Required minimum distribution relief for 2023

Tim Daum
| 8/3/2023
Required minimum distribution relief for 2023
In summary
  • A recently released notice provides guidance on required minimum distribution rules.
  • The notice also provides relief for 2023.
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The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) and SECURE 2.0 Act of 2022 (SECURE 2.0), enacted as part of the Consolidated Appropriations Act, 2023, made changes to retirement plans, including changes to the rules for required minimum distributions (RMDs). Proposed regulations addressing SECURE 1.0 changes were published in early 2022, but final regulations have yet to be published. In October 2022, Notice 2022-53 was issued to provide transition guidance and relief for 2021 and 2022. On July 14, Notice 2023-54 was issued to provide further guidance, including extending the relief already provided for 2021 and 2022 and providing additional relief for 2023.

Changes to RMD rules

Participants in qualified retirement plans and individual retirement accounts (IRAs) must take RMDs when they attain a certain specified age. That age was 70 1/2, until it was increased to 72 by SECURE 1.0. SECURE 2.0 included the following increases in the specified age:

  • Age 73 for individuals who attain age 72 after Dec. 31, 2022, and who attain age 73 before Jan. 1, 2033
  • Age 75 for individuals who attain age 74 after Dec. 31, 2032

Unless the IRS provides relief, legislation is needed to adjust the Dec. 31, 2032, date to Dec. 31, 2033, to correct a drafting error that results in two different required beginning dates for individuals born in 1959.

SECURE 1.0 also modified the RMD rules for distributions made after a participant’s death. Generally, the new rules eliminate the lifetime payment option for most nonspouse beneficiaries and require these beneficiaries to withdraw all funds by the end of the 10-year period following the death of the participant.

Proposed regulations

Proposed RMD regulations for distributions after a participant’s death were issued in early 2022. The proposed regulations provide that in the case of a participant who dies on or after their required beginning date for taking RMDs (April 1 of the calendar year following the year in which the participant attains the specified age, or if later for a qualified retirement plan participant (but not an IRA owner), April 1 of the calendar year following the year in which the participant retires), annual distributions to a designated beneficiary, other than an “eligible designated beneficiary,” generally must commence in the calendar year immediately following the calendar year of the participant’s death, with full distribution required by the end of the 10th calendar year following the calendar year of death. Prior to issuance of the proposed regulations, it was anticipated that although full distribution would be required by the end of the 10-year period, distributions could commence at any time within the 10-year period.

The proposed regulations also provide that for an eligible designated beneficiary (or a beneficiary of an eligible designated beneficiary after the death of the eligible designated beneficiary), annual distributions generally must commence in the calendar year immediately following the calendar year of the participant’s death with payments made over the lifetime or life expectancy of the eligible designated beneficiary, and with complete distribution made by the end of the 10th calendar year following the calendar year of the death of the eligible designated beneficiary. An eligible designated beneficiary is generally one of the following:

  • The surviving spouse of the participant
  • A participant’s child under the age of majority
  • A disabled or chronically ill individual
  • An individual who is not more than 10 years younger than the participant

Crowe observation

The proposed regulations make it clear that upon death of the eligible designated beneficiary, the beneficiary of the eligible designated beneficiary must begin taking distributions in the following year.

Notice 2022-53

The part of the proposed regulations requiring post-death RMDs to commence in the calendar year immediately following the calendar year of the participant’s (or eligible designated beneficiary’s) death was an unexpected interpretation of the new rules that caught many off guard. Because these rules were unexpected and were published in 2022, many administrators did not make the newly required RMDs in 2021 that resulted from participants or eligible designated beneficiaries dying in 2020. Similarly, many RMDs resulting from participants or eligible designated beneficiaries dying in 2021 were not made in 2022.

In October 2022, the IRS issued Notice 2022-53, which provided that plans and participants would not be treated as failing to comply with the RMD rules because of missed 2021 RMDs that were required by participant or eligible designated beneficiary deaths occurring in 2020 or because of any similarly missed 2022 RMDs resulting from deaths occurring in 2020 or 2021. The notice also provided that RMD final regulations would apply no earlier than the 2023 calendar year.

Notice 2023-54

Many administrators were not able to make the necessary adjustments to their systems in time to properly handle 2023 distributions for participants who attain age 72 in 2023. Administrators might have treated 2023 distributions as RMDs ineligible for rollover to an IRA or another qualified plan (which would have been the proper treatment under the prior rules) when the distributions were in fact not RMDs and were eligible for rollover under the new rules.

Notice 2023-54 provides the following relief:

  • Relief provided in Notice 2022-53 is extended for missed 2023 RMDs in the case of participant or eligible designated beneficiary deaths occurring in 2020, 2021, or 2022.
  • Qualified retirement plans will not be treated as failing to satisfy various rules pertaining to eligible rollover distributions as a result of treating distributions between Jan. 1, 2023, and July 31, 2023, to participants who attain age 72 in 2023 as RMDs rather than eligible rollover distributions. Additionally, the normal 60-day rollover period is extended to Sept. 30, 2023, for any such distributions.
  • The normal 60-day rollover period for eligible rollover distributions made between Jan. 1, 2023, and July 31, 2023, to IRA owners (or the IRA owner’s surviving spouse) who attain age 72 in 2023 is extended to Sept. 30, 2023, for distributions that originally were mischaracterized as RMDs. This extension applies even if the IRA owner or surviving spouse has rolled over a distribution within the last 12 months. However, making a rollover of the originally mischaracterized distribution will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. In that case, the individual still could make a direct trustee-to-trustee transfer to another IRA or qualified retirement plan.

The notice also provides that RMD final regulations will apply no earlier than the 2024 calendar year.

Looking ahead

Notice 2023-54 provides welcome relief to plan administrators and participants who have struggled to comply with some of the new RMD rules. Participants and administrators should work with their advisers to determine whether there are any mischaracterized distributions that may be rolled over by the extended Sept. 30, 2023, deadline.

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Tim Daum
Principal, Washington National Tax