On July 18, 2024, the U.S. Treasury Department (Treasury) and Internal Revenue Service (IRS) issued proposed regulations that would provide guidance on required minimum distributions (RMDs) for certain changes made by the SECURE 2.0 Act. These proposed regulations aim to clarify and expand upon several provisions that were purposely left open in the concurrently issued final RMD regulations in order to provide stakeholders a notice and comment period on these proposed rules. The key provisions of the proposed rules relevant to plan sponsors of qualified defined benefit (DB) plans and defined contribution (DC) plans, 403(b) plans, and 457(b) plans are summarized below. Our bulletin summarizing the final RMD regulations can be found here.

Background: When retirement plan RMDs are due

Participants in employer-sponsored DB and DC plans do not incur taxes on the benefits they have earned until those benefits are distributed, except for Roth and other after-tax contributions. However, the federal government mandates that taxes cannot be deferred indefinitely and sets a required beginning date (RBD) for when distributions must start, as well as required minimum distribution (RMD) amounts. Failure to meet these RMDs on time or in sufficient amounts may result in excise taxes.

Typically, the RBD is April 1 of the year following the calendar year in which the individual reaches the RMD age. However, certain plans may allow individuals who are not 5% owners to defer the RBD further, to April 1 following the calendar year in which they reach the RMD age or retire, whichever is later. After the initial RMD, subsequent distributions must be made by December 31 each year.

DC and DB plans: Applicable age for RMDs for individuals born in 1959

Section 107 of the SECURE 2.0 Act increased the RMD age for distributions made after December 31, 2022, for individuals attaining age 72 after December 31, 2022. However, the statute was unclear as to whether the applicable age for RMDs for individuals born in 1959 was 73 or 75. The proposed rule specifies that the applicable age for these individuals is 73. Figure 1 summarizes the recent changes to the RMD age.

DC plans: Aggregation option for annuity contracts

The final RMD regulations provide guidance on RMDs under section 204 of the SECURE 2.0 Act, related to when a portion of a participant’s DC account balance is used to purchase an annuity contract. Rather than applying the RMD rules separately with respect to the annuity portion and the remaining account balance, the final rule allows plans to permit participants to satisfy the RMD rules by aggregating the fair market value of the annuity contract with the remaining account balance but left it to the proposed regulations to address rules of operation of this aggregation alternative and determining the fair market value of the annuity contract.

The proposed regulations provide details on this aggregation option. Under the proposed regulations, the fair market value of the annuity contract would be determined as of December 31 of the year before the calendar year for which an RMD is due (called a “distribution calendar year”). Starting with the 2026 distribution calendar year, the fair market value would have to be determined using the alternative method provided in Treasury Regulation §1.408A-4, Q&A-14(b)(2), used to convert a traditional annuity-type IRA to a Roth IRA, and is generally based on the cost of a comparable contract through the same annuity issuer or the cost of the annuity itself if the determination is made soon after the annuity was sold.

DC plans: RMDs from designated Roth accounts

Section 325 of the SECURE 2.0 Act exempts designated Roth accounts from the RMD requirements during the participant’s lifetime beginning in 2024 (except prior-year RMDs paid in 2024). According to the final RMD regulations, if a participant has both designated Roth accounts and other non-Roth accounts, then the designated Roth accounts are excluded when calculating RMDs through the calendar year of the participant’s death. If the participant’s entire DC plan accounts are in designated Roth accounts, no RMDs are required to be made during their lifetime.

The proposed regulations build upon the limited guidance in the final rule, providing that distributions from designated Roth accounts do not count toward satisfying the RMD requirement for a year for which a participant is required to take an RMD. In addition, such distributions are not treated as RMDs for rollover purposes, so they can be rolled over to a Roth IRA if they otherwise qualify as an eligible rollover distribution.

DC and DB plans: Corrective distributions and excise tax reduction

Section 302(b) of the SECURE 2.0 Act provides that the excise tax on an RMD shortfall is reduced from 25% to 10% for taxpayers who fail to receive their full RMD, if, by the end of the correction window, they receive a corrective distribution of the shortfall and they submit a tax return reflecting the reduced tax. The correction window is defined as the period from when the excise tax is imposed (i.e., when the RMD was due) to the earliest of the following:

• The date the IRS mails the notice of the RMD shortfall
• The date the excise tax is assessed
• The last day of the second taxable year beginning after the taxable year in which the excise tax is imposed

The final RMD regulations provide that, if an individual dies before satisfying their RMD requirement for a calendar year, then the beneficiary has until the later of the tax filing deadline (including extensions) for the year the individual died, or the end of the following calendar year, to take the missed RMD and qualify for the automatic waiver of the excise tax.

The proposed RMD regulations clarify that corrective distributions for missed RMDs from a previous year do not count toward satisfying the RMD requirements for the year in which the corrective distribution was made. Therefore, the RMD for the subsequent year must still be made in addition to the corrective distribution. Furthermore, corrective distributions are treated as RMDs and are not eligible for rollover.

DC and DB plans: Surviving spouse elections for RMDs

DC plans

If a participant dies prior to their RBD, section 327of the SECURE 2.0 Act permits DC plans to allow a surviving spouse who is the participant’s designated beneficiary to elect to be treated as if they were the participant for RMD purposes (permitting annual payments over their life or life expectancy), to delay receiving RMDs until the participant’s applicable RMD age, and to be treated as if they were the participant if they die before their payments start.

The final RMD regulations provide that the surviving spouse is automatically treated as the participant for RMD purposes without needing to make a separate election if the participant died before their RBD, the surviving spouse is the sole beneficiary, and payments are being made to the surviving spouse under the life expectancy rule. Also under the final regulations, DC plans may permit the sole beneficiary surviving spouse to elect to be treated as the participant if the participant dies after their RBD.

The proposed regulations add the following rules for the spousal elections for DC plans.

• Automatic surviving spousal elections. If the participant dies before their RBD and the surviving spouse is the sole beneficiary receiving payments under the life expectancy rule, then the spouse is automatically treated as making the election to be treated as the participant for RMD purposes and would not have to make a formal election.
• Default elections. If the participant dies on or after their RBD, the automatic election above does not apply. Instead, the plan may default the spouse into the election, so the spouse would not need to make a formal election.
• Uniform Lifetime Table. If the surviving spouse election to be treated as the participant is in effect, then regardless of whether the participant died before, on, or after their RBD, the applicable factor for determining the surviving spouse’s RMDs will be based on the Uniform Lifetime Table, rather than the Single Life Table, until the year of the spouse's death. Using the Uniform Lifetime Table will result in smaller RMDs.
• Continuation of distributions. If the surviving spouse election to be treated as the participant is in effect, and they die on or after distributions have begun, then the spouse’s beneficiary must continue to receive annual distributions based on the spouse's remaining life expectancy using the factors from the Single Life Table (using the spouse’s remaining life expectancy for their age in the year of death, then reduced by one for each subsequent year). The spouse’s beneficiary is not considered an eligible designated beneficiary in this scenario, and the final payment of the participant’s account must be made by the end of the calendar year that includes the 10th anniversary of the spouse’s death.
• When surviving spousal elections apply. The surviving spouse election is available only if the first RMD year for the surviving spouse is 2024 or later. Therefore, if a deceased participant would have reached their applicable RMD age in 2024 or later, then the surviving spousal election could apply because annual RMDs would be due in 2024 or later.
• Application of the surviving spousal election is limited. The surviving spousal election treats the surviving spouse as the participant for specific purposes, but this treatment does not apply universally. For instance, the surviving spouse is not subject to the 10% additional tax for early distributions before age 59½. In addition, the date that RMDs for the surviving spouse must start is based on the participant’s age, not the spouse's. Also, when calculating RMDs due to the surviving spouse, all accounts are combined into one, including designated Roth accounts.

DB plans

No additional guidance on surviving spousal elections was proposed for DB plans and the IRS requests comments on whether there are any situations that need further advice.

What is the applicability date of the IRS proposed regulations on required minimum distributions?

The applicability date of the proposed regulations is January 1, 2025, the same applicability date as the related provisions in the final RMD regulations. Specifically, the proposed changes for calculating RMDs would apply for calendar years starting on or after January 1, 2025, and the proposed changes for determining rollover eligibility would apply for distributions on or after January 1, 2025.

Public comments on the proposed regulations must be submitted by September 17, 2024, and a public hearing is scheduled for September 25, 2024.

Please contact your Milliman consultant with any questions.