SECURE 2.0 Shakes Things Up for Required Minimum Distributions

The Securing a Strong Retirement Act of 2022, known as SECURE 2.0 Act, changed several rules for required minimum distributions, which are retirement plan distributions that must be made to avoid an excise tax. The changes reduce the burden on participants by delaying the distribution deadline, eliminating the requirement for certain contributions, and reducing noncompliance penalties. Some of these changes have already gone into effect, while others will take effect next year and as late as 2033.

Increase in RMD Age

In general, RMDs from qualified retirement plans shouldn’t start before participants retire unless they are 5% owners of the plan sponsor. Once a participant retires, plans must commence RMDs to avoid a qualification error. But plans may—and often do—require that participants start benefits before the RMD deadline. Neither the original SECURE Act nor SECURE 2.0 requires a plan with an earlier distribution deadline to delay that deadline.

The RMD deadline for participants (other than 5% owners) is April 1 following their retirement or a specified age, whichever comes later. Until 2020, the specified age for RMDs was 70 1/2. In 2020, the SECURE Act increased that to 72 and made many other changes to the RMD rules. The statute and subsequent proposed regulations didn’t modify the rules on required actuarial increases to suspended benefits in defined benefit pension plans, so age 70 1/2 is still relevant to many pension plans.

SECURE 2.0 further extends the required beginning date to age 73 for participants who turn 73 in 2023—those born after 1950. The required beginning date then increases to age 75 in 2033. However, because of a typo in the statute, it’s unclear if this two-year jump applies to those born in 1959 or those born in 1960. A technical corrections bill will likely address this point before the increase to age 75.

These changes may not require a plan amendment, but plan administrators should consider revising summary plan descriptions and other participant communications describing the tax consequences of RMDs. Revised versions of model special tax notices under Section 402(f) of the tax code are anticipated, but plan administrators might consider changing forms now to avoid participant confusion.

Also, beginning in 2024, pre-death RMDs for Roth contributions in qualified plans are no longer required under SECURE 2.0. This aligns qualified plans with Roth IRA rules.

RMDs for Spouses

Prior to 2024, a surviving spouse would automatically be treated as the participant in the calculation of RMDs when the participant died before distributions commenced, if that would result in a later required beginning date. Under SECURE 2.0, a surviving spouse must elect to be treated as the participant for RMD purposes effective in 2024, which all survivors likely would benefit from doing.

Once regulations are issued on the deadline and requirements for this election, plan administrators may want to ensure that survivors understand the new election requirement for deaths starting next year.

Surviving spouses who elect will have RMDs paid over the longer uniform lifetime table, rather than the survivor’s remaining (single) life expectancy. While this offers an advantage to surviving spouses who elect, it adds another layer of complexity that could lead to administration errors.

Reduction in Excise Tax for RMD Errors

Despite perennially being on the tax exempt and government entities compliance program and priorities list, errors with RMDs aren’t uncommon. Historically, a 50% excise tax imposed on the participant would apply to a fully or partially missed RMD. The IRS employee plans compliance resolution system includes an option to request waiver of the excise tax through its voluntary compliance program, but because of the cost, this often would be pursued only in instances with multiple failures.

Taxpayers also can request a waiver of the penalty tax if the shortfall was due to reasonable error, and if reasonable steps have been taken to remedy the shortfall. To qualify, a statement is attached to IRS Form 5329 with an explanation for the shortfall. The IRS would then decide whether to grant the request.

Effective as of its enactment, SECURE 2.0 reduces the excise tax from 50% to 25% in all instances. It further reduces the excise tax from 25% to 10% if the deficiency in the RMD is corrected by the mailing date of a notice of deficiency from the IRS, the date on which an excise tax is assessed, or the last day of the second tax year beginning after the year in which the excise tax is imposed—whichever is latest.

In addition to reducing the negative impact on participants who fail to take their RMDs, the lower excise tax rates may reduce the burden on the IRS of processing voluntary compliance program requests and reasonable cause waiver requests under IRS Form 5329.

SECURE 2.0 also requires employee plans compliance resolution system revisions to provide that excise taxes relating to IRA RMD errors may be corrected under the program. The IRS must update the system for this and other changes by Dec. 28, 2024.

Other RMD Changes

SECURE 2.0 includes changes to facilitate the provision of annuities with certain features, such as period certain guarantees and guaranteed annual increases of modest amount, in qualified retirement plans. While offering annuities in qualified plans is relatively uncommon, this change is consistent with the trend toward enhancing lifetime income options.

It also revises the statute of limitations for RMD errors under an IRA to commence when the taxpayer files Form 1040 for the year of the error, rather than Form 5329. In instances where participants were unaware of an error, they often wouldn’t file a Form 5329, thus delaying the limitations period.

Finally, SECURE 2.0 changed the RMD rules to allow certain special needs trusts to stretch their distributions over the disabled or chronically ill beneficiary’s lifetime.

Conclusion

SECURE 2.0’s changes to RMDs provide welcome flexibility to retirees and survivors, especially those affected by current volatility in the markets. Participants, as well as plan sponsors and administrators, should appreciate the additional relief for RMD errors. Plan administrators should begin working with their recordkeepers to ensure that participants and survivors receive the information they need to take advantage of these changes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Carly E. Grey is a partner in Morgan Lewis’s employee benefits and executive compensation practice group. She counsels employers on issues relating to qualified and nonqualified retirement plans, health and welfare plans, executive compensation arrangements, and fringe benefits.