Retirement Plan RMD Updates Bring Employers New Challenges

Among the many other tasks retirement plan sponsors must navigate, they need to focus on a few new rules aimed at required minimum distributions (or “RMDs”). While the tax code provisions requiring retirement plan participants to begin distributing their balances during their retirement are not new, three separate changes (and potentially more) to the RMD rules bring fresh complications to this already confusing area. 

These revisions arise out of the SECURE Act (passed in December 2019); the CARES Act (passed in March 2020); and new IRS regulations updating the RMD life expectancy tables (effective in 2022). This article will briefly explain the major changes and action items for retirement plan sponsors. 

SECURE Act

The SECURE Act, which dates back to December 2019, made two significant changes to the existing RMD rules. 

The first—and somewhat simpler—change raised the RMD starting age from age 70 ½ to age 72 for employees who were born on or after July 1, 1949 (and therefore had not reached the prior RMD starting age of 70 ½ by December 31, 2019). So, employees born on or after July 1, 1949, must now begin receiving RMDs by April 1 of the year following the year in which they reach age 72 (or, if later, following the year in which they retire). 

The second—and far more complex—change altered the distribution timing requirements for beneficiaries of a deceased employee’s account. The most significant revision eliminated the ability of many beneficiaries to “stretch” their RMD distributions following the employee’s death. Previously, when an employee died before emptying their entire plan account, their beneficiary could “stretch” the distributions from the employee’s account for the rest of the beneficiary’s life expectancy. This made it possible for grandparents to leave their retirement accounts to grandchildren who could draw down those accounts (and pay taxes) incrementally over the course of decades. 

After the SECURE Act, only a smaller subset of beneficiaries is able to take these stretch distributions over their own life expectancies. This new class of “eligible designated beneficiaries” includes the employee’s spouse, minor children (but only until they reach age 21), disabled or chronically ill individuals, or any other person no more than 10 years younger than the employee. All other individual beneficiaries (including minor children once they reach age 21) must empty the employee’s entire account within 10 years. 

The new RMD rules also preserve many of the pre-existing distinctions that require different distribution timelines and distribution amounts for different types of beneficiaries depending on whether the employee died before or after starting to receive RMDs themselves. Putting all of those pieces together has unfortunately become more difficult.

Regulations: One Proposed, One Final

Seeing an opportunity to update the existing RMD regulations in connection with these changes, the IRS embarked on a full-scale rewrite of the regulations, which it published in draft form earlier this year. The proposed regulations—which are not yet final, and may still see revisions—address the SECURE Act changes as well as a few other administrative provisions. 

Another new portion of the RMD regulations, which has been in process for several years, became effective for 2022. To calculate the length of time over which an individual must withdraw a plan account balance, the RMD regulations provide tables used to determine the employee’s or beneficiary’s life expectancy. As those tables had not been updated in many years, the IRS finalized new tables effective for 2022 that reflect longer life expectancies and therefore require smaller annual RMDs (i.e., because the employee or beneficiary must withdraw the account over their expected lifetime, the amount required to be distributed in a given year is smaller if they are anticipated to live longer). 

CARES Act

To add yet another complicating factor, the CARES Act, containing many other COVID relief provisions, waived most RMDs related to 2020, including the initial RMD that would have been due by April 1, 2020, if the employee reached their RMD starting date in 2019; the regular, ongoing 2020 RMD that would have been due for all individuals required to take 2020 RMDs; and the initial RMD that would have been due by April 1, 2021, if the employee reached their RMD starting date in 2020. The CARES Act also provided certain relief related to notice, withholding, and rollover rules in connection with distributions during 2020 that would have been RMDs but for the waiver. 

Employer Action Items

All of these items require plan document updates, operational updates, or in many cases both. Employers sponsoring retirement plans should already be complying with the new RMD rules operationally. If they haven’t done so already, employers also will need to work with their plan recordkeepers to ensure the recordkeeper’s procedures accurately reflect the employer’s wishes. 

Thankfully, in August 2022 the IRS extended the plan amendment deadline for the SECURE Act and CARES Act (but only the CARES Act changes related to the 2020 RMD waiver, not the remaining provisions). The original amendment deadline—December 31, 2022—presented a difficult timeline given the lack of final rules on provisions that are required to be included in the plan amendments. With a few exceptions, the amendment deadline for both laws is now delayed until the end of 2025, which should provide ample time to address the final rules when they are issued.  

In many respects, employer-sponsored retirement plans have significant latitude in how they handle the more complicated SECURE Act RMD provisions—for example, they can choose to allow only lump-sum distributions to employees, meaning a former employee would need to withdraw their entire plan balance before or when they start taking RMDs, or they can require all beneficiaries to withdraw the entire remaining account balance immediately following the employee’s death. Additionally, employer-sponsored plans may also set limitations on distribution methods, which might prohibit even eligible beneficiaries from taking “stretch” distributions. These and other elections will need to be incorporated into the plan document and operational procedures.

Future Legislation

Overlaid on all of these modifications are several pieces of major retirement plan legislation pending in Congress. These proposals would further amend the RMD rules, which could create yet another new set of rules, elections, and deadlines. Although it is difficult to tell with any certainty whether any bill will pass, and what provisions it may ultimately contain, there does appear to be sustained momentum for comprehensive retirement legislation. 

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The RMD rules can be challenging even without the added complications of overlapping changes. Our ESOPs & Employee Benefits Practice Group can help guide employers through the process. Please feel free to reach out to discuss these or any other retirement plan matters.