Final Rule Issued on Required Minimum Distributions Under the SECURE Act | Faegre Drinker Biddle & Reath LLP

The Internal Revenue Service (IRS) has issued final regulations regarding required minimum distributions (RMDs) from certain retirement plans, including tax-qualified plans, Internal Revenue Code (Code) section 403(b) plans, individual retirement accounts (IRAs), and deferred compensation plans that qualify under Code section 457(b). The regulations implement changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0).

The final regulations apply to calendar distribution years beginning on or after January 1, 2025. However, because some of the RMD changes discussed in the final regulations have already become effective under the effective dates set forth in the SECURE Act and SECURE 2.0, plan sponsors should review current plan operations for compliance.

The final regulations largely follow the proposed RMD regulations issued in 2022, as described in a previous client alert, with some changes made in response to public comments on the proposed regulations. The final regulations include the following key elements:

• RMD Start Date:Consistent with the SECURE Act and SECURE 2.0, the final regulations establish rules for determining an employee’s “applicable age” for purposes of the “required start date” under section 401(a)(9) of the Code.¹ It is important to note that the final regulations do not resolve the ambiguities in SECURE 2.0 for employees born in 1959. The final regulations reserve the treatment of employees born in 1959 for consideration in proposed regulations that were published concurrently with the final regulations, as discussed in more detail below.
• Death of participant prior to commencement of required minimum payments under defined contribution plans:The final regulations clarify the rules for RMDs paid to “qualified designated beneficiaries” (usually the participant’s spouse or minor child, a beneficiary who is disabled, chronically ill, or no more than 10 years younger than the participant) versus “designated beneficiaries” (usually someone who does not qualify as a qualified designated beneficiary) when the participant dies before the required start date. Specifically, the final regulations confirm that if the participant began annual RMDs before death, the designated beneficiary must continue to take annual RMDs during the 10-year period after death, and the remaining amount will be paid at the end of the 10-year period.

The final regulations also address when a plan is required to establish a default RMD election rule in the event of a participant’s death prior to the required start date, as well as how to determine who is an eligible designated beneficiary or designated beneficiary.

• Designated Roth Accounts:The final regulations provide that any portion of a participant’s account balance held in a designated Roth account is excluded from the calculation of required minimum distributions (RMDs) required during the participant’s lifetime.
• Certain Distributions for Surviving Spouses:The final regulations retain the special “hypothetical RMD” rule introduced in the proposed regulations, which was intended to limit the ability of a surviving spouse to defer required annual distributions beyond the year in which RMDs would have to begin if the surviving spouse had made a rollover to his or her own IRA upon the participant’s death. However, the final regulations limit the application of the hypothetical RMD rule to beneficiaries of the surviving spouse in defined contribution plans because the loophole that the rule is intended to close occurs with the spouse’s election under the 10-year rule.

As noted above, on the same day the final RMD regulations were published, the IRS also published proposed regulations governing other issues related to SECURE 2.0, including:

• The “applicable age” for an employee born on or after 1 January 1959, but before 1 January 1960 (the applicable age for such individuals is 73, not 75).
• How amounts withdrawn from a participant’s Roth account are treated for RMD purposes during years in which the participant is required to take RMDs.
• Treatment for RMD purposes of corrective payments that result in a reduction or exemption from excise taxes under section 4974 of the Code.
• Electing a spouse to be treated as an employee for RMD purposes in the event the employee dies before the required work start date.

Although the deadline for most plans to amend under the SECURE Act and the SECURE 2.0 RMD changes has been extended to December 31, 2026, plan sponsors should review plan operations as many RMD changes are currently in effect or will become effective in 2025. With additional guidance on the horizon, we will continue to monitor this topic as the rulemaking process progresses.

Footnotes

1. The Final Provisions define the applicable age as follows:

• 72 for employees born on or after 1 July 1949 but before 1 January 1951.
• 73 for employees born on or after 1 January 1951 but before 1 January 1959; and
• 75 for employees born on or after 1 January 1960.