3903 / What is an eligible designated beneficiary? How does this designation impact the rules governing retirement plan distributions after an account owner’s death?

Editor’s Note: The IRS extended the deadline for making amendments required under the SECURE Act to December 31, 2025 (the original deadline for required amendments to most 401(k)s and IRAs was December 31, 2022). Plans should adopt required amendments prior to the December 31, 2025 deadline and make the amendment retroactive to the date the SECURE Act or the relevant regulation was enacted (the SECURE Act was enacted December 20, 2019). In the meantime, plans should operate as though the amendment was in place.¹

Exceptions to the 10-year distribution rule (see Q 3901 and Q 3902) created by the SECURE Act exist for a newly created class of beneficiaries called “eligible designated beneficiaries.” Eligible designated beneficiaries who are not required to use the “ten-year rule” for distributions (and who may continue to use the pre-SECURE Act life expectancy rules) include:²

• Surviving spouses,


• Disabled beneficiaries,


• Chronically ill beneficiaries,


• The account owner’s children who have not reached “the age of majority” (proposed regulations provide that, for defined contribution plans, a child reaches the age of majority on their 21^st birthday), and


• Individuals who are not more than 10 years younger than the account owner.

Whether an individual is an eligible designated beneficiary is determined as of the date of the original account owner’s death.³ Under proposed regulations, an account owner is treated as having no eligible designated beneficiary if the owner has multiple designated beneficiaries and one of those beneficiaries is not an eligible designated beneficiary.

Once a minor child reaches the age of majority,⁴ the child becomes subject to the 10-year rule beginning at that point, rather than beginning with the account owner’s death.⁵

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Planning Point: Note that only the account owner’s minor children qualify as eligible designated beneficiaries. Grandchildren and other minor children become subject to the 10-year rule beginning with the account owner’s death regardless of their age.

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If the disabled beneficiary is under 18 at the time of the account owner's death, the individual must have a medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or be of long-term and indefinite duration. For older beneficiaries, disability is determined using the definition in IRC Section 72(m)(7). Disabled beneficiaries include those who are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to (1) result in death or (2) create the need for long-term care for an indefinite duration. A safe harbor is also available so that disability can be determined based on disability for Social Security purposes.

“Chronically ill beneficiaries” include those who are unable to perform (without substantial assistance) at least two activities of daily living for a period of 90 days due to a loss of a functional capacity or those who require substantial supervision to protect them from threats to health and safety because of severe cognitive impairment.⁶

A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary (See Q 3907 for requirements when a trust for the benefit of multiple disabled or chronically-ill beneficiaries is desired). Under the original SECURE Act, the trust could have other beneficiaries in addition to the ill or disabled individual, but those beneficiaries did have to be designated beneficiaries (not EBDs) in order to take advantage of the stretch after the ill or disabled beneficiary’s death. However, charities did not count as designated beneficiaries. Under the SECURE Act 2.0, a qualified charity will now count as a designated beneficiary of these special needs trusts so that the charity can take advantage of the stretch distributions over the special needs individual's lifetime after that beneficiaries' death. This change is effective immediately, beginning in 2023.

Upon the death of the eligible designated beneficiary, the 10-year rule applies regardless of whether that individual’s beneficiary is also an eligible designated beneficiary.⁷

The SECURE Act modifications apply to all defined contribution plans. These new rules apply to distributions as to employees who die after December 31, 2019 (note that the rules governing distributions from Roth IRAs were not changed).