Required Minimum Distribution Rules Modified

March 2, 2020

Minimum distribution rules apply to tax-favored employer-sponsored retirement plans and IRAs. While an employee (or IRA owner) is alive, distributions of the individual's interest are required to be over the life or life expectancy of the employee (or IRA owner), or over the joint lives or joint life expectancy of the employee (or IRA owner) and a designated beneficiary.

Under pre-Act law, the after-death minimum distributions rules vary depending on (a) whether an employee (or IRA owner) dies before, on, or after the required beginning date, and (b) whether there is a designated beneficiary for the benefit. Under the regs, a designated beneficiary generally must be an individual. If an employee (or IRA owner) dies on or after the required beginning date, the basic statutory rule is that the remaining interest must be distributed at least as rapidly as under the method of distribution being used before death.

If an employee (or IRA owner) dies before the required beginning date and any portion of the benefit is payable to a designated beneficiary, the statutory rule is that distributions are generally required to begin within one year of the employee's (or IRA owner's) death (or such later date as prescribed in regs) and are allowed to be paid over the life or life expectancy of the designated beneficiary. If the beneficiary of the employee (or IRA owner) is the individual's surviving spouse, distributions are not required to begin until the year in which the employee (or IRA owner) would have attained age 70½. If the surviving spouse dies before the employee (or IRA owner) would have attained age 70½, the after-death rules apply after the death of the spouse as though the spouse were the employee (or IRA owner).

If an employee (or IRA owner) dies before the required beginning date and there is no designated beneficiary, then the entire remaining interest of the employee (or IRA owner) must generally be distributed by the end of the fifth calendar year following the individual's death (the 5-year rule).

New law. Generally effective for distributions with respect to employees (or IRA owners) who die after Dec. 31, 2019 (see below for exceptions), the SECURE Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances (including annuity contracts purchased from insurance companies under defined contribution plans or IRAs) upon the death of the account owner. 

Under the SECURE Act, the general rule is that after an employee (or IRA owner) dies, the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death. This rule applies regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date, unless the designated beneficiary is an eligible designated beneficiary (see below). (Code Sec. 401(a)(9)(H)(i), as amended by SECURE Act Sec. 401(a)(1)) The Committee Report explains that under the 10-year rule, the remaining account balance must be distributed by the end of the tenth calendar year following the year of the employee or IRA owner's death.

 

Observation. In general, for distributions required to be made after Dec. 31, 2019, with respect to individuals who attain age 70-1/2 after that date, SECURE Act Sec. 114 defers the required beginning date for lifetime distributions to April 1 following the calendar year in which the employee (or IRA owner) attains age 72 (instead of age 70-1/2 under pre-SECURE Act law). 

An exception to the 10-year rule for post-death required minimum distributions applies to an eligible designated beneficiary. This is an individual who, with respect to the employee or IRA owner, on the date of his or her death, is:

(1) the surviving spouse of the employee or IRA owner;

(2) a child of the employee or IRA owner who has not reached majority;

(3) a chronically ill individual as specially defined in Code Sec. 401(a)(9)(E)(ii)(IV), and

(4) any other individual who is not more than ten years younger than the employee or IRA owner.

 

Under the exception, following the death of the employee or IRA owner, the remaining account balance generally may be distributed (similar to pre-Act law) over the life or life expectancy of the eligible designated beneficiary, beginning in the year following the year of death. (Code Sec. 401(a)(9)(E)Code Sec. 401(a)(9)(H)(ii), as amended by SECURE Act Sec. 401(a)(1); Committee Reports).

Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years after the death of the eligible designated beneficiary. (Code Sec. 401(a)(9)(H)(iii), as amended by SECURE Act Sec. 401(a)(2)) After a child of the employee or IRA owner reaches the age of majority, the balance in the account must be distributed within 10 years after that date. (Code Sec. 401(a)(9)(E)(iii), as amended by SECURE Act Sec. 401(a)(2))

 

Effective date. The above changes generally apply to distributions with respect to employees or IRA owners who die after Dec. 31, 2019. (SECURE Act Sec. 401(b)(1))

For a collectively bargained plan, the changes apply to distributions with respect to employees who die in calendar years beginning after the earlier of:

(1) The later of (A) the date on which the last collective bargaining agreement ratified before the date of enactment (Dec. 20, 2019) terminates, or (B) Dec. 31, 2019; or 

(2) Dec. 31, 2021. (SECURE Act Sec. 401(b)(2)).

 

For governmental plans (as defined in Code Sec. 414(d)), the changes apply to distributions with respect to employees who die after Dec. 31, 2021. (SECURE Act Sec. 401(b)(3)) 

Additionally, the modification to the after-death minimum distribution rules does not apply to a qualified annuity as specially defined in SECURE Act Sec. 401(a)4)(B)), that is a binding annuity contract in effect on the date of enactment (Dec. 20, 2019) and at all times thereafter. (SECURE Act Sec. 401(b)(4))

 

10-year rule following death of beneficiary where account owner dies before effective date. A special rule applies in the case of an employee (or IRA owner) who dies before the “effective date” (see below) for the plan (or IRA), and the designated beneficiary of the employee (or IRA owner) dies on or after the “effective date.” In this situation:

 

(A) the required distribution rules carried in SECURE Act Sec. 401(a) apply to any beneficiary of the designated beneficiary chosen by the employee or IRA owner, and

 

(B) the designated beneficiary chosen by the employee or IRA owner will be treated as an eligible designated beneficiary for purposes of Code Sec. 401(a)(9)(H)(ii) (which allows eligible designated beneficiaries to receive post-death distributions based on the beneficiary’s life or life expectancy). (SECURE Act Sec. 401(b)(5)(A)) 

 

 

For purposes of this special rule, the “effective date” means the first day of the first calendar year to which the amendments made by SECURE Act Sec. 401(a) apply to a plan with respect to employees dying on or after such date. (SECURE Act Sec. 401(b)(5)(B)) In other words, as the Committee Report explains, the “effective date” here is the date of death of the employee (or IRA owner) used to determine when the provision applies to the plan (or IRA), for example, before January 1, 2020, under the general effective date. 

Illustration (1).   Anne dies in 2020 and leaves her IRA to designated beneficiary Ben, her brother, who was born eight years after Anne. Ben is an eligible designated beneficiary, and the balance in the IRA at Anne’s death may be paid over Ben’s life or life expectancy. If Ben dies before the IRA account is exhausted, the remaining balance must be paid out within 10 years after Ben's death.

 

 

Illustration (2).  Chad dies in 2020 and leaves his IRA to designated beneficiary Dee, his sister who was born 12 years after Chad. Dee is not an eligible designated beneficiary because she is more than 10 years younger than Chad, and the balance in the IRA at Chad’s death must be paid out within 10 years after Chad's death.

 

Illustration (3).   Jack dies on Nov. 30, 2019, and leaves his IRA to designated beneficiary Frank, his nephew, who is 30 years younger than Jack. Because Jack died before 2020, Frank is treated as an eligible designated beneficiary (even though the age disparity between the two is greater than 10 years) and the balance in the IRA at Jack’s death may be paid over Frank’s life or life expectancy. If Frank dies on or after Jan. 1, 2020, before the balance in the IRA is exhausted, the account balance must be paid out to any beneficiary of Frank within 10 years after Frank’s death. 

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