IRS Issues Proposed SECURE Act Regulations

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By: Patricia E. Malley, Burns & Levinson LLP

In late February 2022, the IRS released proposed regulations under the SECURE Act which has proven to be one of the most significant pieces of retirement benefits legislation in recent years.  The proposed regulations (which consist of 275 pages) address how the required minimum distribution (“RMD”) rules will work for defined contribution plans (i.e. IRAs, 401(k)s and 403(b)s) and their owners, plan participants and beneficiaries.

This blog post will highlight some of the key clarifications addressed by the proposed regulations.

Clarification Regarding Birthdate

The SECURE Act raised the age for which retirees must start to withdraw money from applicable retirement plans from age 70 ½ to 72.  Thus, under the Act, where an individual reached the age of 70 ½ in 2019, they were required to take their RMD by April 1, 2020.  However, if an individual reached age 70 ½ in 2020 or later, they would be required to take their RMD by April 1 of the year after reaching age 72.

Practitioners raised concerns over how this change in the required beginning date would impact surviving spouses who were named as the sole beneficiary of an employee’s retirement account.  Previously, the law allowed a spouse to delay distributions if the deceased employee was not receiving RMDs during lifetime until such time as the deceased employee would have been required to receive such RMD (i.e. at age 70 ½).  The concern raised was whether the change would mean that spouses who had previously inherited their interest in a deceased employee’s retirement account prior to the effective date of the SECURE Act might still be required to receive distributions based on the 70 ½ age rule.  The proposed regulations clarify that surviving spouses may delay distributions until the end of the calendar year in which the employee would have attained age 72.  Similarly, a spouse who has elected to roll over a retirement account into his or her own name may delay distributions until the surviving spouse reaches their own required beginning date.

Clarification Regarding 10-Year Rule

A key component of the SECURE Act was its elimination of the ability of beneficiaries other than a spouse or other so-called “eligible designated beneficiary” (“EDB”) [1] to “stretch” distributions over their life expectancies.  Now, under the SECURE Act, distributions to non-spouse and non-EDB individuals must be completed within 10 years following the death of a plan participant or IRA owner (distributions to spouse or EDB beneficiaries may be stretched over their life expectancies).

When the SECURE Act was enacted, there was some confusion over the 10-year period particularly the timing of when distributions were required to be made from the account to the beneficiaries.  As drafted, the proposed regulations clarify that if an account owner dies before his or her required beginning date (typically April 1st of the year after his or her 72nd birthday), the 10-year rule requires that the account be distributed by December 31st of the tenth year following the year of death.  However, if an account owner dies after his or her required beginning date, the 10-year rule applies and the beneficiary must take annual RMDs in years one through nine.

Clarification Regarding Age of Majority

 When enacted, the SECURE Act failed to define the age of majority for a child named as a beneficiary of an employee’s retirement plan. 

As drafted, the proposed regulations clarify that a child of an employee will be considered to be above the age of majority on his or her 21st birthday and therefore will no longer be considered an EDB unless he or she is disabled.[2]  While this age is somewhat inconsistent with what is considered the age of majority in most states (and, to a certain extent, what practitioners thought would be the applicable age for purposes of determining whether a child would be considered an EDB excepted from the 10-year rule above) it is worth noting that it is consistent with what is considered the age of majority in the gift tax context.

Clarification Regarding Definition of Disability

Currently, the SECURE Act relies on the Internal Revenue Code definition of disability (provided under section 72(m)(7) of the IRC) which provides a standard of disability based on whether an individual is unable to engage in “substantial gainful activity.”  However, this standard can be difficult to apply particularly when the individual in question is under the age of 18.  Thus, the proposed regulations provide rules for determining whether an individual who is under the age of 18 is disabled for purposes of being considered an EDB.  In addition, the proposed regulations impose a new documentation requirement for chronically ill and disabled beneficiaries.

Additionally, the proposed regulations provide a safe harbor for determining whether a beneficiary is disabled.  If, as of the date of the employee’s death, an individual has been determined to be disabled within the meaning of 42 U.S.C. 1382c(a)(3), then that individual will be considered disabled for purposes of being considered an EDB.

(Additional) Clarification regarding Trusts as Beneficiaries

It is worth noting that the proposed regulations continue to maintain the concept of a see-through trust whereby certain beneficiaries are treated as direct beneficiaries of an employee if the trust meets the see-through trust requirements.  Although consistent with the examples that are in the current regulations, the proposed regulations provide additional fact patterns that are intended to address issues raised in private letter rulings particularly where a trust has EDB and non-EDB beneficiaries.

Applicability

The proposed regulations will apply for purposes of determining RMDs and for distributions on or after January 1, 2022.  For 2021 individuals must continue to apply the current regulations but take into account a reasonable and good faith interpretation of the SECURE Act amendments, which compliance with the proposed regulations will satisfy.

Comments

As a reminder the regulations discussed above are proposed regulations and therefore are subject to change as a result of comments submitted by the public.

Members of the public who wish to submit comments on the proposed regulations will have until May 25, 2022 to submit written or electronic comments.

Commenters are encouraged to submit public comments electronically via the Federal eRulemaking Portal at www.regulations.gov however paper submissions may be sent to: CC:PA:LPD:PR (REG-105954-20), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.  A public hearing is scheduled for June 15, 2022

[1] For purposes of the SECURE Act, EDBs are defined as: (i) the employee’s surviving spouse; (ii) the employee’s child who is under the age of majority; (iii) a disabled individual; (iv) a chronically ill individual; or (v) an individual no more than 10 years younger than the employee.

[2] Please note that the proposed regulations do appear to allow defined benefit plans that have used the prior definition of age of majority to retain that plan provision, thus, grandfathering their definition of “age of majority”.  Therefore, some care will need to be exercised when a minor child becomes the beneficiary of an owner’s retirement account.