IRS Clarifies Proposed Regulations on Required Minimum Distributions

On February 24, 2022, Treasury issued proposed regulations (the “Proposed Regulations”) regarding required minimum distributions (“RMDs”) under §401(a)(9) The proposed regulations run 275 pages and largely repeat existing guidance with modifications as required to reflect the changes made to §401(a)(9) by the Setting Every Community Up for Retirement Act (the “SECURE Act”), whose provisions were generally effective for calendar years beginning after December 31, 2019. In Notice 2022-53 the Treasury and the IRS announced their intent to issue final regulations related to required minimum distributions (RMDs) under §401(a)(9) that will apply no earlier than the 2023 distribution calendar year. In addition, IRS Notice 2022-53 provides guidance and penalty relief related to certain provisions of §401(a)(9) that apply for 2021 and 2022.

BACKGROUND

The Code contains rules governing various tax-deferred retirement savings vehicles. These vehicles, which include qualified plans described in §401(a), individual retirement arrangements under §408, tax deferred annuities under §403(b), and eligible deferred compensation plans under §457(b), which allow retirement savers to defer paying income taxes until money is distributed from the savings vehicle. But deferred taxes mean delayed tax revenue. As much as the government wants to incentivize retirement savings, it also needs to recover the tax revenue. The required minimum distribution (RMD) rules under §401(a)(9) govern when distributions from a retirement plan must begin and end. Section 4974 imposes a 50% excise tax on any participant or beneficiary who has an RMD shortfall in tax year. A plan that fails to make RMDs in accordance with §401(a)(9) faces qualification issues.