IRS Releases Long-Awaited Final RMD Regulations and New Proposed Regulations to Implement SECURE 2.0 Provisions

By Alison R. Peak, Adam R. McMahon and Grace F. Sullivan

TAXING TIMES, November 2024

On July 19, 2024, the Treasury Department and Internal Revenue Service (IRS) published final regulations (the Final Regulations) on required minimum distributions (RMDs) from retirement plans and IRAs. The Final Regulations had been hotly anticipated since proposed regulations were released in February 2022, which were intended to reflect changes made to the RMD rules by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0).[1]

Also included in the July 19th regulatory package was a new set of proposed RMD regulations (the Proposed Regulations) intended to further update the RMD regulations to include additional changes made to the RMD rules by the SECURE 2.0 Act of 2022 (SECURE 2.0).[2]

SECURE 1.0 and SECURE 2.0 enacted a number of important changes to the RMD rules, with SECURE 1.0 acting as the impetus for the Treasury Department and IRS to update the rules for the first time in about two decades. Because SECURE 2.0 was enacted almost a year after the 2022 proposed regulations under SECURE 1.0 had already been released, the Final Regulations incorporate some, but not all, of SECURE 2.0’s changes to the RMD rules.

In this article, we focus on the most important rules in the Final and Proposed Regulations that practitioners should know as the effective date for the Final Regulations draws near. We begin by briefly reviewing the longstanding RMD rules and how they have been impacted by SECURE 1.0 and SECURE 2.0. Next, we demystify the Final Regulations by providing a basic framework for determining how the rules apply to different beneficiaries, including special circumstances involving spousal beneficiaries. We then analyze the key ways in which the Final Regulations differ from the 2022 proposal. And finally, we summarize the SECURE 2.0 provisions that are the focus of the Proposed Regulations and how they were addressed by the regulatory package released in July.

The RMD Rules in Context

In order to understand the recent overhaul of the RMD regulations, it is necessary to first understand how the RMD rules applied to retirement plans and IRAs before the enactment of SECURE 1.0 and 2.0. Under those longstanding RMD rules, retirement plan participants and IRA owners were generally required to begin drawing down their retirement plan and IRA savings once they reached age 70½, over their life or over a period not extending beyond their life expectancy.

Additionally, when a retirement plan participant or IRA owner died, the RMD rules applied differently to inheriting beneficiaries depending on whether an employee or IRA owner died before, or on or after, their required beginning date (RBD)—generally, April 1 of the calendar year following the calendar year in which the individual reached age 70½. If the participant or IRA owner died before their RBD, any remaining plan or IRA balance had to be distributed either: (1) over the life or life expectancy of their designated beneficiary; or (2) by the end of the year that contained the fifth anniversary of the participant or owner’s death. If the plan participant or IRA owner died on or after their RBD, any remaining interest had to be distributed over the longer of the decedent’s or designated beneficiary’s life expectancy.

SECURE 1.0

SECURE 1.0 included a pair of changes to the RMD rules that are addressed in the Final Regulations. First, SECURE 1.0 increased the “applicable age”—i.e., the age that triggers lifetime RMDs—from age 70½ to age 72. This change was intended to account for the fact that Americans are working and living longer than ever before and, therefore, should be able to delay the commencement of retirement benefits until later in life. (As discussed below, the applicable age has since been increased again by SECURE 2.0.) Second, SECURE 1.0 enacted major changes to the RMD rules that apply to beneficiaries after the death of a retirement plan participant and IRA owner. These changes are the primary driver behind the IRS’s overhaul of its RMD regulations and are discussed in greater detail later in this article. At a very high level, unless an exception applies, SECURE 1.0’s after-death RMD rules require any amounts remaining in a defined contribution (DC) retirement plan or IRA after the death of the participant or IRA owner to be distributed within ten years of death.

This new “10-year rule” significantly limits the longstanding RMD rules that had previously allowed designated beneficiaries to “stretch” RMDs over their life or over a period based on the life expectancy of the decedent or designated beneficiary. Congress created this 10-year rule because it will, in many cases, accelerate the taxation of inherited retirement accounts. Accordingly, it provided Congress with a mechanism to help offset some of the revenue losses that resulted from unrelated retirement plan enhancements included in SECURE 1.0. These changes to the after-death RMD rules generally apply, by statute, to plan participant and IRA owner deaths after 2019, with special delayed effective dates for collectively bargained and governmental plans. The new rules also do not apply to certain pre-existing annuity contracts if the employee made an “irrevocable election” before Dec. 20, 2019 as to the method and amount of annuity payments to the employee and any designated beneficiaries.

SECURE 2.0

Building on SECURE 1.0’s success, at the end of 2022, Congress passed SECURE 2.0—the most substantial set of retirement reforms in decades. Like SECURE 1.0, SECURE 2.0 included substantial changes to the RMD rules. The overall purpose of these RMD changes was to account for the fact that Americans are living and working longer than ever before, to encourage the use of lifetime income features, and to harmonize the RMD rules among different types of retirement arrangements. The RMD changes included in SECURE 2.0 are discussed in greater detail later in this article.

Need for Updated Regulations

The Final Regulations are intended to update the RMD rules so that they reflect the RMD changes that were included as part of SECURE 1.0, SECURE 2.0, and other legislative, regulatory, and judicial changes that have occurred since the IRS last updated the regulations.[3] Prior to the overhaul released in July, the IRS had most recently updated its RMD regulations in 2002 and 2004. As part of its recent makeover, the IRS also reconfigured the format of its rules, abandoning a “question and answer” format in favor of a format that is more consistent with how the IRS has published regulations in recent years.

Summary of the After-Death RMD Changes

As noted above, the primary driver behind the IRS’s recent overhaul of its RMD regulations was SECURE 1.0’s substantial changes to the RMD rules that apply after the death of a plan participant or an IRA owner. These changes are also the primary focus of this article.

The changes to the after-death RMD rules, as interpreted by the recently released regulations, may seem like an intimidating amalgamation of complex rules, defined terms, cross-references, exceptions, and exceptions to exceptions. And if you were to simply read the RMD rules from beginning to end, it would be very difficult to analyze how the updated rules apply to many common fact patterns involving beneficiaries.

In this article, we seek to demystify the final RMD regulations by summarizing their foundation and offering an analytical framework for determining how they apply to different beneficiary situations. As discussed further below, this framework depends on the answers to three factual questions.

Question 1: What Type of Retirement Savings Arrangement Is Involved?

The first question to ask in thinking about how the final RMD rules apply to any given beneficiary is, what type of retirement savings arrangement is involved? This is because SECURE 1.0’s changes to the after-death RMD rules apply only to DC retirement plans and IRAs.[4] For beneficiaries of deceased participants in defined benefit retirement plans, the after-death RMD rules in effect prior to SECURE 1.0 continue to apply. While SECURE 1.0’s changes to the after-death RMD rules apply to beneficiaries of DC retirement plan participants and IRA owners alike, in the remainder of this article, we will generally refer to the relevant decedent as the “employee,” consistent with the language used in the Final Regulations.

Question 2: What Type of Beneficiary Is Involved?

Assuming that SECURE 1.0’s after-death RMD rules apply, the next question to ask is, what type of beneficiary is involved? This is because SECURE 1.0’s changes to the after-death RMD rules apply in different ways to different types of beneficiaries. In general, there are three types of beneficiaries that will determine how the RMD rules apply after the death of an employee:

Designated Beneficiary. A designated beneficiary is an individual who is a beneficiary designated under the plan as of the date of the employee’s death and who remains[5] such a beneficiary as of September 30 of the calendar year following the calendar year of the employee’s death. A designated beneficiary must be an individual (i.e., natural) person and generally cannot, for example, be a trust or an estate.[6]

Eligible Designated Beneficiary. An eligible designated beneficiary (EDB) is any designated beneficiary who falls into one of the following categories: (1) a surviving spouse; (2) an employee’s child who is a minor (i.e., under age 21); (3) a disabled or chronically ill individual;[7] or (4) any other person who is no more than 10 years younger than the employee.[8] As described below, EDBs get special treatment under the after-death RMD rules that is not available to other types of beneficiaries.

Non-Designated Beneficiary. Sometimes, an employee will designate a non-individual, such as an estate or trust, as their beneficiary. In these cases, the employee is generally treated as not having a designated beneficiary.[9] Consistent with the preexisting regulations, the Final Regulations continue to include special rules that permit individual beneficiaries of “see-through” trusts to be treated as designated beneficiaries for RMD purposes, and the Final Regulations expand the options that are available to see-through trusts.

Special rules apply when there are beneficiaries who are minor children, trust beneficiaries, and multiple beneficiaries, including when there are beneficiaries of different categories. A full discussion of those rules is beyond the scope of this article.

Question 3: Did the Employee Die Before or On or After Their Required Beginning Date?

The final question to ask is, did the employee die before their RBD or did they die on or after their RBD? In general, an employee’s RBD is April 1 of the calendar year following the later of (1) the calendar year in which the employee reaches the “applicable age,” and (2) the calendar year in which the employee retires from employment with the employer maintaining the plan.[10] Except for governmental plans and certain church plans, if an employee is a 5% owner, the RBD is April 1 of the calendar year following the calendar year in which the employee attains the applicable age, without regard to when they retire.[11] An IRA owner’s RBD is always determined without regard to when they retire.[12]

The Basic Framework

The answers to the three questions above are critical to understanding how the after-death RMD rules will apply to any given beneficiary under the basic framework that is set forth in the following section of this article. There are also a series of special rules that apply to a spouse beneficiary that wants to roll over a deceased employee’s interest into the spouse’s own plan or IRA, or elect to treat a decedent’s IRA as the surviving spouse’s own (collectively referred to herein as “spousal continuation”). Those special spousal continuation rules for surviving spouses are examined separately in this article. We note that the discussion below is generally limited to non-annuitized accounts.

Employees Who Die On or After Their RBD

In the case of employees who die on or after their RBD,[13] the Final Regulations require distributions to be made to beneficiaries in the following manner:

Designated Beneficiaries. If the beneficiary is a designated beneficiary—but not an EDB—distributions must be made on an annual basis over the longer of the employee’s remaining life expectancy and the beneficiary’s life expectancy, starting by the end of the calendar year following the calendar year of the employee’s death.[14] Additionally, all amounts must be fully distributed by the end of the year containing the 10th anniversary of the employee’s death.[15] The IRS’s final interpretation of how the RMD rules apply in this scenario, which has been controversial, remains unchanged from the proposal.

EDBs. If the beneficiary is an EDB, distributions must be made on an annual basis over the longer of the employee’s remaining life expectancy and the EDB’s life expectancy, starting by the end of the calendar year following the calendar year of the employee’s death.[16] The IRS’s final interpretation of how the RMD rules apply in this scenario, which has been controversial, remains unchanged from the proposal.

In this circumstance, two additional rules also apply. First, if the EDB is the employee’s minor child, then the employee’s entire remaining interest must be distributed by the end of the calendar year containing the 10th anniversary of the child’s 21st birthday (i.e., when the child reaches age 31).[17] Second, upon the death of any EDB, the entire interest must be fully distributed by the end of the calendar year containing the 10th anniversary of the EDB’s death.[18] During both of these 10-year periods, RMDs must continue each year over the longer of the employee’s or EDB’s life expectancy, as applicable.

Non-Designated Beneficiaries. If the beneficiary is not a designated beneficiary, distributions must be made on an annual basis over the employee’s remaining life expectancy, starting by the end of the calendar year following the year of the employee’s death. In this case, there is no other cap on the distribution period.

Except for spouse beneficiaries, the distributions described above will be determined using the Single Life Table in Treasury Regulation section 1.401(a)(9)-9(b). As described in more detail below, surviving spouses may have the option of determining distributions using the Uniform Lifetime Table in Treasury Regulation section 1.401(a)(9)-9(c).

Under this regime, if an employee dies on or after their RBD, all beneficiary types must receive RMDs in the year following the employee’s death and in each subsequent year. Put differently, annual RMDs can’t stop. Furthermore, in this context, SECURE 1.0’s 10-year rule operates as a “cap” that can be triggered, depending on the circumstance, upon the death of the employee, the death of an EDB, or a minor child EDB attaining age 21.

Employees Who Die Before Their RBD

In the case of employees who die before their RBD, the Final Regulations require distributions to be made to beneficiaries in the following manner:

Designated Beneficiaries. If the beneficiary is a designated beneficiary—but not an EDB—no distributions are required until the end of the year containing the 10th anniversary of the employee’s death (the “10-Year Deferral Rule”). However, the entire interest must be distributed by the end of this 10-year period.[19]

EDBs. If the beneficiary is an EDB, the RMD rules may generally be satisfied in one of two ways. First, the EDB can satisfy the RMD rules under the 10-Year Deferral Rule.[20] Alternatively, the RMD rules may be satisfied if distributions are made on an annual basis over the EDB’s life expectancy, starting by the end of the calendar year following the calendar year of the employee’s death.[21] A surviving spouse who is the sole beneficiary may delay the commencement of distributions until the year in which the employee would have attained the “applicable age” (referred to herein as the “Spousal Delay Rule”).[22] The Final Regulations provide that, absent a provision providing otherwise in a governing document, the life expectancy approach, including the Spousal Delay Rule, is the default distribution option.[23]

If the RMD rules are satisfied using the life expectancy approach, several additional rules also apply. First, if the EDB is the employee’s minor child, then the employee’s entire remaining interest must be distributed by the end of the calendar year containing the 10th anniversary of the child’s 21st birthday (i.e., when the child reaches age 31).[24] Second, upon the death of an EDB, the entire interest must be fully distributed by the end of the calendar year containing the 10th anniversary of the EDB’s death.[25] During both of these 10-year periods, RMDs must continue each year over the EDB’s life expectancy. Additionally, if the sole spouse beneficiary dies before stretch payments are required to start, the spouse is treated as the employee (referred to herein as the “Spousal Proxy Rule”). In that instance, the spouse’s beneficiary is subject to the RMD rules that apply based on (1) the status of the spouse’s beneficiary, and (2) when the spouse died in relation to their own RBD.[26]

Non-Designated Beneficiaries. If the beneficiary is not a designated beneficiary, no distributions are required until the end of the calendar year containing the 5th anniversary of the employee’s death. However, the entire interest must be distributed by the end of this 5-year period. [27]

Under this regime, and unlike the rules that apply to employees who die on or after their RBD, beneficiaries can defer distributions from their inherited accounts for up to 10 years, rather than having to continue taking RMDs each year following the employee’s death. However, EDBs have the additional option of taking distributions over their life expectancy, in which case the payments must commence in the year following the year of the employee’s death (subject to the Spousal Delay Rule) and continue in each subsequent year. Additionally, for EDBs receiving these life expectancy payments, any remaining interest must be fully distributed by the end of the 10-year period commencing with the year in which the EDB dies or, in the case of an EDB who is a minor child, by the end of the 10-year period commencing with the year in which the child attains age 21.

Summary of Special Rules for Spousal Continuation

As noted above, there are also a series of special rules that apply to a surviving spouse beneficiary that wishes to roll over a deceased employee’s interest into the spouse’s own plan or IRA, or elect to treat a decedent’s IRA as the surviving spouse’s own (collectively referred to herein as “spousal continuation”). For surviving spouse beneficiaries under a retirement plan (i.e., a non-IRA), the spouse can roll over an eligible rollover distribution (ERD) to a plan or IRA in which they are treated as the employee and not treated as the beneficiary. However, ERDs do not include any portion that is an RMD or is treated as an RMD.[28]

The Final Regulations generally retain the rules from the 2022 proposed regulations that deny a surviving spouse the ability to roll over any amount attributable to a “hypothetical RMD” in certain circumstances. These rules are intended to prevent a surviving spouse from using the 10-Year Deferral Rule to defer distributions beyond the date they otherwise would have commenced RMDs and then rolling amounts to their own IRA or plan before the end of the 10-year period.

In this regard, if the employee died before their RBD, and the spouse is under the 10-Year Deferral Rule, if the spouse rolls over a distribution to a plan or IRA where they are not treated as the beneficiary in or after the year the spouse attains their “applicable age,”[29] the amount eligible for rollover will be reduced by a “hypothetical RMD.” The hypothetical RMD rules do not apply to surviving spouses of employees who die on or after their RBD because the 10-Year Deferral Rule is not applicable in such cases, and that is the rule at which the hypothetical RMD requirement is directed.

The calculation of the hypothetical RMD is complicated, but it generally equals the excess, if any, of (1) the sum of the hypothetical RMDs that would have been due for each calendar year during a “catch-up period,” over (2) the actual distributions made to the surviving spouse during those calendar years.[30] The “catch-up” period is generally the period starting in the year in which the surviving spouse attains the applicable age and ending in the year in which the rollover distribution is made. The Proposed Regulations include an example showing how to calculate the hypothetical RMD.

For IRAs, the rules are generally the same as for plans except that a surviving spouse who is the sole beneficiary can elect (or be deemed to elect) to treat the decedent’s IRA as their own instead of doing a rollover of the decedent’s interest into a new IRA. Under the Final Regulations, however, before such an election can be made, the surviving spouse must withdraw, to the extent applicable, any hypothetical RMD that would have been due had the surviving spouse received a distribution and sought to roll it over into their own IRA.[31] Thus, while the Final Regulations abandon the rule from the 2022 proposed regulations that, in certain cases, would have prohibited a surviving spouse from electing to treat a decedent’s IRA as their own, the revised version of the hypothetical RMD rule will still introduce significant complexity for surviving spouse beneficiaries who are subject to the rule and wish to treat a decedent’s IRA as their own. In all other respects, the Final Regulations generally retain the rules under prior law regarding how a surviving spouse can elect, or is deemed to elect, to treat the IRA as their own.

Proposed vs. Final Rules

Overall, the Final Regulations are very similar to the 2022 proposed regulations, subject to a few modifications based on public input and a series of updates that incorporate the RMD changes that were enacted as part of SECURE 2.0. In this section, we discuss the key ways in which the Final Regulations remain consistent with the 2022 proposal and the key ways in which they depart from that proposal.

After-Death RMD Rules. In general, the final interpretations of the changes that SECURE 1.0 made to the after-death RMD rules are very similar to what was originally proposed in 2022. Most notably, for example, the IRS did not budge on its controversial interpretation of the so-called 10-year rule as it applies to employees who die on or after their RBD. This interpretation has been controversial because beneficiaries of such employees must continue receiving RMDs each year after the employee dies, notwithstanding the application of the 10-year rule. That is, it does not permit RMDs to be deferred or paused for 10 years after an employee’s death. This interpretation came as a surprise to many given the IRS’s longstanding interpretation of the “5-year rule,” upon which the 10-year rule is based. Under the 5-year rule, beneficiaries are permitted to defer RMDs until the end of the applicable 5-year period.

Effective Date. In a helpful change from the proposal, and in recognition of the delay in getting final RMD regulations published, the Final Regulations will apply to distributions made, and for distribution calendar years beginning, on or after Jan. 1, 2025. For RMDs in earlier years, the Final Regulations state that taxpayers must apply the preexisting RMD regulations, but taking into account a reasonable, good faith interpretation of the relevant amendments enacted by SECURE 1.0 and SECURE 2.0.

Other Key Changes. While the Final Regulations are generally consistent with the proposal, the IRS adopted a few notable changes. For example, the Final Regulations abandon the proposed rule that would have created a special cap on the distribution period for employees who die on or after their RBD and name an older beneficiary.[321] As another example, in the case of an annuity contract, the Final Regulations clarify that a beneficiary’s status as an EDB is determined as of the annuity starting date, rather than as of the date of the employee’s death.[33] This helps ensure that joint and survivor annuities can work as intended even if a joint annuitant’s status as an EDB changes after the annuity starting date.

Tax-Exempt 457(b) Plans. The Final Regulations confirm that SECURE 1.0’s changes to the after-death RMD rules apply to 457(b) plans maintained by governmental and tax-exempt employers. This had been somewhat unclear due to the labyrinth of relevant statutory cross-references.

SECURE 2.0 Changes in Final and Proposed Regulations

Because SECURE 2.0 was enacted after the IRS proposed its overhaul of the RMD regulations, the IRS took two different approaches to incorporating SECURE 2.0 in the regulations. For some of SECURE 2.0’s changes, the IRS believed that the statute was straightforward and, therefore, it was appropriate to incorporate such changes into the Final Regulations without first publishing proposed regulations and soliciting public input. Those SECURE 2.0 amendments were incorporated, without any proposal, into the Final Regulations that were published in July. For other SECURE 2.0 changes, however, the IRS felt that it must first propose interpretations and solicit public input before proceeding with final rules. Accordingly, for this latter group of changes, the IRS published the Proposed Regulations on the same day it published its Final Regulations. These proposed changes are discussed in more detail below.

Applicable Age. The Final Regulations reflect the changes that SECURE 2.0 made to the age that is used to determine an employee’s RBD.[33] The Final Regulations provide that the “applicable age” is determined using the employee’s date of birth as follows:

If the individual was born…	The “applicable age” is…
Before July 1, 1949	70½
July 1, 1949 to Dec. 31, 1950	72
Jan. 1, 1951 to Dec. 31, 1959	73*
On or after Jan. 1, 1960	75

*SECURE 2.0 inadvertently made age 73 and age 75 the applicable age for individuals born in 1959. The Proposed Regulations would clarify that age 73 is the applicable age for these individuals.[35]

Spousal ULT Election. Section 327 of SECURE 2.0 permits surviving spouses to elect to calculate their RMDs (as beneficiaries) using the Uniform Lifetime Table (ULT) rather than the Single Life Table (SLT). The effect of this change is to permit surviving spouse beneficiaries to receive RMDs more slowly than had been permitted under prior law. The Final Regulations reflect this rule,[36] and the Proposed Regulations clarify how this rule would apply. The following describes three key provisions under the Proposed Regulations.

First, in the case of plans that offer surviving spouses the ability to elect the ULT, the Proposed Regulations specify that the spousal election will operate in two different ways depending on whether the employee died before, or on or after, their RBD. That is, if an employee died before their RBD, a surviving spouse will be treated as having automatically elected to apply the ULT.[37] In contrast, if an employee dies on or after their RBD, a surviving spouse is not automatically treated as having elected to apply the ULT.[38] However, in this latter case, the ULT election may be the default election under the terms of the plan. It is not clear why the Proposed Regulations draw this distinction between deaths before the RBD and deaths on or after the RBD. It seems to add administrative complexity to an already complex rule.
Second, the Proposed Regulations state that the spousal ULT election is only available if the first year for which a surviving spouse must receive RMDs is 2024 or later.[39] Thus, as currently drafted, if a spouse was required to start taking RMDs in 2023 or earlier, the new Spousal ULT rule would not be available. This does not seem to be consistent with the effective date rule in SECURE 2.0, which provides that the spousal ULT rule “shall apply to calendar years beginning after Dec. 31, 2023.”[40]
Third, the preamble to the Proposed Regulations indicates that, notwithstanding the legislative changes that created the spousal ULT election, the Spousal Delay Rule and the Spousal Proxy Rule apply “automatically”—i.e., without regard to whether a surviving spouse elects their application and without regard to whether the Spousal ULT Rule applies.[41] Although this clarification doesn’t directly impact a spouse’s ability to elect the ULT, the SECURE 2.0 provisions that created the spousal ULT election were drafted in a way that created uncertainty about the extent to which a surviving spouse would be required to elect the Spousal Delay Rule and the Spousal Proxy Rule, together or separately. The confirmation in the preamble seems helpful in this regard.

Lifetime RMD Exemption for Designated Roth Accounts. SECURE 2.0 added a lifetime RMD exemption for designated Roth accounts maintained within retirement plans (i.e., non-IRAs). The purpose of this change was to create parity with the treatment for Roth IRAs, which have always been exempt from the lifetime RMD rules.

In the Final Regulations, the IRS confirmed that, for a year in which an RMD obligation otherwise exists during an employee’s life, their account balance does not include any amounts in their designated Roth account under the plan.[42] The Proposed Regulations also clarify that any distribution from a designated Roth account during a year in which the employee is alive does not count towards a participant’s RMD obligation for any non-Roth accounts.[43]

Additionally, in the Final Regulations, the IRS clarified that, upon the death of an employee whose entire interest under a plan is in a designated Roth account, the employee is treated as having died before their RBD.[44] What is still not clear under either set of regulations is how the post-death RMD rules should apply if only a portion of an employee’s interest is held in a designated Roth account. This is especially relevant if the employee dies on or after their RBD because the employee’s interest in the non-Roth account will be subject to the RMD rules that apply when an employee dies on or after their RBD, i.e., the at-least-as-rapidly rule applies, whereas the employee’s interest in the designated Roth account presumably should be subject to the RMD rules that apply when an employee dies before their RBD, e.g., the 10-Year Deferral Rule or the life expectancy rule. As currently written, however, the Proposed Regulations do not expressly provide for such treatment when an employee has a mixture of Roth and non-Roth money in a plan.

Qualifying Longevity Annuity Contracts (QLACs). The Final Regulations reflect the amendments made by section 202 of SECURE 2.0 and retain other improvements to the QLAC rules from the 2022 proposed regulations regarding QLACs.[45] In this regard, they (1) repeal the 25% account balance limit on QLAC premiums, (2) increase the dollar limitation on QLAC premiums to $200,000, as adjusted for inflation starting in 2024, (3) clarify that certain free-look provisions are permitted, (4) clarify that a divorce occurring after a QLAC is purchased and before the annuity payments commence will not require changes to the payout, provided that a qualified domestic relations order (QDRO) or a divorce or separation instrument satisfies certain requirements, and (5) retain the rule from the 2022 proposal that permits QLACs to have a cash surrender value before the RBD.[46]

The Final Regulations provide a welcome clarification that the new premium limit applies to QLACs that were originally purchased before the effective date of SECURE 2.0, as long as the QLAC satisfied the requirements to be a QLAC on that date. As a result, the contract does not need to be exchanged for another QLAC in order for the employee to get the benefit of the new premium limits, despite statutory language suggesting otherwise.[47]

Increasing Annuity Payments. Prior to SECURE 2.0, the regulations generally required annuity payments to be non-increasing. Certain exceptions were available, provided that the payout stream satisfied a “minimum income threshold test” (sometimes called the MITT). It was often difficult to satisfy the MITT, so many common forms of annuity payouts were not permitted under the RMD rules. Section 201 of SECURE 2.0 added new Code section 401(a)(9)(J), which was intended to eliminate these regulatory restrictions on certain types of increasing annuity payments. The Final Regulations retain the general rule that annuity payments must be non-increasing but expressly permit the types of payment increases reflected in new Code section 401(a)(9)(J).[48] In particular, the following increasing payouts are now permitted under the Final Regulations:
- Annuity payments that increase by a constant percentage, applied not less frequently than annually, at a rate that is less than 5% per year.
- Any lump sum payment that is:
- Dividends and similar payments, provided that the issuer of the contract determines the amount using reasonable actuarial methods and assumptions, as determined in good faith by the issuer of the contract when calculating the initial annuity payments and the issuer’s experience with respect to those factors. The Final Regulations retained the definition of “actuarial gains” so that it encompasses payments that fluctuate with other types of gains, such as those under variable annuities.
- Lump sum return of premium (ROP) death benefits, under which a final payment upon death does not exceed the excess of the total amount paid for the annuity payments, less the aggregate amount of prior distributions or payments from or under the contract.

Partial Annuitization. Section 204 of SECURE 2.0 provides rules that address how the RMD rules should apply to a partial annuitization of an employee’s retirement account. Before SECURE 2.0, if an employee partially annuitized their account, the account rules in Treasury Regulation section 1.401(a)(9)-5 would apply to the remaining balance in the account and the annuity payments had to independently satisfy the annuity RMD rules in Treasury Regulation section 1.401(a)(9)-6. However, annuitized benefits often result in annual payments that exceed the annual RMD amount that would be due if the employee had not annuitized in the first place. Because this could disincentivize annuitization, SECURE 2.0 included a provision that allows the employee to use their excess annuity payments to offset the RMD due from the non-annuitized portion of their account.

The Final Regulations provide that a plan may permit the employee to elect this special partial annuitization rule, which the regulations call the “Optional Aggregation Rule.” To accomplish this, the fair market value (FMV) of the annuitized contract is added to the remaining account balance of the non-annuitized portion of the account to determine the “total RMD” that would be due if the individual had not annuitized. Then the sum of the annuity payments that are made in the year are subtracted from the “total RMD” determined above. Whatever is left is treated as the only RMD that must be taken from the non-annuitized account.[49> ] While the Final Regulations provide a basic outline for how this relief works, the Proposed Regulations provide guidance on when and how to determine the “value” of an annuity for purposes of the new rule.[50]

In particular, the Proposed Regulations provide that the FMV of the contract must be determined using the “gift tax method” for valuing annuities under the regulations for Roth conversions involving annuity contracts. One issue that has so far been identified with the Proposed Regulations is the mandatory use of this method for determining the value of the contract. Not all systems are set up to calculate the value of an annuitized contract using this method. It seems that a principle-based rule for valuing the annuitized contract using reasonable actuarial methods and assumptions, determined in good faith, would be more feasible. In addition, the Proposed Regulations do not include any examples on how the Optional Aggregation Rule would apply. Given that the rule is new and complex, it would seem that examples would help issuers and taxpayers apply the new rule.

Reduced RMD Excise Tax. SECURE 2.0 reduced the excise tax on the failure to take an RMD from 50% to 25%. Additionally, if a taxpayer fixes an RMD mistake within a statutorily specified correction window and corrects their return, the excise tax can be further reduced from 25% to 10%. The Final Regulations reflect these amendments made by SECURE 2.0.[51] The Proposed Regulations confirm that corrective distributions taken in accordance with this relief do not count for purposes of determining whether an individual has satisfied their RMD obligations for the calendar year in which a corrective distribution is made.[52] However, for purposes of the rollover rules, these corrective distributions are treated as RMDs and, therefore, are not eligible for rollover.[53]

Conclusion

While the recent overhaul of the after-death RMD rules can initially seem overwhelming due to its sheer length and complexity, we believe these rules can be demystified by starting with the basic framework of asking: (i) what type of retirement savings arrangement is involved—and therefore whether the after-death RMD rules are applicable at all; (ii) what type of beneficiary is involved—e.g., a designated beneficiary, an EDB, or a non-designated beneficiary; and (iii) when did the employee die in relation to their RBD. On that foundation, it then becomes a matter of following the rules in the Final Regulations that are applicable to the beneficiary’s particular circumstances.

Looking ahead, as discussed above, the Final Regulations will apply for distributions made, and for distribution calendar years beginning, on or after Jan. 1, 2025. Practitioners should begin to familiarize themselves with these new after-death RMD rules, especially any changes from the 2022 proposal, in order to prepare for this fast-approaching deadline, and they should also watch for when the Treasury Department and IRS will finalize the new Proposed Regulations.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Alison R. Peak is the managing partner of Davis & Harman LLP. She can be reached at arpeak@davis-harman.com.

Adam R. McMahon is a partner with Davis & Harman LLP. He can be reached at armcmahon@davis-harman.com.

Grace F. Sullivan is an associate with Davis & Harman LLP. She can be reached at gfsullivan@davis-harman.com.

Endnotes

[1] Setting Every Community Up for Retirement Enhancement Act of 2019, Division O of the Further Consolidated Appropriations Act of 2019, Pub. L. No. 116-94.

[2] Division T of the Consolidated Appropriations Act, 2023, Pub. L. No. 117-328.

[3] See, e.g., 87 Fed. Reg. 10504, 10517 (Feb. 24, 2022).

[4] References to IRAs include individual retirement accounts in Code section 408(a) and individual retirement annuities in Code section 408(b).

[5] Treas. Reg. section 1.409(a)(9)-4 describes circumstances when a beneficiary may cease to be a beneficiary as of that date.

[6] Treas. Reg. section 1.401(a)(9)-4(a), (b), and (c).

[7] An EDB must be disabled within the meaning of Code section 72(m)(7) or chronically ill within the meaning of Code section 401(a)(9)(E)(ii)(IV).

[8] Code section 401(a)(9)(E)(ii).

[9] Treas. Reg. section 1.401(a)(9)-4(b).

[10] Treas. Reg. section 1.401(a)(9)-2(b)(1). See the discussion associated with infra note 34 for an explanation of the “applicable age.”

[11] Treas. Reg. section 1.401(a)(9)-2(b)(3).

[12] Treas. Reg. section 1.408-8(b)(1)(i).

[13] A Roth IRA owner is always treated as dying before their RBD, so these rules do not apply to Roth IRAs. See Treas. Reg. section 1.408A-6, Q&A-14(b). Likewise, as discussed below, for an employee whose entire interest under a plan is in a designated Roth account, the employee is treated as having died before their RBD. See Treas. Reg. section 1.401(a)(9)-3(a)(2).

[14] Treas. Reg. section 1.401(a)(9)-5(d)(1)(ii).

[15] Treas. Reg. section 1.401(a)(9)-5(e)(2).

[16] Treas. Reg. section 1.401(a)(9)-5(d)(1)(ii).

[17] Treas. Reg. section 1.401(a)(9)-5(e)(4).

[18] Treas. Reg. section 1.401(a)(9)-5(e)(3).

[19] Treas. Reg. section 1.401(a)(9)-3(c)(3).

[20] Treas. Reg. section 1.401(a)(9)-3(c)(5)(iii).

[21] Treas. Reg. section 1.401(a)(9)-3(c)(5)(i)(C).

[22] See the discussion associated with infra note 34 for an explanation of the “applicable age.”

[23] Treas. Reg. section 1.401(a)(9)-3(c)(5)(i).

[24] Treas. Reg. section 1.401(a)(9)-5(e)(4).

[25] Treas. Reg. section 1.401(a)(9)-5(e)(3).

[26] The Spousal Proxy Rule can be used only once. In other words, if the Spousal Proxy Rule applies, and the surviving spouse remarries but dies before distributions have begun, the Spousal Proxy Rule is not available to the surviving spouse of the deceased employee’s surviving spouse. Treas. Reg. section 1.401(a)(9)-3(e)(2).

[27] Treas. Reg. section 1.401(a)(9)-3(c)(2).

[28] Code section 402(c)(4)(B).

[29] See the discussion associated with infra note 34 for an explanation of the “applicable age.”

[30] Treas. Reg. section 1.402(c)-2(j)(4)(ii).

[31] Treas. Reg. section 1.408-8(c)(1)(iv).

[32] 2022 Prop. Treas. Reg. section 1.401(a)(9)-5(e)(5).

[33] Treas. Reg. section 1.401(a)(9)-6(d)(2)(ii).

[34] Treas. Reg. section 1.401(a)(9)-2(b)(2).

[35] Prop. Treas. Reg. section 1.401(a)(9)-2(b)(2)(v).

[36] Treas. Reg. section 1.401(a)(9)-5(g)(3).

[37] Prop. Treas. Reg. section 1.401(a)(9)-5(g)(3)(ii)(A).

[38] Prop. Treas. Reg. section 1.401(a)(9)-5(g)(3)(ii)(B).

[39] Prop. Treas. Reg. section 1.401(a)(9)-5(g)(3)(ii)(E).

[40] SECURE 2.0 section 327(c).

[41] 89 Fed. Reg. 58644, 58646 (July 19, 2024).

[42] Treas. Reg. section 1.401(a)(9)-5(b)(3).

[43] Prop. Treas. Reg. section 1.401(a)(9)-5(g)(2)(iii).

[44] Treas. Reg. section 1.401(a)(9)-3(a)(2).

[45] Treas. Reg. section 1.401(a)(9)-6(q).

[46] The Proposed Regulations specify other types of divorce or separation instruments that will qualify for this provision. See Prop. Treas. Reg. section 1.401(a)(9)-6(q)(3)(vii)(B).

[47] SECURE 2.0 section 202(c)(1)(A).

[48] Treas. Reg. section 1.401(a)(9)-6(o).

[49] Treas. Reg. section 1.401(a)(9)-5(a)(5)(iv).

[50] Prop. Treas. Reg. section 1.401(a)(9)-5(a)(5)(v).

[51] Treas. Reg. section 54.4974-1(a)(1)-(2).

[52] Treas. Reg. section 1.401(a)(9)-5(g)(2)(iv).

[53] Treas. Reg. section 1.402(c)-2(f)(1).

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