The Internal Revenue Service (IRS) recently published final regulations that update the required minimum distribution (RMD) rules for qualified plans, including 401(k) plans. The final regulations implement changes made by the SECURE and SECURE 2.0 Acts and generally follow the proposed rules with a few modifications.

Furthermore, the IRS published proposed regulations that address other RMD issues under the SECURE 2.0 Act that the final regulations specifically did not address.

The following provisions in the final and proposed regulations apply to 401(k) plans:

  • Effective Date of the Final Rules—The final rules apply when determining RMDs for calendar years beginning on or after January 1, 2025, using a reasonable, good faith interpretation of the relevant SECURE and SECURE 2.0 Act amendments.
  • Distributions that Occur During an Employee’s Lifetime—The general required beginning date (RBD) is April 1st of the year following the year an employee reaches the applicable age or retires, whichever is later. Plans can now institute a uniform RBD of the calendar year following the year an employee reaches seventy ½ years old. Furthermore, the proposed regulations would resolve a conflict in the SECURE 2.0 Act by setting the applicable age at 73 for employees born in 1959.
  • Distributions Occurring After an Employee’s Death—Under the final regulations, annual RMDs must continue if the employee dies on or after their RBD. The remaining provisions of the Code concerning distributions following an employee’s death still apply, including that all distributions must occur within ten years of the employee’s death.
  • When Death Occurs Before RBD—The final regulations provide that only “eligible” designated beneficiaries of employees who die before their RBD may receive distributions over their life expectancy. Distributions must then continue according to the final regulations until fully distributed. However, plans may specify or restrict distribution methods for some categories of eligible designated beneficiaries.
  • Defining Eligible Designated Beneficiaries – Eligible designated beneficiaries include surviving spouses, minor children, and designated beneficiaries who are disabled, chronically ill, or ten or fewer years younger than the employee.
  • How to Handle Multiple Designated Minor Beneficiaries – In the case of multiple designated minor beneficiaries, full distribution is not required until ten years after the youngest child who is a designated beneficiary becomes an adult, or the last of the minor children dies, whichever occurs first.
  • When Trusts Are Designated Beneficiaries—Some beneficiaries of see-through trusts that meet certain conditions are treated as beneficiaries of the employee. More specifically, the trust must be valid under state law (or would be if it had corpus), irrevocable or become irrevocable upon the employee’s death, have identifiable beneficiaries, and meet documentation requirements.
  • Special Provisions for Surviving Spouses – A surviving spouse who is the employee’s sole beneficiary can elect to be treated as the employee for some purposes. For instance, if the employee dies before the RBD and the sole beneficiary surviving spouse is subject to the life expectancy rule, this election is automatic. On the other hand, if the employee dies after the RBD, the election would not be automatic unless the plan terms so provided.
  • Partial Account Purchase of Annuity Contracts – Plans may permit employees to take an RMD for a calendar year in an amount equal to the excess of the RMD for that year over the annuity amount. This alternative treats the annuity payment as a portion of the RMD for that year, which is determined by adding the fair market value of the annuity contract to the remaining account balance. The proposed regulations would determine the fair market value of the annuity contract as of December 31st of the calendar year before the distribution year.
  • Exemption of Designated Roth Accounts – Amounts held in designated Roth accounts do not count toward determining the account balance subject to RMD rules. Likewise, distributions from designated Roth accounts do not count toward the RMD.
  • Corrective Distributions – The final regulations implement an automatic waiver of the Code §4974 excise tax for failure to meet the RMD in any year the employee dies, so long as it is met by the end of the following calendar year. However, according to the proposed regulations, if the corrective action occurs in the following calendar year, the RMD also would have to be met for that calendar year.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and H.R./employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.