRAs, tax-deferred annuities, and 457(b) plans. Compliance with the final regulations must begin January 1, 2025. Plan amendments for most plans (e.g., calendar year plans) must be made by December 31, 2026.
The final regulations follow proposed regulations released by the IRS in 2022, which the IRS received comments and questions on. The IRS made changes in response to comments but largely retained the 2022 proposed regulations.
Specifically, some comments from 2022 suggested that if an individual has started required annual distributions and then dies, a beneficiary should not be required to continue those annual distributions if the remaining account balance is fully distributed within ten years of the individual’s death. The IRS chose not to follow such comments and retained the provision in the proposed regulations requiring the beneficiary to continue receiving annual payments. Beginning in 2025, plan sponsors must monitor the deaths of participants receiving annual RMD payments and ensure distributions are promptly initiated to beneficiaries.
Additionally, the final regulations address the increased age for required beginning dates, Roth account exemptions from lifetime distributions, RMD excise tax reductions, and expanding the lifetime income availability.
Proposed Regulations
The proposed regulations address other changes relating to RMDs that were made by SECURE 2.0, including changes affecting rollovers, spousal election, calculation of the optional partial annuity aggregation rule, corrective distributions, designated Roth account distributions that are not subject to lifetime RMD payments, and trust beneficiary distributions. The comment period on the proposed regulations ended on September 17, 2024.
Excise Tax Reduction
Although the excise tax for failing to comply with RMD rules has been reduced, a hefty penalty still remains. From 2023 onward, the excise tax is 25 percent on insufficient or late RMD withdrawals, which is lowered to 10 percent if the RMD is corrected timely. Plan sponsors and participants must be vigilant about the new deadlines to avoid penalties and should reach out to benefits counsel with questions on how to comply.
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