The IRS is also providing transition relief for plans and certain beneficiaries who would be required to take annual distributions under changes made by the SECURE Act of 2019 and the IRS’s 2022 proposed regulations to implement those changes.
As a reminder, the SECURE Act changed the retirement plan beneficiary payment options to require most non-spouse beneficiaries to deplete the inherited account within 10 years of the participant’s death, effective for beneficiaries inheriting after 2019. Much of the industry assumed the new 10-year rule would operate similarly to the old 5-year rule, such that beneficiaries would not be forced to take payments from the inherited account until the end of the 10-year term. But the IRS’s proposed regulations to interpret these SECURE Act changes contained a surprising twist. That is, if a participant dies after their required beginning date for taking required minimum distributions (RMDs), beneficiaries who fall in the new category of “non-eligible designated beneficiaries” and are subject to the 10-year rule must take annual payments throughout the 10 years or until the account is depleted if sooner.
Because of the confusion in the industry over this interpretation, the IRS announced in 2022 that it would not assess the excise tax for those beneficiaries who missed a required payment in 2021 or 2022 under the new 10-year rule. The IRS also provided relief to defined contribution plans that failed to make a required beneficiary distribution, stating the plan will not be treated as having a qualification failure merely because the distribution was not made.
The IRS has still not finalized its regulations interpreting the RMD and beneficiary changes made by the first SECURE Act. And, so, it has issued another year of relief. Under Notice 2023-54, certain beneficiaries will not be penalized, and plans will not be disqualified, for not making a beneficiary payment in 2023. This relief applies to beneficiaries who are required to follow the 10-year rule and who inherited a plan account from:
- A participant who died in 2020, 2021, or 2022 after their required beginning date, or
- Another beneficiary who was taking life expectancy payments and died in 2020, 2021 or 2022.
The IRS notice also stated that the final RMD and beneficiary regulations would be effective no earlier than 2024 – although it did not say whether it would be changing its interpretation of the 10-year rule.
IRS Provides Relief to Participants Born In 1951
With Notice 2023-54, the IRS also provides relief to plan participants who were born in 1951 and were expecting to begin taking RMDs in 2023 at age 72. SECURE 2.0 raised the RMD starting age to 73, but the law was passed on December 29, 2022, just two days before the start of the 2023 calendar year. With such short notice to re-program systems, many plans may have automatically paid out RMDs to participants who turn 72 in 2023, even though they were no longer required to start taking RMDs at age 72.
The IRS relief allows participants born in 1951 who received what they thought was an RMD between January 1–July 31, 2023, to roll that distribution back into the plan or an IRA by September 30, 2023. The IRS has also stated that any plan that made this mistaken RMD payment will not be considered to have failed to satisfy the requirements of the tax Code.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
RP-869-0923 Tracking #1-05378664 (Exp. 09/25)